Analys
US crude recovery could cover all OPEC cuts
Over the last two weeks Brent crude has fallen close to $4/b. Market perception has shifted from “OPEC will do the job and US crude production will recover gradually” to instead “Can OPEC do the job? and US production is rebounding strongly”. The hypothesis that US crude oil production will only recover gradually and slowly as long as the oil price stays below $60/b has clearly fallen. The US EIA projects that US crude production will move above its April 2015 peak of 9.6 mb/d in February 2018. We think that this will happen already in October 2017. However, if we extrapolate the average weekly increase since the start of 2017 (+33.9 kb/d/week) we get that with a starting point of 9.1 mb/d on the 10th of March then US crude production will pass the 9.6 mb/d already in June 2017. Thus full attention to the US EIA’s weekly publishing of US crude production is clearly warranted.
If US production had only recovered slowly as long as the oil price stayed below $60/b, then it would easily have been in OPEC’s power to drive the oil price rather quickly back to $60/b. However, US shale oil rig count rose by 7 rigs per week in H2-17 when the WTI 15mth forward price averaged around $52/b in H2-16. When that part of the forward curve was pushed up to $55-56/b following OPEC’s decision to cut it lifted the weekly rig count additions to 9.2 rigs/week on average so far in 2017. Along with the latest sell-off the WTI 15mths price has now fallen back to $50.5/b. This can be interpreted as an effort by the market to push back the current acceleration in shale oil investments. If this price stays at this level of about $50/b then we won’t know the effect of this before some 6-8 weeks down the road which is the typical lag between price action to rig count reaction. Thus the growth in US shale oil rig count is likely to continue unabated all through April.
OPEC will meet on the 25th of May this year to discuss whether to continue its cuts or not. US crude oil production stood at 8.7 mb/d when OPEC decided to cut at its 30th November meeting in 2016. That was only 0.25 mb/b above the US crude production trough of 8.45 mb/d in July/August 2016. The general view then was clearly that US crude production would recover gradually. There would not be much acceleration unless the oil price moved up to $60/b. OPEC decided to cut 1.16 mb/d from its October production level which lead to a production target of 31.8 mb/d for H1-17. So far OPEC has cut 0.4 mb/d less than planned with an averaged Jan/Feb production of 32.2 mb/d. I.e. the organisation has cut some 0.8 mb/d versus its October 2016 level. Back in November a US crude production rebound was not even on the horizon and not much discussed. The US EIA’s monthly report only stretched out to the end of 2017 with a prediction that US crude production would hit 8.94 mb/d in Dec 2017 which was just 250 kb/d above the US crude production in November 2016.
Now it all looks different. If we look away from EIA’s projection of US hitting 9.6 mb/d in Feb 2018 and instead focus on the latest weekly production data of 9.1 mb/d and extend it with the growth trend so far this year then US production would hit close to 9.5 mb/d just when OPEC’s members meet on the 25th of May. US production would then have increased by close to 0.8 mb/d since OPEC decided to cut in November 2016. That is close to exactly what OPEC has cut in Jan and Feb. Thus if OPEC’s compliance to the decided cuts don’t rise from here then US crude oil production recovery could end up rising equaly much as OPEC ended up cutting. The previous oil minister in Saudi Arabia, Ali al-Naimi’s words that an OPEC cut would only yield a lower market share while not necessarily lift the oil price may start to ring in the back of the head of OPEC’s members. We don’t expect OPEC to extend its cuts into H2-17. We have this itching feeling that OPEC compliance to cuts may start to erode towards the end of H1-17. Especially if the expectation is that there will be no further cuts.
Speculative market repositioning helped to shift oil prices lower
The pullback in the oil price last two weeks was clearly a repositioning in speculative positions as holders of long positions started to be concerned about the increasingly visible strong US production recovery. Net long speculative positions in WTI reached close to 600 mb some 4 weeks ago but have now sold off back down to 500 mb. A more neutral level is however around 350 mb. Thus there is still risk for further bearish repositioning.
We still expect Brent crude at $57.5/b in Q2-17 before falling back to $52.5/b in Q4-17
We are still positive for crude oil prices into Q2-17 where we expect front month Brent to average $57.5/b. We expect to see inventories to start to draw any moment as OPEC’s elevated production in Nov and Dec now increasingly is assimilated. Global refineries are also now increasingly coming back on line thus starting to process crude oil again. As oil inventories continues to draw as it did all through H2-16 we expect the forward crude oil curves to flip fully into backwardation. This will then enable the Brent crude oil front month contract to move up to $57.5/b while still leaving the WTI 15mth contract at around $51-52/b. Our outlook for Q2-17 is however at risk if US crude oil production continues to grow at its current trend rate. We still expect Brent crude to head down to average $52.5/b in Q4-17 in order to cool US shale oil production growth.
We expect OECD inventories to draw down 160 million barrels in 2017
The market was disappointed when it heard from IEA that OECD inventories rose by 48 mb in January. In perspective however, OECD inventories normally increase by some 30 mb from Dec to Jan. Thus the increase in inventories was only 18 mb more than normal. What is striking is that OECD’s inventories trended downwards all through H2-16 and ended down y/y for the first time in a long, long time in both December and January. And this was even without the help of OPEC cuts. We still expect the oil market to run a deficit of some 0.4 mb/d in 2017 thus resulting in a steady draw in inventories. Thus we have passed the OECD peak inventories and we are now heading downwards. The higher activation of US shale oil rigs than expected over the last two to three months has however impacted our projected supply/demand balance for 2018 leading to virtually no deficit in 2018 and thus very limited draws. Thus 2018 look likely to be a waiting year for the oil market with still plenty of oil in OECD inventories and with few pressure points.
Ch1: OECD down y/y for the first time in a long time in Dec and Jan
We are past the peak OECD inventories. To draw down from here
Ch2: Strong US production growth recovery is posing a problem for OPEC
OPEC cuts unlikely to continue in H2-17 as US production may reach 9.5 mb/d already in late May (trend extrapolation)
Ch3: Latest sell-off has increased the depth of front end crude curve contango
This contango and discount for spot crude prices versus longer dated contracts is just what OPEC wants to get away from
The 1-2 year forward WTI curve has shifted down to $50/b which would reduce the profitability for new shale oil investments
Ch4: Net long speculative WTI positions has pulled back but are still high
Now standing at 500,000 contracts or 500 million barrels.
Neutral level would be around 350 million barrels
Ch5: OPEC production at 32.16 mb/d in Feb and thus some 350 kb/d above its target.
Will OPEC compliance fall apart if it becomes increasingly clear that there will be no cuts in H2-17?
Ch6: We still expect a deficit the next three years despite strong US production growth
The balance assumes no OPEC cuts after H1-17
Ch7: Due to current high OECD inventories the global oil market is fine all through 2017 and 2018.
Not a lot of pressure points to be seen before 2019
Ch8: And yes, we are bullish US crude oil production but even more than that is needed in 2019
Then it all boils down to “too little too late” or “too much too soon”.
The US EIA is lifting its prognosis every month all since last July.
We expect them to continue to do that going forward as well as the EIA prognosis is still way behind the curve in our view.
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
Brent prices slip on USD surge despite tight inventory conditions
Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.
Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.
Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.
In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.
Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.
Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.
We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.
Analys
Oil falling only marginally on weak China data as Iran oil exports starts to struggle
Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.
Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.
China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.
Analys
Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025
Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.
”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.
Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.
Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.
The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.
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