Analys

Trade war today and oil market balance tomorrow

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5 år sedan

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2 augusti, 2019

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Brent crude lost 7.2% and closed at $60.5/bl with also the three year contract loosing 4% with a close of $56.02/bl. Neither equities nor oil were satisfied with ”mid-cycle rate adjustment” cut by the Fed earlier in the week and were already on a weak footing. Yesterday’s announcement/tweet by Donald Trump that an additional $300 bn worth of trade with China would get a 10% import levy totally pulled the plug on oil.

The thing is that the global oil market balance is not too bad right now and so far this year. IEA announced in its July Oil Market Report that OECD oil inventories had been rising during the first part of the year. It is true that the OECD inventories are up 34 m bl in May versus December last year but normally (2010 to 2014 average) they increase 45 m bl during this period. So if inventories are the proof of the pudding then the global oil market was pretty much in balance from Jan to May this year. Since then the US crude oil inventories have fallen sharply and the Brent crude oil forward curve is still in backwardation signalling a market which is on the tight side of the scale.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

The sell-off yesterday is thus about concerns for the oil market balance for tomorrow, for next year and not so much for the current balance and the balance in 2H-19.

The forward Brent crude oil curve is still in backwardation, US crude inventories have been falling sharply since early June and continue to do so, US shale oil production growth is slowing quite sharply, European overall spot refining margin is close to the highest level over the past 2-3 years, OPEC+ is cutting and supply from Iran and Venezuela is just plunging.

Thus the bearish take on oil is not so much coming from the front end (spot) of the oil market. It is all about slowing global growth, slowing oil demand growth, US-China trade war, too little proactive stimulus from the US Fed and deep concerns for the oil market balance of tomorrow.

If we remember correctly Saudi Arabia commented earlier this summer that it might be difficult to cut yet deeper in 2020 than what they are doing now. So if the oil market is running a surplus in 2020 then the oil price and not OPEC+ will have to do the job of balancing the market.

If we look at where oil prices are trading on the forward curve it is very clear that the main job of the oil prices at the moment is about holding US shale oil production growth in check. The three year WTI price yesterday closed at $50.12/bl while the three year Brent crude oil contract closed at $56/bl. Thus the oil price right now is all about controlling US shale oil production growth.

Four new pipelines channelling oil out of the Permian will come on-line in 2H-19 and early 2020 with a total capacity of 2.3 m bl/d. What this mean is that local Permian oil prices will move much closer to US Gulf seaborne oil prices and Brent crude oil prices. Oil will be drained out of the Permian and allow Permian oil producers to ramp up production without crashing the local Permian oil price. The flow of oil from Permian to Cushing Oklahoma on the Sunrise pipeline will slow to a halt. US Cushing stocks will decline much more easily and the WTI Cushing price will also move closer to Brent crude.

So, again, will WTI move up to Brent or will Brent move down to WTI when the pipelines open up? The 670 Cactus II from Permian to Corpus Christi at the US Gulf opened for service on 1 August. Since one year ago the Brent June 2020 contract has declined by $10.2/bl while the comparable WTI contract has declined by only $7.5/bl and the spread between the two has declined from $8.5 to now $5.8/bl. So over the past year at least we see that it is the Brent contract which has moved down to the WTI price and not the WTI price which has moved up to the Brent price. The interim transportation cost on the Epic II pipeline has been lowered from $5/bl to only $2.5/bl and pipelines from Cushing to US Gulf are lowering tariffs in competition. In a slowing shale oil production growth situation coupled with a large increase in pipeline capacity we should expect to see a further strong convergence between the Brent crude oil price curve and the WTI price curve. In general the Brent prices should move down to the WTI prices but the initial reaction will be declining US crude oil inventories both in general and in Cushing Oklahoma. This will drive WTI prices higher initially and drive the WTI crude curve into full backwardation.

The only reconciliation we can envisage for an oil market where the current situation is tight, refinery margins are strong and IMO 2020 is coming on top coupled with deep rooted market concerns for the oil market balance for 2020 is very weak 2020 forward prices together with spiky and backwardated front end prices. So expect WTI curve into full backwardation (strong spot prices), weak 2020 prices and tighter Brent to WTI spreads with forward Brent prices moving down towards the WTI prices.

Ch1: Rising OECD inventories by IEA. But those rises are very close to normal seasonal trends. From Jan to March inventories usually drop by 32 m bl (2010 to 2014 average seasonal trend). This year they only dropped by 16 m bl. From March to May however they normally increase by 46 m bl while this year they only increased by 39 m bl. In total from Jan to May they normally increase by 14 m bl while this year they increased by 23 m bl. So yes OECD inventories increased by 9 m bl more than the seasonal trend from Jan to May. That is pretty close to noise as it gets. So if OECD inventories are anything to go by we’d say that the OECD-inventory implied supply/demand balance was pretty much in balance from Jan to May

Ch2: US crude stocks have fallen sharply since early June. Here seen in days of consumption where it has fallen from 28.9 days to only 25.4 days in the latest data. We expect US crude inventories to fall further

Ch3: US crude oil stocks in barrels have fallen sharply since early June and now only stands some 9 m bl above the 5 year average. Also if we look at total US crude, middle distillates and gasoline we see that these US inventories in total are only 9 m bl above normal (2014 – 2018).

