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Unlikely that Saudi switches from ”price” to ”volume” any time soon

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Small gains with low conviction this morning. But we don’t think Brent can resist the upside. Brent crude rebounded 0.9% ydy with a close at USD 77.99/b following the sharp selloff last week on signals that a ceasefire in Gaza could be in the cards. This morning Brent crude is inching higher by 0.2% to USD 78.1/b without great conviction early in the morning it seems. Shanghai and Hong Kong equities are however up 3-4% this morning and industrial metals follows suites with some positive backdrop. The Chinese equity gains this morning may be more due to Chinese government technical measures to stem the equity market route than from real growth fundamentals. The general view of SEB’s Chief Asia Strategist, Eugenia Victorino, is however that the Chinese government these days has shifted fully to growth focus. Positive surprises from China are in the cards for 2024 in her view. While oil seems a little bewildered on where to go this morning, we think it won’t be able to resist the upside. The selloff last week on the possible ceasefire in Gaza followed by hopeful qualm in the Red Sea, Houthis, Hezbollah, Hamas, Iran, the lot seems way premature in our view.

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

No Chance that Saudi/OPEC+ will fold their cards now that we see emerging signs of global revival. The great concern now for a long time has been that the incredible rise in interest rates (US+++) would lead to a recession which would kill oil demand cyclically and possible force Saudi/OPEC+ to fold their cards, increase production, let the oil price fall and thus reduce US shale oil production to a more suitable level.

The latest manufacturing PMIs are however very interesting reading. India is of course full steam ahead at 56.5. But suddenly South Korea has moved up above the 50-line to 51.2. SEB’s prior economist in Norway, Stein Bruun, used to say that South Korea manufacturing PMI is the ”Canary in the coal mine” as the whole world needs manufactured sub-components from the country. So when the world starts to accelerate it will be visible in South Korea to start with. US ”new orders” has jumped to 52.5, the global PMI has lifted to 50.0 and the EU is ticking higher (still below 50) month by month as the cost of natural gas now has come down just an inch from the real average price from 2010-2019.

These emerging signs of improvements is essentially what Saudi/OPEC+ has been hoping for and dreaming about: Global economic acceleration. It almost seems too good to be true amid high interest rates, geopolitical turmoil, EU energy crisis and Chinese property market problems. Still, that is what the PMIs seems to indicate.

There is no chance in h*** that Saudi/OPEC+ will cave in and switch from ”price over volume” to ”volume over price” with emerging signs on the horizon of a global revival. It implies a stronger demand impulse down the road. And if you look upon the world economy with the eyes of an optimist your take would probably be: Chinese policy has shifted focus to growth, Biden is stimulating the h*** out of the US economy with his infrastructure stimulus package (to be re-elected), the EU is crawling out of the woods as nat gas prices have come down towards the real, 2010-2019 average level, India marches on, inflation globally is fading and interest rate cuts are coming. 

I.e. the risk for a sudden drop in the oil price as a consequence of a possible shift from price to volume by Saudi/OPEC+ seems highly unlikely at present.

Global manufacturing PMIs

Global manufacturing PMIs
Source: SEB graph, Blbrg data

Speculators tend to build long positions when global manufacturing accelerates and reduce when it contracts. Net long specs will likely be in for an upturn if global manufacturing starts to expand again.

Net long speculative position in WTI and Brent crude oil
Source: SEB graph and calculations, Blbrg data

Is Biden stimulating his way to re-election? Projection for US cement consumption to 2027 gives a great reflection of the incredible magnitude of Biden’s infrastructure package.

Projection for US cement consumption to 2027
Source: SEB graph, FT.com

Saudi Arabia Official Selling prices. Only marginal changes for March.

Saudi Arabia Official Selling prices for oil
Source: SEB graph, Blbrg data

Analys

Breaking some eggs in US shale

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Lower as OPEC+ keeps fast-tracking redeployment of previous cuts. Brent closed down 1.3% yesterday to USD 68.76/b on the back of the news over the weekend that OPEC+ (V8) lifted its quota by 547 kb/d for September. Intraday it traded to a low of USD 68.0/b but then pushed higher as Trump threatened to slap sanctions on India if it continues to buy loads of Russian oil.  An effort by Donald Trump to force Putin to a truce in Ukraine. This morning it is trading down 0.6% at USD 68.3/b which is just USD 1.3/b below its July average.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Only US shale can hand back the market share which OPEC+ is after. The overall picture in the oil market today and the coming 18 months is that OPEC+ is in the process of taking back market share which it lost over the past years in exchange for higher prices. There is only one source of oil supply which has sufficient reactivity and that is US shale. Average liquids production in the US is set to average 23.1 mb/d in 2025 which is up a whooping 3.4 mb/d since 2021 while it is only up 280 kb/d versus 2024.

Taking back market share is usually a messy business involving a deep trough in prices and significant economic pain for the involved parties. The original plan of OPEC+ (V8) was to tip-toe the 2.2 mb/d cuts gradually back into the market over the course to December 2026. Hoping that robust demand growth and slower non-OPEC+ supply growth would make room for the re-deployment without pushing oil prices down too much.

From tip-toing to fast-tracking. Though still not full aggression. US trade war, weaker global growth outlook and Trump insisting on a lower oil price, and persistent robust non-OPEC+ supply growth changed their minds. Now it is much more fast-track with the re-deployment of the 2.2 mb/d done already by September this year. Though with some adjustments. Lifting quotas is not immediately the same as lifting production as Russia and Iraq first have to pay down their production debt. The OPEC+ organization is also holding the door open for production cuts if need be. And the group is not blasting the market with oil. So far it has all been very orderly with limited impact on prices. Despite the fast-tracking.

The overall process is nonetheless still to take back market share. And that won’t be without pain. The good news for OPEC+ is of course that US shale now is cooling down when WTI is south of USD 65/b rather than heating up when WTI is north of USD 45/b as was the case before.

OPEC+ will have to break some eggs in the US shale oil patches to take back lost market share. The process is already in play. Global oil inventories have been building and they will build more and the oil price will be pushed lower.

A Brent average of USD 60/b in 2026 implies a low of the year of USD 45-47.5/b. Assume that an average Brent crude oil price of USD 60/b and an average WTI price of USD 57.5/b in 2026 is sufficient to drive US oil rig count down by another 100 rigs and US crude production down by 1.5 mb/d from Dec-25 to Dec-26. A Brent crude average of USD 60/b sounds like a nice price. Do remember though that over the course of a year Brent crude fluctuates +/- USD 10-15/b around the average. So if USD 60/b is the average price, then the low of the year is in the mid to the high USD 40ies/b.

US shale oil producers are likely bracing themselves for what’s in store. US shale oil producers are aware of what is in store. They can see that inventories are rising and they have been cutting rigs and drilling activity since mid-April. But significantly more is needed over the coming 18 months or so. The faster they cut the better off they will be. Cutting 5 drilling rigs per week to the end of the year, an additional total of 100 rigs, will likely drive US crude oil production down by 1.5 mb/d from Dec-25 to Dec-26 and come a long way of handing back the market share OPEC+ is after.

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Analys

More from OPEC+ means US shale has to gradually back off further

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The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly. 

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

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Analys

Tightening fundamentals – bullish inventories from DOE

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The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.

US DOE, inventories, change in million barrels per week
US crude inventories excl. SPR in million barrels
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