Analys
We can confidently say yet again that Saudi Arabia is the boss

Crude oil prices are pulling back this morning on China concerns. But Saudi Arabia is probably very happy with the overall situation. It has showed the oil market yet again who’s the boss and the world will also need more of its oil in the coming months. The global market is set to run a deficit of 1.7 m b/d in Q4-23 according to the latest IEA report if Russia and Saudi Arabia sticks to their current production. After now having put the market strait there is no reason for Saudi Arabia to let such a deep deficit and inventory draw actually play out. It would lead to much higher prices but Saudi would also receive a lot of political pain from the US, China, India, Europe. Why ruin the party with oil rallying above USD 100/b and drive up an ugly political debacle when oil at USD 85/b is such a beautiful place. Tapering of Saudi Arabia’s cuts in Q4-23 would be the natural thing to expect. But all through September at least there should be a very sharp and tight market.

Through most of the first half of this year all up until late June there was deep disagreement with respect to global oil demand. In its June oil market report (STEO), the US EIA projected an oil demand in Q4-23 of 101.8 m b/d while the IEA in its OMR report the same month projected a Q4-23 demand of 103.5 m b/d. Such magnitudes of diverging views with respect to global oil demand is very rare. Markets didn’t really know what to believe with deep fear of deteriorating economic outlook on top due to sky rocketing interest rates around the world and a sluggish Chinese economy. The actual level of global oil demand is usually something we only really know in hindsight. With lots of facts in hand the IEA now estimates that global demand was 103 m b/d in June and expects it to be 103.1 m b/d in Q4-23.
The world did indeed get a strong rebound in global oil demand as the world increasingly and fully emerged from Covid-19 restrictions. Increased flying, driving and strong demand for petrochemicals. But it took a little longer to materialize than expected and it was shrouded in fears over the direction of the global economy. Global demand at 103 m b/d is not about a vigorously growing global economy but mostly about normalization post Covid-19. The IEA now estimates that global demand this year will average 102.2 m b/d versus 99.9 m b/d in 2022 giving a rebound of 2.2 m b/d YoY. But if it hadn’t been for Covid-19 then global oil demand would probably have been averaging close to 106 m b/d this year and 106.5 m b/d in H2-23 if we assume the normal 1.3% oil demand growth since 2019 had taken place. Much of this normal oil demand growth is due to population growth which is relentlessly rising higher. There is thus still a potentially huge, pent up demand for oil which may have built up during the Covid-19 years. Whether that potential pent up demand will actually emerge or not remains to be seen. But for now we are at a solid 103 m b/d demand. This is what the market can see and believe in. But significant pent up demand may be lurking behind the curtains.
Saudi Arabia was probably very frustrated with financial oil markets as they sold oil heavily in H1-23 and drove prices lower even as Saudi Arabia could see in its physical oil books that demand was robust. Saudi Arabia made deep cuts to production from 10.5 m b/d in April and all the way down to almost 9.0 m b/d in July with same level also in August and September. This isn’t Saudi Arabia’s first rodeo and it has really showed the market yet again who’s the boss.
Global oil demand normally rises by 1.3 m b/d from H1 to H2. Production from OPEC+ has however declined by 1.6 m b/d from April to August. And market is now very tight. If Saudi Arabia and Russia sticks to their current production levels throughout H2-23 then the IEA projects a draw in global oil inventories of 1.7 m b/d. That is a big, big draw which would drive oil prices yet higher. The price of sour crude (Dubai) which normally trades at at discount to sweet crudes is now instead trading at a premium. That is how tight the sour crude market has gotten.
But Saudi Arabia now has plenty of spare capacity at hand and it can easily lift production by 1.5 m b/d again back up to 10.5 m b/d. While they may chose to keep production at around 9.0 m b/d for a little while longer they have no good reason to drive the oil price up to USD 100-110/b. That will only give them large political problems with their main consumers. For sure neither the US nor China or India will be very happy.
Saudi Arabia should be fully content for the moment. It has shown the market yet again who’s the boss. It has driven the oil price back up to a very satisfying level of USD 85/b (ish). The world needs more of its oil and Saudi has spare capacity to provide it. Could it be better? Hardly.
US oil inventories with and without SPR. We still haven’t seen a decline in US crude and product stocks excluding SPR. But that will be the proof of the pudding. A running global deficit of 1.7 m b/d will eventually show up in declining US crude and product stocks.

Main oil product stocks in the US are lower this year than last year. At least a little. Refining margins are very strong as a result of reviving global demand for gasoline and jet fuel. When refining margins are strong then refineries make a lot of money and then they buy a lot of crude oil to make more.

Refining margins ticked lower following crazy levels in 2022 but have now shot back up again as demand for gasoline and jet fuel has revived post Covid-19.

Significant cuts from Saudi Arabia and some cuts by Russia has made total OPEC+ production fall like a rock (blue line). But that also means there is more spare capacity at hand.

The sharp decline in production from OPEC+ has led to a rebound in the time spreads for both Brent crude and Dubai crude. The tightening by OPEC+ is so large that Dubai sour crude now trades at a premium to Brent crude which is highly unusual (lilac graph).

Analys
Crude stocks fall again – diesel tightness persists

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.

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.


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

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.

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.

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

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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