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Venezuela is bullish but S&P 500 still looks like the driver

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25 januari, 2019

Brent crude has gained 21% since Christmas eve following a comparable 12.4% recovery in the S&P 500 index. So just as the sell-off in Brent crude went more or less hand in hand with the equity sell-off this autumn the Brent crude recovery has gone hand in hand with the recovery of the S&P 500 so far this year. There is of course a fundamental story for the oil rebound as well with cuts by OPEC+, US shale oil rig count decline and declining production in Venezuela and Iran (and others). But what the equity-oil relationship through the autumn up to now is telling us is that if the current equity rebound falters with a renewed sell-off in the S&P 500 then the Brent crude oil price is likely to falter as well.

Donald Trump’s call for a regime shift in Venezuela with his outright support for opposition politician Juan Guaidó has led to a gain in the value of government bonds in Venezuela and thus seen as a positive development by bond investors on a general basis. Impacts on Venezuela’s oil production in the short to medium term is however another matter. To us it looks like more chaos and further decline in crude production.

Bjarne Schieldrop, Chief analyst commodities

A ban on oil imports from Venezuela to the US would likely only hurt US refineries which needs the heavy oil from Venezuela to blend with ultralight shale oil. Venezuela’s crude would probably just travel to other parts of the world instead of to the US. So an import ban to the US would probably not tighten the oil market as such. Tighter sanctions towards the Venezuelan economy with the goal of toppling the current Maduro regime would however most likely lead to a further rapid deterioration in Venezuela’s oil production which of course is directly bullish for the oil market. Eventually moving to the other side of chaos with an eventual Juan Guaidó regime holding hands with the US would then of course turn things around again as it would lay the foundation for a revival in crude production in Venezuela again but that seems to be way down the road from here.

As far as we understand it is not at all impossible for the US refineries to process ultralight US shale oil as it is today without blending it with heavy crude from Mexico or Venezuela. It is more that it is not optimal. Many of the US refineries were built for medium sour crude from the Middle East. In such complex refineries there are a lot of expensive post processing units following the division of the oil molecules in the atmospheric and vacuum distillation stage. All these post processing units have specific volume capacities calibrated to the molecule distribution in medium sour crude. So if US refineries process outright ultralight US shale oil in the distillation stage then many of the post processing units will run at sub-par volumes. Even the distillation stage may not be able to run at optimal capacity. I.e. it is technically and economically sub-optimal for these refineries to run shale oil outright but not necessarily difficult. It is mostly about economics. So a lower shale oil crude price versus product prices should facilitate this. The gasoline crack to Brent crude has however crashed to below zero and made it much more difficult. Or said in another way: A yet lower shale oil crude price is needed.

US crude and product inventories have sky-rocketed adding close to 90 m bl since late July last year of which 60 m bl have been added since late December. At the moment the market does not care too much about this since OPEC+ is cutting and production in Iran is falling (with further falls in Venezuela to be expected) while US well completions and rig count has started to decline. So the remedy for the booming inventories is on the way. If however the US S&P 500 recovery sours before the remedy shows signs of working (declining inventories) then crude oil prices would most likely follow the S&P 500 index lower.

A price-path dependent oil market. In our crude oil projection for 2019 we have projected Brent crude to average $55/bl in Q1-19 and we are well above that level now. It is important to note the strong price path dependence of today’s crude oil market. If we get a higher oil price now we’ll have more drilling more well completions and a higher oil production in the following quarters. It may feel good with Brent at $61/bl right now for global oil producers, but it may not be so good for the oil market in H2-19 as it will lead to a higher US crude oil production then.

US shale oil production slows. In this week’s US EIA drilling productivity report we see that well completions have come down thus reacting to the decline in crude oil prices in H2-18. Losses in existing production rose to a new high of 530 k bl/d/mth while new production before losses rose to 602 k bl/d/mth for February. Marginal, annualized production growth thus fell to only 0.86 m bl/d/yr as new production growth slowed and moved closer to the rising legacy loss in the existing production.

Ch1: Crude prices and the S&P 500 continue hand in hand.

Ch2: US crude and product stocks have rallied. Up close to 90 m bl since late July of which close to 60 m bl since late December. But remedy is on the way with cuts by OPEC+ so the market has not cared too much about this since late December

Ch3: Refining margins have been murdered by the crash in the gasoline crack (to Brent). Now gasoil and diesel cracks are also ticking lower as we moves towards the later part of the Nordic hemisphere winter.

Ch4: Not so difficult to be booming shale oil as long as some 3 m bl/d is removed from supply from other suppliers. Booming US shale oil supply in the US is bad for Iran. The higher it goes the more room it gives Donald Trump to tighten Iran sanctions yet tighter.

Ch5: Brent crude curve has flattened significantly since the low of 24 December

Ch6: The shale oil volume weighted WTI crude price has come down from $72.3/bl. But it has rebounded back to close to $55/bl which would imply “medium shale oil heat” if it stays at that price level. Access to capital is probably just as important as the oil price.

Ch7: US oil rig count has ticked lower but not all that much yet

Ch8: The local Permian crude oil price traded at a huge discount versus Brent and WTI at times in 2018 as lack of pipelines out of Permian basin led to land-locked oil in the Permian

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Ch9: Permian is obviously no longer very land-locked with respect to getting its oil to Cushing Oklahoma WTI and Permian prices are now almost equal again.

Ch10: Losses in existing US shale oil production will be 530 k bl/d/mth in February according to the US EIA. The most ever. I.e. more and more new wells need to be completed in order to counter this rising loss.

Ch11: Number of completed shale oil wells moved sideways in Oct and Nov and then down in December.

Ch12: A lower level of well completions led to a lower level of “new production”. Losses in existing production continued to increase. The gap between new production and losses thus narrowed so net production growth slowed to lowest growth rate since mid-2017.

Ch13: Well completions per month now only running at 153 (13%) wells above steady state (when US shale oil production growth = 0). That is the lowest since mid-2017. Due to strongly rising legacy loss the well completions only need to decline by another 153 wells per month to drive US shale oil production growth to a halt.

Ch14: Shale players are however still drilling way more than they are able or willing to complete. There is thus probably a significant inventory of DUCs which they can complete without drilling. So there is room for drilling rigs to decline significantly without a comparably significant decline in well completions.

Ch15: Well productivity ticks higher at a pace of about 5-10% per year. But number of completed wells/mth is more important

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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2 dagar sedan

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.