Analys
Trump holds the key for commodities
In a summer when investors have been caught off guard by everything from emerging market woes and the dollar’s tailwind to a brewing trade war, commodity markets have once again appeared in the crosshairs in terms of market turbulence. This time, it is not China, OPEC or oil which are central to crisis, but rather it is the USD-financed emerging markets and their mined metal and soft commodity production. We do not think the emerging markets crisis will be a China crisis and we believe that copper and zinc are set to rebound.
Starting point is Trump’s politics
Three major President Trump-related developments are having a significant impact on the commodity universe right now. First, the US decision to leave the Iran agreement and impose sanctions in two stages against Tehran laid the ground for a more direct market pricing of any similar actions against other countries.
Second, sanctions were imposed on Russia, and and most recently, US import tariffs on steel and aluminium were doubled on Turkey.
Third, on top of sanctions, developments in the trade war stalled during the summer and the positions of the various sides appeared to become locked.
These developments served to illustrate the US approach to emerging markets, in our view, and changed market pricing, kicking off a divergence between the pricing of US assets and those of emerging markets.
Turkey will not spread to Asia
If the Turkish currency crisis is not staved off, the risk of a financial system meltdown and, ultimately, a government debt default is high. But even though Spanish banks are vulnerable, Turkey’s problems should not hurt the overall eurozone economy to a significant degree. Euro weakness and European stock market declines due to the escalation of Turkey’s crisis therefore seem to be overdone. However, Turkey is far from out of the woods yet and the situation might need to worsen still to convince Turkey to adopt a painful, but more sustainable, path toward regaining financial markets’ trust. Other emerging markets with similar challenges, such as South Africa, Argentina and Pakistan, also face tough times ahead.
China stands out
What ties the affected emerging market countries together this time is expensive USD financing. China is not among them. This is can be seen clearly by studying developments in the cost of credit default swaps, or CDS.
China has barely moved while Turkey and Argentina have gone through the roof. Among the worst hit are Brazil, South Africa and Russia. These countries have also seen their currencies underperform along with their local equity markets.
As currencies have fallen, investors have started to anticipate an increase in the export of commodities to secure income. We have seen agricultural commodities trading lower, as seasonal stockpiles are expected to be shipped at a higher rate than normal.
Numbers point to a brighter future
The idea that fear is stronger than greed is relevant here, in our view. We think the first phase of President Trump’s threatening of the emerging markets is over. Running the numbers on the impact of tariffs still points to a bright future. It is hard to prove that tariffs will take a meaningful toll on growth in consumption, we believe. The impact on corporate investment is more difficult to judge. Typically, there are many negative assumptions made ahead of investments decisions. After President Trump’s “flip flop” policies, there is scope for many more multinational companies. Our base case is that President Trump will sign a deal with China in November, in time to influence the midterm elections. In such a scenario, we think base metals would recover, especially copper. Within base metals, it is clear that those more exposed to the Asian construction sector, e.g. copper and zinc, have been the greatest losers, while nickel has done much better, supported by a larger share of demand coming from the US and Europe, posting positive data during the summer.
Oil is all about Iran
The first phase of the new US sanctions against Iran came into force in August. Among other things, this means that Iran cannot use USD. However, sanctions on oil exports will not come into effect until November. These sanctions will probably not hit the country as hard as the previous ones, as they do not have the support of the rest of the world.
Oil prices rose after, among other things, the French oil company Total announced at the OPEC meeting in June that it had already stopped buying oil from Iran. This decision was a typical action in line with American sanctions, whereby a company safeguards its activities in the US and prioritises trade with the US as the larger market. President Trump also always has the option of taking sanctions against Iran to the next level. As with the last occasion that the US used sanctions against Iran, the country could forbid all companies that trade with Iran from having access to the huge US market, and prevent dollar funding. This makes the US sanctions very effective.
In the first half of the year, leaders from the EU tried to get the US to remain in the Iran agreement and presented a series of measures to instead put pressure on Iran, including closing down the missile programme. The Trump administration considered the measures to be insufficient, and chose to withdraw from the agreement. Now, the administration has urged Iran to return to the negotiating table to formulate a more comprehensive agreement than the previous one; however, Iran has stated that the US must first revert to the agreement before negotiations can recommence.
