Analys

Will OPEC drop the ball in 2018?

Publicerat

8 år sedan

den

16 juni, 2017

OECD inventories rose 18.6 mb in April marginally up y/y. OPEC has not been able to draw OECD inventories down yet which is a disappointment to the market. Weekly data have shown a substantial draw since mid-March. Some of that draw has been in floating storage and have thus not shown up in the OECD inventories yet.

The IEA estimated that the need for OPEC’s oil was 32.1 mb/d in H1-17. This is more or less exactly what Bloomberg statistics tells us that OPEC produced on average year to May 2017. Thus no inventory draws or gains of any magnitude in H1-17.

For the second half of 2017 the IEA calculates that the market will need 33.4 mb/d of oil from OPEC, a full 1.3 mb/d higher than in H1-17 due to seasonal demand effects and refining maintenance seasonality. Maintenance of refineries has been unusually high so far this year. But these are now coming back in operation.

If we assume that OPEC keeps production at current production of 32.2 mb/d through H2-17 (baring potentially further production revival in Libya and Nigeria) then this will drive inventories some 200 mb lower in H2-17. OECD inventories currently have a surplus of some 300 mb above normal. Thus a drawdown of some 200 mb (if taken out of the OECD inventories) would drive inventories a good way towards normality and lead to a flatter crude oil price curve.

As we have argued many times it is the medium term WTI forward curve which tells the US shale oil players what kind of cash flow they can lock in with a forward hedge if they decide to drill an additional well. The medium term WTI forward curve (proxy 18 mth contract) is the real incentive lever.

Except for a brief flash sell-off in August 2016, the 18 mth forward WTI price has not touched down to $47/b since April 2016. It was when this forward contract broke enduringly above $47/b for more than 6 weeks last spring that the US oil rig count started to rise and has been rising continuously since then.

While the IEA implicitly predicts a substantial inventory draw in H2-17 they see a different picture for 2018 where they estimate that the need for OPEC’s oil is no more than 32.6 mb/d. OPEC now produces 32.2 mb/d while it holds back 1.2 mb/d and thus has a natural production of 33.4 mb/d. Thus OPEC will need to hold back at least 0.8 mb/d all through 2018 in order to prevent inventories from rising again. And if Iraq’s production capacity rises to 5 mb/d by the end of 2017 versus current production of 4.45 mb/d or if Libya’s and Nigeria’s production revives even further then OPEC will have to hold back more.

The IEA basically says that inventories will draw substantially in H2-17 due to OPEC cuts. Then however in 2018 OPEC will have to maintain more or less the same size of cuts just in order to prevent inventories from rising again.

Drawdown in inventories is likely to flatten the forward curve in H2-17. Currently there is a $3/b discount for the 1mth contract versus the 18 mth contract WTI crude. By the end of the year the 1mth contract is likely to trade much closer to the 18 mth contract or even above depending of the magnitude of drawdown.

The level of the WTI 18 mth contract which now currently trades at $47.5/b is however the big question. Will it shift higher as well? Usually the whole forward curve shifts higher when inventories draw down and the spot market firms up.

However, IEA is prediction that OPEC needs to cut production all through 2018 as well in order to prevent growing OECD inventories. Thus for every additional shale oil rig being activated through the next 6-12 months means that OPEC will have to hold back even more of its production in 2018.

In our view, while we have a more positive view of the supply/demand balance in 2018 than the IEA, we do not see the need for a single additional shale oil rig to be activated in the US over the next 12 months. In order for this to happen the WTI 18 mth contract needs to stay put at around $47/b over the next 6-12 months. Thus fundamentally, the WTI 18mth contract should not rise above the $47/b level over the next 12 months.

Every additional rig in the US over the next 12 mths is increasing the production-cut burden for OPEC in 2018. It is also increasing the need for the market to believe that OPEC will cut production all through 2018.

The market fear is that the production-cut burden will in the end become too large for OPEC and that it will drop the ball in 2018. Not prolonging the cuts beyond March 2018 and instead opt for volume over price again just as it did in 2014. That is an open question which is itching in the back head of the market.

