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USD weakness, inventory draws and a pinch of Venezuela concerns

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SEB - Prognoser på råvaror - CommodityLast week Brent crude gained 9.3% w/w with a close of $52.52/b on Friday. WTI gained comparably much (+8.6%) with a close of $49.71/b. The main gains were in the front end of the crude curves leading to a substantial flattening of the forward curves. Brent crude Dec 2020 only gained 2.6% with a close of $54.72/b and thus a way smaller gain than in the front end of the forward curves. For WTI the front end contract now only sits $0.34/b below the 18 mth forward WTI contracts which closed the week at $50.05/b.

Continued inventory draws last week underpinned the crude oil price rally and the flattening of the forward crude curves. Weekly inventory data last week saw draws of 16 mb of which 10 mb were in the US while a reduction of 8.6 mb in floating storage also took a solid bite. Over the past 5 weeks inventories have drawn down some 70 mb in weekly data. Thus inventory draws kicked in and accelerated almost on the clock as we entered stronger seasonal consumption in Q3-17. Since mid-March weekly data indicate an inventory draw of 104 mb of which 76 mb took place in the US while 18 mb were drawn in floating storage. Refineries are rapidly coming back online with increased crude oil consumption as a result. There are still more refineries to come back online both in Asia and LatAm while Europe and Africa are mostly all up and running. We expect continued draws in H2-17.

Saudi Arabia of course added some extra fuel on the fire last week as they promised exports of no more than 6.6 mb/d in August. That would be their lowest monthly export since early 2011 (not including oil products). From Jan-May Saudi Arabia exported 7.17 kb/d. If it sticks to 6.6 mb/d exports in August it will be a reduction of 705 kb/d y/y versus its pledged production cut of 490 kb/d. The lower export pledged in August of course coincide with high domestic summer demand in Saudi Arabia. As such it remains to be seen whether the export cap of 6.6 mb/d remains in place after August. What it shows more than anything is determination by the Saudi energy minister Al-Falih. Determination to draw inventories down and the time to do it is H2-17 before US shale oil revival extends too far in 2018. It is thus possible that Saudi Arabia maintains its export cap beyond August.

The softening in the US dollar has definitely underpinned the whole crude oil rally. It has underpinned a rally in the whole commodity complex. Over the past 5 weeks Bloomberg’s commodity index has gained 8.3% with 11.9% in Energy, 8.3% in Agri, 7% in Industrial metals and 1% in precious. The USD index has declined a substantial 4.1% over the period with half of the overall commodity index gain being a nominal impact from a softer dollar. IMF’s upgrade last week of growth in Europe, Japan and China while downgrading US growth from 2.3% to 2.1% (little hope for promised tax cuts) is the example in case which drives the dollar lower. US growth has been ahead of the curve for a long time and now the rest of the world is catching up. If the dollar weakness continues it will undoubtedly drive commodity prices in general and oil prices specifically higher in nominal terms. With the 4.1% USD Index decline over the past 5 weeks the Brent crude Dec 2020 contract has gained 5.5%. Thus almost all of this can be attributed to the dollar effect.

The deteriorating situation in Venezuela probably adds some support to oil prices as well. A national election was held this weekend to vote for members of a National Constituent Assembly. This Assembly will have no fixed term, it will have powers to rewrite the constitution. It will supersede the National Assembly and hand Nicolas Maduro close to dictatorial power and end close to six decades of democracy. At least 10 people were killed in clashes during the election this weekend and some 120 people have been killed in uprisings since April. Venezuela probably holds the world’s largest oil reserves (297 billion barrels) and produced 1.97 mb/d in June (Blberg) which is close to exactly equal to the production cap under the current OPEC production agreement. Its production has however deteriorated steadily due to lack of investments with production standing at 2.37 mb/d back in July 2015. The main concern in the oil market following the election is possible sanctions by Donald Trump. The US buys a third of Venezuela’s oil exports. Extensive US sanctions could make it almost impossible for international oil companies to work in Venezuela. For now the market is awaiting reactions from Donald Trump.

Today equities are up across the board, industrial metals are up 1% and Brent crude traded as much as 0.8% higher before now trading flat at $52.5/b. Thus so far this morning crude oil is lagging behind the gains in industrial metals. Crude oil is trading cautiously following five consecutive days of solid gains. A slight negative this morning is the USD Index which gains 0.3%. We expect to see further oil inventory draws also this week. If the USD Index also continues on its softening trend the two drivers are likely to push crude oil prices yet higher also this week. Money managers have added net long positions for 4 weeks in a row now but probably have room to add more. Producers are likely to sell into the forward crude prices. This is likely to hold back gains for medium term crude prices while inventory draws and investor appetite continues to push upwards in the front leading to a yet flatter crude curve. Potentially shifting the curves into backwardation.

The crude oil inventory draws taking place at the moment are of course real and they will draw down more during H2-17. Still it is important to remember that they are artificially managed by a 1.8 mb/d cut by OPEC and some non-OPEC members. Currently they help to draw down invnetories and to flatten curude curves. When needed however, the volumes will be put back into the market some time in 2018 or 2019.

Ch 1: Inventories in global weekly data drew 16 mb last week.
Over the past 5 weeks inventories have drawn down 70 mb in weekly data

Inventories in global weekly data drew 16 mb last week

Oil

Ch2: US crude and product stocks now well below last year
And down y/y first time since 2014

US crude and product stocks now well below last year

Ch3: The USD Index has moved down 9.6% since the start of the year
More specifically it has moved down 4.2% since crude oil prices bottomed out in June 21st.
It is now the weakest since a brief sell-off in February 2016.
However, it needs to decline another 15% to get down the the weakness it had in 2014.

The USD Index has moved down 9.6% since the start of the year

Ch4: If we had had USD weakness as in 2014 we should nominally have had an oil price of close to $60/b

If we had had USD weakness as in 2014 we should nominally have had an oil price of close to $60/b

Ch5: Crude oil forward curves flattened substantially last week
As investors and refineries bought the front while producers probably sold into the rally out on the curve

Crude oil forward curves flattened substantially last week

Ch6: The 1 to 6mth crude time spreads got close to zero

The 1 to 6mth crude time spreads got close to zero

Ch7: And crude time spreads of 1mth to 18mth were not far away either
With WTI 1mth closing just $0.34/b below the 18mth on Friday and trading just $0.19/b below today

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And crude time spreads of 1mth to 18mth were not far away either

Ch8: A word of caution though. The tightness is not so evident in the Brent crude oil spot market
Dated Brent still trades at a $0.5/b discount to the 1mth contract in a sign that deficit of crude oil is still not quite yet here

A word of caution though. The tightness is not so evident in the Brent crude oil spot market

Ch9: US oil players added 2 rigs last week

US oil players added 2 rigs last week

Oil

Ch10: Global refineries are rapidly getting back on line consuming more crude oil
More to come in Asia, ME and LatAm

Global refineries are rapidly getting back on line consuming more crude oil

Ch11: Deteriorating crude production in Venezuela
Production could be hit hard by possible US sanctions

Deteriorating crude production in Venezuela

Ch12: Net long managed money probably has room to add more length
Even though length has been added 4 weeks in a row now

Net long managed money probably has room to add more length

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

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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.

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Analys

Waiting for the surplus while we worry about Israel and Qatar

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

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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!

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