Följ oss

Analys

US crude oil production, only a lower price can slow it down

Publicerat

den

SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityPrice action – Long positions taking a hit – Pain trade to the down side

The front month Brent crude contract sold off 5% yesterday with a clos at $53.11/b. This was the lowest close for front month Brent since early December 2016 and clearly a break out of the close, sideways trend around $55/b which has been in place since OPEC decided to cut production in late November. Technically the Brent crude May 17 contract broke the important support level of $54.64/b. The next support level for the contract is $52.86/b and that has already been broken in today’s trading with Brent crude now trading at $52.3/b. Net long speculative positions are close to record high so if the bearish sentiment continues then oil prices are naturally and clearly vulnerable to the downside. That is where the pain-trade is.

It is worth mentioning that in a week on week perspective there has been a broad based sell-off in commodities in general with all sub-indices selling off between 2.6% and 4.4% and the total commodity index down 3.5%. In a week on week perspective Brent sold off 5.8% so a little more than the total energy index which sold off 3.9%. Still, oil was not alone in the sell-off. I.e. It was not just oil specific reasons for why oil sold off over the last week even though the sell-off came yesterday. In the background for all assets is the market concern for higher US interest rates which is hurting bonds, equities as well as commodities. Gold which is definitely sensitive to higher interest rates sold off 3.3% over the past week. The bullish US employment statistics yesterday probably helped to underpin the expectation for higher US rates.

Longer dated crude oil contracts also sold off yesterday with the Brent crude December 2020 contract closing yesterday at $53.74/b which is a new fresh low since April 2016. As stated earlier we expect this contract to trade yet lower down towards the $50/b mark in a pure neccessity to lower the implied shale oil profitability offered US shale oil players on a forward crude oil price curve. More than anything it is the one to three year forward contracts which needs to move lower in order to stemm the current strong rise in shale oil rigs and shale oil investments. Since OPEC decided to cut production in late November 2017 US shale oil players have been offered a nice profitable lunch on in the forward market basis.

Crude oil comment – US crude oil production, only a lower price can slow it down

The consequence of the increase in US oil rigs since the mid-May last year has now become alarmingly visible in US crude oil production. US crude oil production is growing. And it is growing strongly. That was one of the key bearish statistics in the US EIA’s data release yesterday. US crude oil production rose by 56 kb/d w/w to 9.088 mb/d. Sounds like little in the big picture but multiply by 52 weeks (if it is a steady trend rather than weekly noise) and you get a marginal, annualized US crude oil production growth rate of 2.9 mb/d. Since the start of 2017 the average US crude oil production growth has been +35 kb/d w/w. That equates to a marginal, annualized growth rate of 1.8 mb/d. We are in general very bullish US shale oil production growth. However, we had not expecte to see this level of growth rate before in September 2017.

There is only one way to slow down the US crude oil production growth and that is a lower oil price. Thus beside an overall bearish sell-off in commodities in general, the oil price is pushing lower. A marginal, annualized US crude oil production growth rate of 1.8 mb/d which we now have seen since the start of the year is too much, too early. The shale oil veteran Harrold Hamm this week said at the Cera Week in Houston that the current investment binge in US shale oil production will kill the oil market unless it is tempered. Pioneer’s Scott Sheffield was out earlier in the week stating that US Permian crude oil production could rise to 8-10 mb/d in 10 years time and thus surpas Saudi Arabia’s Ghawar field (biggest in the world today). He also said that the WTI crude oil price would fall to $40/b if OPEC doesn’t carry over its production cuts into H2-17. On top of this the US EIA revised its US crude oil production projections significantly higher yet again. We still think they are way behind the curve when they predict US crude oil production at 9.73 mb/d on average in 2018 versus our projection of 10.76 mb/d for that year. We thus think that the US EIA will revise higher its projections for US crude oil 2018 production projection again and again in 2017.

If US crude oil production continues to grow at the pace we have seen since the start of the year, then it will pass its past peak of 9.61 mb/d (which was reached in June 2015) by mid-June 2017. That is not our projection, just a pure mathematical extrapolation.

Shale oil service costs, labour costs and material costs are tellingly definitely on the rise. This could definitely slow down weekly rig count additions if the cost side starts to bit significantly. In that case the oil price would not need to move all that much lower in order to slow down rig count additions. However, we have not seen that effect yet. Normally there is a time lag of 6-8 weeks from the oil price moves to when we see a reduction or increase in the weekly US shale oil rig count numbers. As such even if the oil price now continues yet lower we are likely to see that the US shale oil rig count increases by 9-10 rigs every week the next 6-8 weeks.

We still think that oil inventories will fall in Q2-17 and as such give support to prices. Our expectations is to see the highest Brent crude oil price to be printed in Q2-17. However, US crude oil prodution is now growing so strongly that market focus is shifting away from OPEC cuts and over to US production growth. We had not expected this to happen before in late Q2-17.

