Analys
US shale oil rigs keeps rolling in (oil price not yet low enough to reverse the inflow)

Crude oil price action – A marginal rebound this morning before selling down further
Brent crude traded down 2.5% w/w to Friday with a close of $46.71/b. From a high close of $49.68/b last Monday it was downhill all week with a selloff from Monday close to Friday close of a full 6%. Not even the report of a large inventory draw in US (Crude: -6.3 mb, Gasoline: -3.7 mb and Distillates: -1.9 mb) on Thursday was able to counter the bearish sell-off. This morning Brent crude rebounded 0.5% to $47.18/b before the selling continued. The invitation of Nigeria and Libya to OPEC & Co’s meeting in St. Petersburg, Russia on July 24th is put forward as the explanation for the rebound. Of course OPEC & Co would like to see a production cap on both Nigeria and Libya. It would of course be no problem for Libya to offer a production cap which would be 5% below its 1.6 mb/d capacity while it now is producing just above 1 mb/d and thus still a long way off from a potential cap of 1.5 mb/d (minus 5% versus capacity of 1.6 mb/d).
Further, what has now become entirely clear is that cutting production makes little sense as long as US drillers keeps adding +30 rigs each month.
Crude oil comment – US shale oil rigs keeps rolling in (oil price not yet low enough to reverse the inflow)
The number of US oil rigs rose by 7 last week and also by 7 for implied shale oil rigs. That is above the 10 week average of 5.8 rigs/week. The weekly average since start of June 2016 is 6.7 rigs/wk. There is typically a 6 week lag from price action to rig count change reaction. Six weeks ago the 18mth forward WTI price stood at around $49 – 50/b and thus above the $45-47/b empirical inflection point from one year ago (the price level where oil rigs neither increase nor decrease). Thus naturally rigs keep flowing into market. I.e. the oil price and the forward WTI crude curve were still too high six weeks ago.
The WTI 18 mth on Friday closed at $47.3/b and thus just touching down to the inflection point (empirical value from one year ago)
US oil rig inflow has not yet stopped and continues to flow into the market at a solid, steady rate as of yet.
The oil price needs to move lower in order to stem the inflow.
Over the past six weeks 35 shale oil rigs were added into active operation. So what is the productive impact of these extra 35 rigs? Our estimate is that today each active rig will lead to about 1200 b/d/mth of new production in a combination of [wells/rig/month] and [barrels/well/day/mth1]. That is 42,000 b/d/mth of new production for the 35 rigs. Today we assume a lag from rig activation to first oil of some 8 months due to pad drilling practice. The 35 rigs added over the past 6 weeks will thus be hitting the market with production in January/February 2018. From then onwards well will be stacked on well month after month. The staggering calculation is that by the end of 2018 these 35 rigs will add some 300 kb/d of production when the production of all these wells is stacked on top of each other (assuming 60% well production decline after 12mths).
Tomorrow the US EIA will release its monthly Short Term Energy Outlook (STEO) with a forecast stretching to end of 2019. The EIA has been lagging and under estimating US crude production consistently over the past year. As such they have revised US production forecast up, up, up every month with respect to 2017 and 2018 forecasts. Today their 2017 forecast is probably mostly correct. Their forecasts for 2018 and 2019 are however in our view hugely under estimated. As such we expect them to continue to revise their US crude production forecasts higher and that this will also be part of their message tomorrow at 1800 CET.
Table 1: US oil rig count up by 7 last week
Ch1: US shale oil rig count change versus oil prices 6 weeks ago
Ch2: As oil prices have a lagging impact we expect oil rigs to continue flowing into the market until late August
Ch3: Productive effect of the 35 shale oil rigs added last six weeks: +300 kb/d in December 2018
Assuming 1200 b/d/rig/mth1 and a well production decline of 60% after 12 mths
Ch4: The official US drilling productivity probably under estimates real productivity by some 40% to 60%
This is what we find when we combine wells/rig/mth with barrels/day/well/mth1
When the US EIA adjust for this in their models it should have a dramatic effect on their US oil production forecast.
Table2: Solid draw in inventories in last week’s data
Ch5: Inventories in weekly data back on track for decline – more to come in H2-17
At the moment the market doesn’t care.
The effect should be a tightening of the time spreads at the front end of the crude curve 1 to 3 mths and 1 to 18 months.
Ch6: WTI net long speculative positions slightly higher last week
Net long position still to the high side of neutral
Ch7: Crude forward curves close on Friday and one week ago
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
Crude stocks fall again – diesel tightness persists

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.
Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.
Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).
Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.
On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.


Analys
Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.
OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.
Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.
This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.
The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

Analys
Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.
Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.
For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.
Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.
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