In our view, the current sanctions are fully accounted for in the oil price and a certain amount of ‘over-compliance’, such as in the example of Total, is also priced in. However, what has not been included in the oil price, in our view, is the reality of President Trump taking a step further and cutting off Iran from the global economy completely. In that case, for example, China would not be able to import oil from Iran. The latest decrease in the oil price (from around USD 78/barrel in early July to USD 72) can mainly be attributed to the escalating trade war between the US and China, in our view, but this does not mean that the situation with Iran has become any less significant.
Sparkling electricity market
Power markets have surged during the summer as because of weak hydro supply and high temperatures (Nordic reservoirs now 18% below seasonal norm). Prices also supported by strong fuels complex and Emission Rights hitting a 7-year high EUR 19.33 at the time of this being published.
Analys
Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today
Brent crude rallied to a high of USD 75.29/b yesterday, but wasn’t able to hold on to it and closed the day at USD 74.49/b. Brent crude has now crossed above both the 50- and 100-day moving average with the 200dma currently at USD 76.1/b. This morning it is trading a touch lower at USD 74.3/b
Brent riding a rollercoaster between bullish sanctions and bearish tariffs. Biden sanctions drove Brent to USD 82.63/b in mid-January. Trump tariffs then pulled it down to USD 68.33/b in early March with escalating concerns for oil demand growth and a sharp selloff in equities. New sanctions from Trump on Iran, Venezuela and threats of such also towards Russia then drove Brent crude back up to its recent high of USD 75.29/b. Brent is currently driving a rollercoaster between new demand damaging tariffs from Trump and new supply tightening sanctions towards oil producers (Iran, Venezuela, Russia) from Trump as well.
’Liberation day’ is today putting demand concerns in focus. Today we have ’Liberation day’ in the US with new, fresh tariffs to be released by Trump. We know it will be negative for trade, economic growth and thus oil demand growth. But we don’t know how bad it will be as the effects comes a little bit down the road. Especially bad if it turns into a global trade war escalating circus.
Focus today will naturally be on the negative side of demand. It will be hard for Brent to rally before we have the answer to what the extent these tariffs will be. Republicans lost the Supreme Court race in Wisconsin yesterday. So maybe the new Tariffs will be to the lighter side if Trump feels that he needs to tread a little bit more carefully.
OPEC+ controlling the oil market amid noise from tariffs and sanctions. In the background though sits OPEC+ with a huge surplus production capacity which it now will slice and dice out with gradual increases going forward. That is somehow drowning in the noise from sanctions and tariffs. But all in all, it is still OPEC+ who is setting the oil price these days.
US oil inventory data likely to show normal seasonal rise. Later today we’ll have US oil inventory data for last week. US API indicated last night that US crude and product stocks rose 4.4 mb last week. Close to the normal seasonal rise in week 13.
Higher last week and today as sanctions bite harder than recession fears. Brent crude gained 2% last week with a close on Friday of USD 73.63/b. It traded in a range of USD 71.8-74.17/b. It traded mostly higher through the week despite sharp, new selloffs in equities along with US consumer expectations falling to lowest level since 2013 (Consumer Conf. Board Expectations.) together with signals of new tariffs from the White House. Ahead this week looms the ”US Liberation Day” on April 2 when the White House will announce major changes in the country’s trade policy. Equity markets are down across the board this morning while Brent crude has traded higher and lower and is currently up 0.5% at USD 74.0/b at the moment.
New US sanctions towards Iran and Venezuela and threats of new sanctions towards Russia. New sanctions on Venezuela and Iran are helping to keep the market tight. Oil production in Venezuela reached 980 kb/d in February following a steady rise from 310 kb/d in mid-2020 while it used to produce 2.3 mb/d up to 2016. Trump last week allowed Chevron to import oil from Venezuela until 27 May. But he also said that any country taking oil or gas from Venezuela after 2 April will face 25% tariffs on any goods exported into the US. Trump is also threatening to sanction Russian oil further if Putin doesn’t move towards a peace solution with Ukraine.