Then we are left with the question – What will OPEC do in the face of strongly rising US crude oil production? The can decide to cut also in H2-17, but does it make sense? We think not. US shale oil production response is too fast and too flexible.

Ch1: Brent crude front month contract – Breaking the sideways trend. Back to pre-OPEC-cut-decission?

Brent crude front month contract

Ch2: US crude oil production rising strongly – too strongly. Now just 0.5 mb/d below prior peak
If it continues at this pace then US crude production will pass the 9.6 mb/d mark in June 2017

US crude oil production rising strongly

Ch3: Brent crude oil 1mth contract adjusted for US dollar strength since July 2013.
For all those longing for a Brent crude oil price of $60/b it is worth remembering that
if we adjust for the 23% stronger USD since July 2013 a Brent price today of only $51/b actually equals $63.6/b in 2013 USD terms.
In that perspective we are already “back above $60/b”. Acutally we were close to $70/b in 2013 dollar terms when Brent averaged $55/b so far this year.

Annons

Gratis uppdateringar om råvarumarknaden

*

Brent crude oil 1mth contract adjusted for US dollar strength since July 2013.

 

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Analys

Volatile but going nowhere. Brent crude circles USD 66 as market weighs surplus vs risk

Publicerat

den

SEB - analysbrev på råvaror

Brent crude is essentially flat on the week, but after a volatile ride. Prices started Monday near USD 65.5/bl, climbed steadily to a mid-week high of USD 67.8/bl on Wednesday evening, before falling sharply – losing about USD 2/bl during Thursday’s session.

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

Brent is currently trading around USD 65.8/bl, right back where it began. The volatility reflects the market’s ongoing struggle to balance growing surplus risks against persistent geopolitical uncertainty and resilient refined product margins. Thursday’s slide snapped a three-day rally and came largely in response to a string of bearish signals, most notably from the IEA’s updated short-term outlook.

The IEA now projects record global oversupply in 2026, reinforcing concerns flagged earlier by the U.S. EIA, which already sees inventories building this quarter. The forecast comes just days after OPEC+ confirmed it will continue returning idle barrels to the market in October – albeit at a slower pace of +137,000 bl/d. While modest, the move underscores a steady push to reclaim market share and adds to supply-side pressure into year-end.

Thursday’s price drop also followed geopolitical incidences: Israeli airstrikes reportedly targeted Hamas leadership in Doha, while Russian drones crossed into Polish airspace – events that initially sent crude higher as traders covered short positions.

Yet, sentiment remains broadly cautious. Strong refining margins and low inventories at key pricing hubs like Europe continue to support the downside. Chinese stockpiling of discounted Russian barrels and tightness in refined product markets – especially diesel – are also lending support.

On the demand side, the IEA revised up its 2025 global demand growth forecast by 60,000 bl/d to 740,000 bl/d YoY, while leaving 2026 unchanged at 698,000 bl/d. Interestingly, the agency also signaled that its next long-term report could show global oil demand rising through 2050.

Meanwhile, OPEC offered a contrasting view in its latest Monthly Oil Market Report, maintaining expectations for a supply deficit both this year and next, even as its members raise output. The group kept its demand growth estimates for 2025 and 2026 unchanged at 1.29 million bl/d and 1.38 million bl/d, respectively.

We continue to watch whether the bearish supply outlook will outweigh geopolitical risk, and if Brent can continue to find support above USD 65/bl – a level increasingly seen as a soft floor for OPEC+ policy.

Fortsätt läsa

Analys

Waiting for the surplus while we worry about Israel and Qatar

Publicerat

den

SEB - analysbrev på råvaror

Brent crude makes some gains as Israel’s attack on Hamas in Qatar rattles markets. Brent crude spiked to a high of USD 67.38/b yesterday as Israel made a strike on Hamas in Qatar. But it  wasn’t able to hold on to that level and only closed up 0.6% in the end at USD 66.39/b. This morning it is starting on the up with a gain of 0.9% at USD 67/b. Still rattled by Israel’s attack on Hamas in Qatar yesterday. Brent is getting some help on the margin this morning with Asian equities higher and copper gaining half a percent. But the dark cloud of surplus ahead is nonetheless hanging over the market with Brent trading two dollar lower than last Tuesday.

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

Geopolitical risk premiums in oil rarely lasts long unless actual supply disruption kicks in. While Israel’s attack on Hamas in Qatar is shocking, the geopolitical risk lifting crude oil yesterday and this morning is unlikely to last very long as such geopolitical risk premiums usually do not last long unless real disruption kicks in.

US API data yesterday indicated a US crude and product stock build last week of 3.1 mb. The US API last evening released partial US oil inventory data indicating that US crude stocks rose 1.3 mb and middle distillates rose 1.5 mb while gasoline rose 0.3 mb. In total a bit more than 3 mb increase. US crude and product stocks usually rise around 1 mb per week this time of year. So US commercial crude and product stock rose 2 mb over the past week adjusted for the seasonal norm. Official and complete data are due today at 16:30.

A 2 mb/week seasonally adj. US stock build implies a 1 – 1.4 mb/d global surplus if it is persistent. Assume that if the global oil market is running a surplus then some 20% to 30% of that surplus ends up in US commercial inventories. A 2 mb seasonally adjusted inventory build equals 286 kb/d. Divide by 0.2 to 0.3 and we get an implied global surplus of 950 kb/d to 1430 kb/d. A 2 mb/week seasonally adjusted build in US oil inventories is close to noise unless it is a persistent pattern every week.

US IEA STEO oil report: Robust surplus ahead and Brent averaging USD 51/b in 2026. The US EIA yesterday released its monthly STEO oil report. It projected a large and persistent surplus ahead. It estimates a global surplus of 2.2 m/d from September to December this year. A 2.4 mb/d surplus in Q1-26 and an average surplus for 2026 of 1.6 mb/d resulting in an average Brent crude oil price of USD 51/b next year. And that includes an assumption where OPEC crude oil production only averages 27.8 mb/d in 2026 versus 27.0 mb/d in 2024 and 28.6 mb/d in August.

Brent will feel the bear-pressure once US/OECD stocks starts visible build. In the meanwhile the oil market sits waiting for this projected surplus to materialize in US and OECD inventories. Once they visibly starts to build on a consistent basis, then Brent crude will likely quickly lose altitude. And unless some unforeseen supply disruption kicks in, it is bound to happen.

US IEA STEO September report. In total not much different than it was in January

US IEA STEO September report. In total not much different than it was in January
Source: SEB graph. US IEA data

US IEA STEO September report. US crude oil production contracting in 2026, but NGLs still growing. Close to zero net liquids growth in total.

US IEA STEO September report. US crude oil production contracting in 2026, but NGLs still growing. Close to zero net liquids growth in total.
Source: SEB graph. US IEA data
Fortsätt läsa

Analys

Brent crude sticks around $66 as OPEC+ begins the ’slow return’

Publicerat

den

SEB - analysbrev på råvaror

Brent crude touched a low of USD 65.07 per barrel on Friday evening before rebounding sharply by USD 2 to USD 67.04 by mid-day Monday. The rally came despite confirmation from OPEC+ of a measured production increase starting next month. Prices have since eased slightly, down USD 0.6 to around USD 66.50 this morning, as the market evaluates the group’s policy, evolving demand signals, and rising geopolitical tension.

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

On Sunday, OPEC+ approved a 137,000 barrels-per-day increase in collective output beginning in October – a cautious first step in unwinding the final tranche of 1.66 million barrels per day in voluntary cuts, originally set to remain off the market through end-2026. Further adjustments will depend on ”evolving market conditions.” While the pace is modest – especially relative to prior monthly hikes – the signal is clear: OPEC+ is methodically re-entering the market with a strategic intent to reclaim lost market share, rather than defend high prices.

This shift in tone comes as Saudi Aramco also trimmed its official selling prices for Asian buyers, further reinforcing the group’s tilt toward a volume-over-price strategy. We see this as a clear message: OPEC+ intends to expand market share through steady production increases, and a lower price point – potentially below USD 65/b – may be necessary to stimulate demand and crowd out higher-cost competitors, particularly U.S. shale, where average break-evens remain around WTI USD 50/b.

Despite the policy shift, oil prices have held firm. Brent is still hovering near USD 66.50/b, supported by low U.S. and OECD inventories, where crude and product stocks remain well below seasonal norms, keeping front-month backwardation intact. Also, the low inventory levels at key pricing hubs in Europe and continued stockpiling by Chinese refiners are also lending resilience to prices. Tightness in refined product markets, especially diesel, has further underpinned this.

Geopolitical developments are also injecting a slight risk premium. Over the weekend, Russia launched its most intense air assault on Kyiv since the war began, damaging central government infrastructure. This escalation comes as the EU weighs fresh sanctions on Russian oil trade and financial institutions. Several European leaders are expected in Washington this week to coordinate on Ukraine strategy – and the prospect of tighter restrictions on Russian crude could re-emerge as a price stabilizer.

In Asia, China’s crude oil imports rose to 49.5 million tons in August, up 0.8% YoY. The rise coincides with increased Chinese interest in Russian Urals, offered at a discount during falling Indian demand. Chinese refiners appear to be capitalizing on this arbitrage while avoiding direct exposure to U.S. trade penalties.

Going forward, our attention turns to the data calendar. The EIA’s STEO is due today (Tuesday), followed by the IEA and OPEC monthly oil market reports on Thursday. With a pending supply surplus projected during the fourth quarter and into 2026, markets will dissect these updates for any changes in demand assumptions and non-OPEC supply growth. Stay tuned!

Fortsätt läsa

Guldcentralen

Aktier

Annons

Gratis uppdateringar om råvarumarknaden

*

Populära