Analys
Waiting for the next bullish catalyst – but do sell the rally when/if it comes
My key takeaways (Sales Summary)
Oil prices have been volatile lately due to the hurricanes in the U.S Gulf coast, with Brent testing the important support of $53/bbl yesterday, and confirmed it. The Brent front end curve is now again in backwardation. OPEC+ is standing firm on its cuts and they seem open to extending them beyond Q1-18. Oil inventories are declining and the number of US Shale Oil rigs have been declining for four weeks in a row and we believe this trend will continue. US crude production have fallen 700kbbl/d due to hurricane Harvey, which would result in a 5 mbbl outage if it lasts for a week. These factors together with low overall net long speculative positions makes us believe that there is great chance that oil prices will increase during H2. However, spikes should be good opportunities for producers to hedge as we believe there will be plenty of oil in 2018.
Price action – Testing support at $53/b – it held
Brent crude traded with some intraday noise yesterday fluctuating between gains and losses before settling up 0.1% on the day at $53.84/b. Intraday it traded down to $53.04/b which seems to have been a pure technical move to test the technical support at $53/b which it recently broke above. Following the price noise from the hurricanes in the U.S. Gulf the Brent crude oil curve is again back in backwardation at the front end of the curve. The WTI curve is however still left in solid contango as the bottlenecks created by Harvey are still problematic. The WTI to Brent November spread has moved out to $5.2/b. The WTI October contract closed up 1.2% ydy as some of the bottlenecks have started to clear but still closed as low as $48.07/b
Crude oil comment – Waiting for the next bullish catalyst – but do sell the rally when/if it comes
Brent crude is back in backwardation at the front of the curve. OPEC+ is standing firm on its cuts. It’s delivering on them and also seems open for extensions beyond 1Q18. Oil inventories are declining and front end crude prices and oil product curve structures are firming.
The number of US shale oil rigs declined by 5 rigs again last week to 605 rigs. It has now fallen four weeks in a row which is the first time since May 2016. We think this trend of declining US shale oil rigs is likely to continue towards the end of the year as there are too many rigs with completions struggling to catch up to drilling.
We do not think that this matters too much fundamentally with respect to the oil market balance in 2018 because there is such a large inventory of drilled but uncompleted wells to complete from. For the autumn however we think that seeing the number of drilling rigs declining when the WTI 1-2 year forward prices holds above $50/b could add a positive, bullish sentiment to the oil price: “See, WTI crude is above $50/b and rigs are declining! Shale oil players need a higher price to be profitable!” And maybe they do need a higher price in order to do what they do. That is at least the verdict of equity market which has punished the shale oil sector so far this year in lack of show of profits.
At the moment we also see that that US crude oil production has fallen back some 700 kb/d due to hurricane Harvey. If the outage lasts for a week it will shave 5 million barrels from global oil inventories. However, it will revive and rise strongly towards the end of the year in our view. Thus later in 4Q17 it could take away some of the current optimism of a firming oil market.
Hedge funds as of Tuesday last week had a fairly low overall net long position. I.e. there is quite a bit of room to the upside in terms of closing down shorts and adding length to their speculative positions.
North Korea has been in the news lately. What would happen to oil if a nuclear event developed is hard to say. For now we have sanctions of oil exports to North Korea on the table. This would of course reduce oil demand and so could be interpreted as potentially bearish. However, the magnitude of their consumption probably does not amount to more than some 20 kb/d. That is no more than the current weekly growth in US crude oil production (baring the recent set-back due to hurricane Harvey).
In the shorter term we have a constructive price situation. OPEC+ is firm on cuts, US shale oil rigs are declining, global oil inventories are declining, US crude production is currently down 700 kb/d, oil production in Libya has recently seen set-backs (though back up again now), hedge funds net speculative positions were at a low level last Tuesday. Technically the Brent crude price has broken up above the important $53/b level. It was tested as support yesterday and it held. Now Brent is set to test the $55.33/b level before the year to date high of $58.37/b (January 3rd) could be challenged.
However, we think there will be plenty of oil in 2018 with the need for OPEC+ to hold cuts through all of next year. Thus a bounce in crude oil prices near term should be utilized as an opportunity to hedged 2018 for the natural sellers, the producers. A new round of hard hitting hurricanes approaching the U.S. Gulf thus creating supply disruption risks could be the catalyst for such a bounce. A new and slightly longer set-back in Libya’s crude oil production could be another one. Producers and natural sellers should stay ready to utilize such a bounce.
Ch1: Brent crude front end curve back in backwardation
We have not had a lasting backwardation like this since 2014
Ch2: The WTI crude curve is still in contango however. Clogged with bottlenecks from hurricane Harvey
Ch4: Crude oil forward curves now and one week ago
Ch5: Hedge funds net long spec at low level as of Tuesday last week
Room to add length which would give bullish impetus to oil prices
Ch6: The spike in product cracks created by hurricane Harvey have fallen back
Ch7: OPEC is delivering on its pledge cuts
Ch8: US implied shale oil rigs have fallen back 4 weeks in a row – first since May 2016
Ch9: US implied shale oil rigs falling back
Ch10: US crude oil production disrupted some 700 kb/d by hurricane Harvey
Shaving some 5 mb off global inventories if it lasts for a week
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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