The Dated Brent crude oil price ydy closed at USD 96/b. Wow, that’s a high price! This sensation however depends on what you think is ”normal”. And normal in the eyes of most market participants today is USD 60/b. But this perception is probably largely based on the recent experience of the market. The average Brent crude oil price from 2015-2019 was USD 58.5/b. But that was a period of booming non-OPEC supply, mostly shale oil. But booming shale oil supply is now increasingly coming towards an end. Looking more broadly at the last 20 years the nominal average price was USD 75/b. But in inflation adjusted terms it was actually USD 97/b.

Saudi Arabia’s oil minister, Abdulaziz bin Salman, yesterday stated that its production cuts was not about driving the price up but instead it was preemptive versus the highly uncertain global economic development. In that respect it has a very good point. The US 2yr government bond rate has rallied to 5.06% which is the highest since 2006 and just a fraction away of being the highest since December 2000. The Chinese property market is struggling and global PMIs have been downhill since mid-2021 with many countries now at contractive, sub-50 level. Thus a deep concern for the health of the global economy and thus oil demand going forward is absolutely warranted. And thus the preemptive production cuts by Saudi Arabia. But killing the global economy off while it is wobbling with an oil price of USD 110-120/b or higher is of course not a smart thing to do either.

At the same conference in Canada yesterday the CEO of Aramco, Amin H. Nasser, said that he expected global oil demand to reach 110 m b/d in 2030 and that talk about a near term peak in global oil demand was ”driven by policies, rather than the proven combination of markets, competitive economics and technology” (Reuters).

With a demand outlook of 110 m b/d in 2030 the responsible thing to do is of course to make sure that the oil price stays at a level where investments are sufficient to cover both decline in existing production as well as future demand growth.

In terms of oil prices we tend to think about recent history and also in nominal terms. Most market participants are still mentally thinking of the oil prices we have experienced during the shale oil boom years from 2015-2019. The average nominal Brent crude price during that period was USD 58.5/b. This is today often perceived as ”the normal price”. But it was a very special period with booming non-OPEC supply whenever the WTI price moved above USD 45/b. But that period is increasingly behind us. While we could enjoy fairly low oil prices during this period it also left the world with a legacy: Subdued capex spending in upstream oil and gas all through these years. Then came the Covid-years which led to yet another trough in capex spending. We are soon talking close to 9 years of subdued capex spending.

If Amin H. Nasser is ballpark correct in his prediction that global oil demand will reach 110 m b/d in 2030 then the world should better get capex spending rolling. There is only one way to make that happen: a higher oil price. If the global economy now runs into an economic setback or recession and OPEC allows the oil price to drop to say USD 50/b, then we’d get yet another couple of years with subdued capex spending on top of the close to 9 years with subdued spending we already have behind us. So in the eyes of Saudi Arabia, Amin H. Nasser and Abdulaziz bin Salman, the responsible thing to do is to make sure that the oil price stays up at a sufficient level to ensure that capex spending stays up even during an economic downturn.

This brings us back to the question of what is a high oil price. We remember the shale oil boom years with an average nominal price of USD 58.5/b. We tend to think of it as the per definition ”normal” price. But we should instead think of it as the price depression period. A low-price period during which non-OPEC production boomed. Also, adjusting it for inflation, the real average price during this period was actually USD 72.2/b and not USD 58.5/b. If we however zoom out a little and look at the last 20 years then we get a nominal average of USD 75/b. The real, average inflation adjusted price over the past 20 years is however USD 97/b. The Dated Brent crude oil price yesterday closed at USD 96/b.

Worth noting however is that for such inflation adjustment to make sense then the assumed cost of production should actually rise along with inflation and as such create a ”rising floor price” to oil based on rising real costs. If costs in real terms instead are falling due to productivity improvements, then such inflation adjusted prices will have limited bearing for future prices. What matters more specifically is the development of real production costs for non-OPEC producers and the possibility to ramp up such production. Environmental politics in OECD countries is of course a clear limiting factor for non-OPEC oil production growth and possibly a much more important factor than the production cost it self.  

But one last note on the fact that Saudi Arabia’s energy minister, Abdulaziz bin Salman, is emphasizing that the cuts are preemptive rather then an effort to drive the oil price to the sky while Amin H. Nasser is emphasizing that we need to be responsible. It means that if it turns out that the current cuts have indeed made the global oil market too tight with an oil price spiraling towards USD 110-120/b then we’ll highly likely see added supply from Saudi Arabia in November and December rather than Saudi sticking to 9.0 m b/d. This limits the risk for a continued unchecked price rally to such levels.

Oil price perspectives. We tend to think that the nominal average Brent crude oil price of USD 58.5/b during the shale oil boom years from 2015-19 is per definition the ”normal” price. But that period is now increasingly behind us. Zoom out a little to the real, average, inflation adjusted price of the past 20 years and we get USD 97/b. In mathematical terms it is much more ”normal” than the nominal price during the shale oil boom years 

Is global oil demand about to peak 1: OECD and non-OECD share of global population

Is global oil demand about to peak 2: Oil demand per capita per year

The market is bewildered and cannot quite figure out whether the latest extension of Saudi Arabia’s unilateral cut to the end of the year is 1) A reflection of weakness to come and an effort to preemptively trying to avoid the oil price from falling below USD 85/b amid coming weakness, or 2) An effort do drive the oil price to USD 100-110/b by the end of the year. If the IEA’s latest calculations for global demand in Q3 and Q4 are correct and Saudi sticks to its cuts then global inventories will indeed decline by 250 million barrels by year end and Brent crude will rally to USD 100-110/b. And Saudi Arabia will get a lot of blame. One thing which is very clear though is that Saudi Arabia together with Russia is in comfortable control of the oil market and we’ll just have to accept the oil price they are aiming for.