The OPEC+ to meet on Saturday 5 April to decide whether to lift production in May or not. The OPEC+ Joint Ministerial Monitoring Committee will meet on Saturday 5 April to review market conditions, compliance by the members versus their production targets and most importantly decide whether they shall increase production further in May following first production hike in April. We find it highly likely that they will continue to lift production also in May.
OPEC(+) crashed the oil price twice to curb US shale, but it kicked back quickly. OPEC(+) has twice crashed the oil price in an effort to hurt and disable booming US shale oil production. First in 2014/15/16 and then in the spring of 2020. The first later led to the creation of OPEC+ through the Declaration of Cooperation (DoC) in the autumn of 2016. The second was in part driven by Covid-19 as well as a quarrel between Russia and Saudi Arabia over market strategy. But the fundamental reason for that quarrel and the crash in the oil price was US shale oil producers taking more and more market share.
The experience by OPEC+ through both of these two events was that US shale oil quickly kicked back even bigger and better yielding very little for OPEC+ to cheer about.
OPEC+ has harvested an elevated oil price but is left with a large spare capacity. The group has held back large production volumes since Spring 2020. It yielded the group USD 100/b in 2022 (with some help from the war in Ukraine), USD 81/b on average in 2023/24 and USD 75/b so far this year. The group is however left with a large spare capacity with little room to place it back into the market without crashing the price. It needs non-OPEC+ in general and US shale oil especially to yield room for it to re-enter.
A quick crash and painful blow to US shale oil is no longer the strategy. The strategy this time is clearly very different from the previous two times. It is no longer about trying to give US shale oil producers a quick, painful blow in the hope that the sector will stay down for an extended period. It is instead a lengthier process of finding the pain-point of US shale oil players (and other non-OPEC+ producers) through a gradual increase in production by OPEC+ and a gradual decline in the oil price down to the point where non-OPEC+ in general and US liquids production especially will gradually tick lower and yield room to the reentry of OPEC+ spare capacity. It does not look like a plan for a crash and a rush, but instead a tedious process where OPEC+ will gradually force its volumes back into the market.
Where is the price pain-point for US shale oil players? The Brent crude oil price dropped from USD 84/b over the year to September last year to USD 74/b on average since 1 September. The values for US WTI were USD 79/b and USD 71/b respectively. A drop of USD 9/b for both crudes. There has however been no visible reaction in the US drilling rig count following the USD 9/b fall. The US drilling rig count has stayed unchanged at around 480 rigs since mid-2024 with the latest count at 484 operating rigs. While US liquids production growth is slowing, it is still set to grow by 580 kb/d in 2025 and 445 kb/d in 2026 (US EIA).
US shale oil average cost-break-even at sub USD 50/b (BNEF). Industry says it is USD 65/b. BNEF last autumn estimated that all US shale oil production fields had a cost-break-even below USD 60/b with a volume weighted average just below USD 50/b while conventional US onshore oil had a break-even of USD 65/b. A recent US Dallas Fed report which surveyed US oil producers did however yield a response that the US oil industry on average needed USD 65/b to break even. That is more than USD 15/b higher than the volume weighted average of the BNEF estimates.
The WTI 13-to-24-month strip is at USD 64/b. Probably the part of the curve controlling activity. As such it needs to move lower to curb US shale oil activity. The WTI price is currently at USD 69.7/b. But the US shale oil industry today works on a ”12-month drilling first, then fracking after” production cycle. When it considers whether to drill more or less or not, it is typically on a deferred 12-month forward price basis. The average WTI price for months 13 to 24 is today USD 64/b. The price signal from this part of the curve is thus already down at the pain-point highlighted by the US shale oil industry. In order to yield zero growth and possibly contraction in US shale oil production, this part of the curve needs to move below that point.
The real pain-point is where we’ll see US drilling rig count starting to decline. We still don’t know whether the actual average pain-point is around USD 50/b as BNEF estimate it is or whether it is closer to USD 65/b which the US shale oil bosses say it is. The actual pain-point is where we’ll see further decline in US drilling rig count. And there has been no visible change in the rig count since mid-2024. The WTI 13-to-24-month prices need to fall further to reveal where the US shale oil industry’ actual pain-point is. And then a little bit more in order to slow production growth further and likely into some decline to make room for reactivation of OPEC+ spare capacity.
The WTI forward price curve. The average of 13 to 24 month is now USD 64.3/b.
The average 13-to-24-month prices on the WTI price curve going back to primo January 2022. Recently dropping below USD 65/b for some extended period.
Brent has defied bearish equities for three days but is losing its stamina today. Brent gained 0.3% yesterday with a close of USD 74.03/b, the highest close since 27 February and almost at the high of the day. It traded as low as USD 73.23/b. Brent has now defied the equity selloff three days in a row by instead ticking steadily higher. A sign of current spot tightness. This morning however it is losing some of its stamina and is down 0.5% at USD 73.7/b along with negative equities and yet higher gold prices.
The new US Iran sanctions is creating frictions in getting its oil to market and helps keeping oil market tight. Part of the current tightness is due to the new US sanctions on Iran which. Ships containing 17 mb of its oil now sits idle east of Malaysia waiting (Bloomberg) for ship-to-ship transfers with China teapot refineries the normal final destination. But the latest US sanctions has probably made these refineries much more cautious. More friction before Iranian oil is reaching its final destination if at all. Tighter market.
Lower Saudi OSPs for May is expected. A signal of a softer market ahead as OPEC+ lifts production. Saudi Aramco is expected to reduce it official selling price (OSPs) for Arab Light to Asia for May deliveries by USD 2/b. A measure to make its oil more competitive in relative to other crudes suppliers. It is also a sign of a softer market ahead. Naturally so since OPEC+ is set to lift production in April and also most likely in May. If Saudi Aramco reduces its OSPs to Asia for May across its segments of crudes, then it is a signal it is expecting softer oil market conditions. But news today is only discussing Arab Light while the main tightness int the market today is centered around medium sour crude segment. A lowering of the OSPs for the heavier and more sour grades will thus be a more forceful bearish signal.
Front-end backwardation may ease as the Brent May contract rolls off early next week. The Brent May future will roll off early next week. It will be interesting to see how that affects the front-end 1-3mth backwardation as it is shifted out into summer where a softer market is expected.
Brent is boring like crazy with 30dma annualized volatility of just 21%. Waiting for something to happen.
Brent crude has defied three days of bearish equity markets and ticked higher instead. Caving in a bit this morning with yet another day of bearish equities and bullish gold.
Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today
Våren präglas av svängigt elpris och ankkurva
Guld kostar över 3100 USD per uns och 1 miljoner kronor per kilo
Oil gains as sanctions bite harder than recession fears
Danska Seaborg Technologies siktar på serieproduktion av smältsaltsreaktorer till mitten av 2030-talet
USA är världens största importör av aluminium
OPEC+ börjar öka oljeutbudet från april
Crude oil comment: Unable to rebound as the US SPX is signaling dark clouds on the horizon
Oversold. Rising 1-3mth time-spreads. Possibly rebounding to USD 73.5/b before downside ensues
Crude oil comment: Not so fragile yet. If it was it would have sold off more yesterday
-
Nyheter3 veckor sedanUSA är världens största importör av aluminium
-
Nyheter4 veckor sedanOPEC+ börjar öka oljeutbudet från april
-
Analys3 veckor sedan
Crude oil comment: Unable to rebound as the US SPX is signaling dark clouds on the horizon
-
Analys4 veckor sedan
Oversold. Rising 1-3mth time-spreads. Possibly rebounding to USD 73.5/b before downside ensues
-
Analys3 veckor sedan
Crude oil comment: Not so fragile yet. If it was it would have sold off more yesterday
-
Analys4 veckor sedan
A deliberate measure to push oil price lower but it is not the opening of the floodgates
-
Nyheter2 veckor sedanPriset på koppar skiljer sig åt efter tariffer
-
Analys2 veckor sedan
Oil prices climb, but fundamentals will keep rallies in check