Analys

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

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7 år sedan

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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

Annons

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 stocks fall again – diesel tightness persists

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2 dagar sedan

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29 augusti, 2025

Redaktionen

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.

Ole R. Hvalbye, Analyst Commodities, SEB

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.

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Analys

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

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6 dagar sedan

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25 augusti, 2025

Redaktionen

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.

Bjarne Schieldrop, Chief analyst commodities, SEB

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.

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

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1 vecka sedan

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22 augusti, 2025

Redaktionen

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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