OPEC produced 27.8 m b/d in August. The IEA in its latest OMR has calculated call-on-OPEC to be 30 m b/d in Q3-23 and 29.8 m b/d in Q4-23. So on paper the global market is running a deficit of 2.2 m b/d or 15.4 m b per week. If so we should see a decline in US oil inventories as they are impacted by the global balance. Maybe on par with US oil demand share of the world being close to 20%. I.e. we should expect to see an inventory decline in the US of at least 3 m b per week. Maybe more. And indeed that is also what we have seen. Ydy the US API released partial US inventory data indicating that US crude inventories declined 5.5 m b last week while gasoline inventories declined 5.1 m b. That is big and a clear signal that the market today is running at a significant deficit. Other signs of a tight market is the elevated level of backwardation in crude and oil product forward curves, rising official selling prices by Saudi and also the fact that Dubai crude is trading at a premium of close to USD 1/b versus Brent crude rather than the usual discount of USD 1-2-3/b.

In this perspective the extension of Saudi Arabia’s unilateral production cut to the end of the year is shocking. If the IEA is correct in its assessments then we would get a global inventory draw of about 250 million barrels from now to the end of the year. And if so the Brent crude oil price would indeed move to USD 100 – 110/b by the end of the year. Speculators can then doubt the market as much as they want. But such a physical deficit would most definitely drive the price up, up, up.

This deliberate action of driving the oil price to USD 100 – 110/b can then squarely be blamed on Saudi Arabia’s unilateral production cuts. Together with Russian export curbs of 0.3 m b/d of course. Everyone can accept that the oil price rallies to USD 100/b and higher due to unforeseen events. But here we are talking about deliberate action of driving the oil price higher in the face of a western world fighting hard to curb inflation while the Biden administration is also preparing for a re-election in 2024. Gasoline prices higher and higher. Hm, that is not at all what the US consumers wants, what Biden wants or what the Fed wants. So the latest action from Saudi Arabia, if it drives the oil price to USD 100/b or higher must indeed lead to political heat from the US.

But there is a possible excuse. We know that interest rates have been lifted rapidly over the past 12-18 months and that this is leading to global economic cooling for the year to come. Add China’s struggling housing market to this. Western consumers are buying less stuff from China. Chinese consumers are buying less stuff because they fear the economic situation. Chinese exports are down 8.8% YoY and imports are down 7.3% YoY.

Saudi Arabia has one of the biggest physical oil books in the world. As such it can see the cards of its oil purchasing clients on a 1-2-3 months forward basis. It can see what they are booking and ordering for the coming 1-2-3 months. IEA’s calculations is the global balance on paper. It is a static snapshot. But the world is dynamic and changing all the time. So it is possible that the extension of Saudi Arabia’s unilateral cut is a counter to weakness to come and an effort to avoid the oil price from falling below USD 85/b rather than an effort to drive the oil price to USD 100/b or higher. It is impossible to know for sure. What we can be pretty confident about however is that Saudi Arabia together with Russia are comfortably running the show.

Another twist here is also that even if Saudi Arabia now has pledged to keep its production at 9 m b/d (vs. normal 10 m b/d) to end of December, it always has the option to change the course in October and November. I.e. if it turns out that the cuts are too deep and the market is overly short oil, then it can lift production November and December if need be.

Oil, gas and coal prices have increased by 11%, 48% and 17% respectively since a low point in early June, but they are still down by 16%, 89% and 68% from a year ago. The worst of last year’s energy crisis has passed. The coming winter should be easier than the last, but weather is a wild card. OPEC+ will continue to have a firm grip on the oil market in the next couple of years, with US shale production slows – USD 85-90bl is a likely balancing point.

Oil market: OPEC+ should be in solid control for the next couple of years

China accounted for 42% of global oil demand growth from 2015-2019, according to BP. If China’s struggling property market evolves into a national recession it would clearly be a negative for oil demand. Call-on-OPEC is projected by the IEA to decline by 0.3 m b/d to 29 m b/d in 2024. This will erode OPEC’s market power, but only marginally. We expect OPEC+ to be in solid control of the global oil market over the next couple of years as US shale oil production slows to a trickle. An oil price of USD 85-90/bl should be a good balancing point for consumers and producers.

Natural gas market: Navigating tensions of geopolitics and market dynamics

 SEB gas forecasts have undergone revisions, affecting near-term prices with most significant reductions for Q4 2023, minor tweaks for FY 2023 and 2024, while 2025 and 2026 remain unchanged. These adjustments stem from geopolitical dynamics, e.g., Russia’s fluctuating energy supply to the EU, which has both economic and strategic implications. EU gas inventories, currently at 93%, suppress short-term prices. However, the divergence between spot and futures indicates an underlying tension and uncertainty in the market. EU’s ability to attract LNG imports is challenged by the global market, with NE Asia likely outbidding Europe for LNG cargoes. Disruptions in Australian LNG exports and maintenance on the Norwegian Continental Shelf further complicate the supply chain. As winter approaches, these variables suggest a volatile market, potentially leading to higher European gas prices in the foreseeable future.

New and Previous Oil & Gas Price Forecast (USD/bl & EUR/MWh)

Brent Oil Price and Estimates (USD/bl)

Ole R. Hvalbye, Analyst Commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB