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Trade war and Nopec-shake, but market looks like tightening

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8 februari, 2019

Brent crude sold off 1.7% yesterday with a close of $61.63/bl but has rebounded 0.4% today trading at $61.8/bl. The sell-off came on the back of a 0.9% decline in S&P 500 and a marginally stronger dollar with DXY now just 0.9% below the highs from late 2018. The clear driver for the sell-off in both crude and equities was the signal from Donald Trump that there will be no trade deal between China and the US before the March 1 deadline runs out. The consequence of this is that tariffs on about $200bn worth of goods from China will increase from 10% to 25% from March 1. It definitely took the air out of growth hopes both for economics and for oil.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities, SEB

US Nopec legislation (“No Oil Producing and Exporting Cartels Act 2019”) moved forward in the US. The bill was approved by the House judiciary committee on Thursday and is now ready for a full House vote. It will also need to be approved by the US Senate. Given Donald Trump’s known hostile stance towards OPEC it now looks like a very good chance that the bill will actually be voted through without being vetoed down by the President (George W Bush did that last time the bill was promoted). The prospect of a passage of Nopec legislation has added bearish pressure to Brent crude.

We don’t think that OPEC intervention matters all that much in the medium to longer term. After all, it is not low cost OPEC oil which sets the marginal cost of oil in the global market. It is the higher non-OPEC marginal cost which sets the global oil price over time. OPEC can never escape from this fact.

OPEC intervention is however a very important short term oil price driver. It is no doubt that the boost in production by OPEC+ from May to November last year helped to drown the global market in oil and crash the oil price from October to December. It is likewise just as clear that the revival in oil prices since December low of just below $50/bl to a recent high of $63.63/bl has the fingerprint of production cuts agreed by OPEC+ in December all over it.

So if the US Nopec legislation is voted through and becomes law it could definitely be bearish for oil prices right here and now given that OPEC+ is in the midst of tactical production cuts right this moment. The Nopec law will enable the US to prosecute OPEC members for price manipulation and potentially confiscate oil assets in the US belonging to such OPEC members. Whether OPEC members in general and Saudi Arabia specifically would cave in if Nopec becomes law remains to be seen. Qatar however left OPEC in December after 57 years in the group presumably due to the risk of Nopec becoming law.

It is Saudi Arabia which really is the captain of the OPEC ship. It is also Saudi Arabia who really moves supply up and down and moves the market with the other members just pitching in a little. The Nopec legislation could end tactical, cooperative production cuts and increases orchestrated by OPEC. It should probably not hinder Saudi Arabia to move production up and down on its own in order to address tactical turns and imbalances in the global oil market.

The Nopec legislation is however right in the face of Saudi Arabia. If Nopec becomes law it must be very damaging to the long lasting relationship between the US and Saudi Arabia. How can they go on being best palls if the US kills off OPEC as an organisation we wonder? This may be the next step in the geopolitical changes taking place in the Middle East. The US needs the Middle East less due to close to self-sufficiency of oil. China and India needs it more and more along with their rapidly rising oil imports and Russia is eager to get closer ties and influence in the region. Thus geopolitical changes could be the biggest fall-out.

OPEC’s true value strategy is not primarily about holding back supply tactically from existing production capacity from time to time even though this is primarily what the oil market is focusing on. The true strategy for OPEC is to make sure that they do not over-invest in their own low cost oil assets over time. It is about making sure that the global oil price balances on the higher non-OPEC marginal cost and not through over-investments within OPEC ends up balancing on low cost OPEC oil.

Thus OPEC needs to make sure that if global oil demand grows with some 1.4 m bl/d per year, then production growth from OPEC should be materially less than that. Achieving that is not about holding back production in existing capacity. It is about making sure that upstream investments in OPEC are not too high. The true OPEC strategy is thus about investment discipline over time and not about production discipline from existing capacity. On this more strategic issue it is not so clear that Nopec legislation will have all that much impact.

The amount of fossil fuels in the world is in a human perspective more or less infinite. It is all over the place. We are not running out. The price of oil is about how much oil we have above ground and not about how much is in the ground. Thus discipline on investments is OPEC’s true strategy.

As of right now OPEC+ continues to firm up the global market with its tactical tightening agreed upon in December. In addition we are losing volumes in Venezuela and Iran while general Haftar is fighting over the Sharara oil field in Libya.

Our view is that the situation in Venezuela will get worse before it gets better. US sanctions are biting and a visible reflection of that could be the softer shipping rates for Caribbean to the US Gulf trades since early January. I.e. it looks like shipments of oil out of Venezuela are declining further due to US sanctions. There may be a regime shift from Maduro to Guaido sometime in the future but we find it hard to imagine that Maduro will give up easily as he is backed by China and Russia. Even after a potential shift it will take time to revive confidence to international investors (debt holders) and oil service companies as well as all the oil service personnel which has fled the country. Money, people, competence and companies needs to move back to the country and then the oil industry needs to be revived. It is hard to see a strong revival in oil production in Venezuela this year.

Iran is definitely a sad, sad story and US shale oil production boom is bad, bad news for the Iran. Donald Trump handed out handsome oil import waivers to international buyers in Q4-18 in order to avoid a spike in the oil price. However, every additional barrel of oil produced in the US enables the US to reduce the Iran waivers just as much. Thus the more you are bullish US crude production, the more you should expect to see further declines in Iran oil exports along with smaller and smaller US waivers being handed out. Thus more US oil probably means comparably less oil out of Iran. Unfortunately for Iran.

The global economy is of great concern with continued US-China trade war (no resolution by March 1) and weakening outlook in general driving the outlook for global oil demand growth in 2019 lower. Global refining margins have moved down to very weak and painful levels at which refineries becomes increasingly likely to reduce their refining utilization. We are also moving towards the spring (March, April) refinery turnarounds where refineries are taken off-line for maintenance and summer tuning. This should lead to a temporary softer crude market with somewhat weaker crude spot dynamics over the next couple of months which might weight bearishly on crude prices. I.e. crude prices could be more bearishly sensitive to ingredients like a stronger dollar and/or equity sell-offs.

In total and on balance, it still looks like the crude oil market is on a tightening path due to both voluntary and involuntary cuts by OPEC+. Set-backs in the oil price rally since late December is however clearly a risk with Nopec, US-China trade war, global growth concerns, weak refinery margins, US dollar strength and potential sell-offs in the S&P 500 as the main concerns.

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.