Ch4: What worries the market is this: Global economic growth and thus oil demand growth. Here depicted through the lense of Bloomberg’s calculated now-cast indices. What stands out here is that it is worse in the rest of the world than in the US but maybe more importantly that the US economy now is cooling faster than the rest of the world. Though this is a very qualitatively assesment from the graph. This week’s quarter percent US Fed rate cut is probably far too little to counter this cooling trend.

Ch5: Agregating Bloomberg’s individual country now-cast indices to one “global now-cast” index shows that the global economy is cooling and cooling and will soon be down to the trough in 2015/16. Graphing this global index versus the Brent crude 6m/6m change in prices we see that from a demand/macro view point Brent has moved counter to the cooling macro trend and a deteriorating global demand back-drop. It has risen on the back of OPEC+ supply cuts and Iran issues.

Ch6: Huge loss in supply from key producers since primo 2017 not enough to lift prices

Ch7: Aggressive cuts by Saudi Arabia neither enough to lift prices. It is very hard to lift prices through production cuts amid a deteriorating global growth

Ch8: European spot refining margins are very strong and close to the highest level over the last 2-3 years

Ch9: Speculators are not feeling very bullish in the face of the deteriorating global macro picture

Ch10: Forward crude oil curves. Ydy close vs end of June. Brent down more than WTI. Brent is moving lower and closer to WTI.

Ch11: Spreads between the forward crude oil curves have moved lower since late June

Ch12: US shale oil production growth has slowed to a growth rate of only 0.6 m bl/d on a marginal, annualized rate. Sharply down from around 1.5 – 2.0 m bl/d in 2017/18 period. Shale oil players are signalling further slowdown during the autumn. The shale oil well completion rate only needs to be lowered by some 100 to 200 wells per month in order to drive US shale oil production growth to close to zero

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Analys

Crude oil comment: Big money and USD 80/b

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18 timmar sedan

den

21 januari, 2025

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Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.

Bjarne Schieldrop, Chief analyst commodities, SEB

Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.

Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.

Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.

Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.

New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.

Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.

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Analys

Donald needs a higher price to drive US oil production significantly higher

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2 dagar sedan

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20 januari, 2025

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Easing a bit towards the 80-line this morning following recent strong gains. Brent crude gained another 1.3% last week with a close of USD 80.79/b. It reached a high of USD 82.63/b last Wednesday. This morning it is inching down 0.3% to USD 80.5/b.

Donald needs a higher oil price to get another US shale oil production boom. Donald Trump declaring an energy emergency with promises of opening up federal land for oil exploration +++, may sound alarmingly bearish for oil. But the days when US oil production (shale) was booming at an average oil price of USD 58/b (2015-19) are behind us. Brent has averaged USD 81/b through 2023 and 2024, and US shale oil is now moving towards zero growth in 2026.

Donald Trump (and the US oil industry) needs a higher oil price to drive US oil production significantly higher over the next 4 years. The US oil industry also needs to know that there will be a sustainable need for higher US oil production. So, someone else in the oil market needs to exit to make room for more oil from the US. Iran and/or Venezuela will be the likely targets for Donald Trump in that respect. But it is still not obvious that the US oil industry will go for another period of strong oil supply growth with natural doubts over how lasting a possible outage from Iran and/or Venezuela would be.

Strong rise in speculative positions increases the risks for pullbacks below the 80-line. The new sanctions on Russia have pushed crude oil higher over the past weeks, but speculators have also helped to drive flat prices higher as well as driving the front-end of the crude curves into steeper backwardation. Speculators typically buy the front-end of the crude curves and thus tend to bend the forward curves into steeper backwardation whey they buy. So, curve shapes are not fully objective measures of tightness. Net-long speculative positions (Brent +WTI) rose 52.4 mb over the week to last Tuesday. In total they are up 415 mb to 577 mb versus the low point in the autumn of 162 mb in early September.

Brent crude has now technically pulled back from overbought with RSI at 65.2 and back below the 70-line. But washing out some long-specs with Brent trading sub-80 for a little while is probably in the cards still.

But this does not look like just a speculatively driven frothy flash-in-the-pan. But do not forget that time-spreads have been tightening since early December and flat prices have risen higher along with them. Thus, this is not just a speculatively driven frothy flash-in-the-pan. The new sanctions on Russia are also having a tightening effect on the market both on Crude, LNG and middle distillates. Add also in that Donald Trump needs a higher oil price to drive US oil production higher. So even if we find it likely that Brent crude will make a pullback below the 80-line, it does not mean that this is the end of the gains.

Net long speculative positions in Brent + WTI in million barrels

52-week ranking of speculative positions in Brent + WTI and 52-week ranking of 1-7mth Brent time-spread.

Brent crude 1mth vs. Dubai 1-3mth time spread. The Dubai time-spread is probably less impacted by speculative positions and thus a better reflection of actual physical conditions. This is rising yet a little more this morning.

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Analys

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

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5 dagar sedan

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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.

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.