Annons

Ch1: Deeper contango for crude curves
But front end likely to firm in H2-17 as inventories draw down

Ch2: OECD inventories increased in April – big dissapointment
Will decline substantially in H2-17

Ch3: Iraq crude production
It says that its production capacity will reach 5 mb/d end of 2017

Ch4: Nigeria and Libya crude production reviving
Libya NOC says more to come

Ch5: WTI 18 mth forward crude price heads for the US shale oil “price floor” (or rig versus price inflection point) from one year ago.
Is the inflection point still there or is it higher or lower?
The market is asking US shale oil players to stop adding more rigs.
How low will the price need to move in order to make them listen?

Ch6: Deeper rebate for 1mth to 18 mth Brent lately.
Likely to firm in H2-17

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Relaterade ämnen:bjarne schieldrop seb analys

Nästa

SEB Råvarubrev 20 juni 2017

Missa inte

SEB Råvarubrev 13 juni 2017

Fortsätt läsa

Analys

OPEC+ will likely unwind 500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d in one go could be in the cards

Publicerat

1 dag sedan

den

1 oktober, 2025

Redaktionen

Down to mid-60ies as Iraq lifts production while Saudi may be tired of voluntary cut frugality. The Brent December contract dropped 1.6% yesterday to USD 66.03/b. This morning it is down another 0.3% to USD 65.8/b. The drop in the price came on the back of the combined news that Iraq has resumed 190 kb/d of production in Kurdistan with exports through Turkey while OPEC+ delegates send signals that the group will unwind the remaining 1.65 mb/d (less the 137 kb/d in October) of voluntary cuts at a pace of 500 kb/d per month pace.

Bjarne Schieldrop, Chief analyst commodities, SEB

Signals of accelerated unwind and Iraqi increase may be connected. Russia, Kazakhstan and Iraq were main offenders versus the voluntary quotas they had agreed to follow. Russia had a production ’debt’ (cumulative overproduction versus quota) of close to 90 mb in March this year while Kazakhstan had a ’debt’ of about 60 mb and the same for Iraq. This apparently made Saudi Arabia angry this spring. Why should Saudi Arabia hold back if the other voluntary cutters were just freeriding? Thus the sudden rapid unwinding of voluntary cuts. That is at least one angle of explanations for the accelerated unwinding.

If the offenders with production debts then refrained from lifting production as the voluntary cuts were rapidly unwinded, then they could ’pay back’ their ’debts’ as they would under-produce versus the new and steadily higher quotas.

Forget about Kazakhstan. Its production was just too far above the quotas with no hope that the country would hold back production due to cross-ownership of oil assets by international oil companies. But Russia and Iraq should be able to do it.

Iraqi cumulative overproduction versus quotas could reach 85-90 mb in October. Iraq has however steadily continued to overproduce by 3-5 mb per month. In July its new and gradually higher quota came close to equal with a cumulative overproduction of only 0.6 mb that month. In August again however its production had an overshoot of 100 kb/d or 3.1 mb for the month. Its cumulative production debt had then risen to close to 80 mb. We don’t know for September yet. But looking at October we now know that its production will likely average close to 4.5 mb/d due to the revival of 190 kb/d of production in Kurdistan. Its quota however will only be 4.24 mb/d. Its overproduction in October will thus likely be around 250 kb/d above its quota with its production debt rising another 7-8 mb to a total of close to 90 mb.

Again, why should Saudi Arabia be frugal while Iraq is freeriding. Better to get rid of the voluntary quotas as quickly as possible and then start all over with clean sheets.

Unwinding the remaining 1.513 mb/d in one go in October? If OPEC+ unwinds the remaining 1.513 mb/d of voluntary cuts in one big go in October, then Iraq’s quota will be around 4.4 mb/d for October versus its likely production of close to 4.5 mb/d for the coming month..

OPEC+ should thus unwind the remaining 1.513 mb/d (1.65 – 0.137 mb/d) in one go for October in order for the quota of Iraq to be able to keep track with Iraq’s actual production increase.

October 5 will show how it plays out. But a quota unwind of at least 500 kb/d for Oct seems likely. An overall increase of at least 500 kb/d in the voluntary quota for October looks likely. But it could be the whole 1.513 mb/d in one go. If the increase in the quota is ’only’ 500 kb/d then Iraqi cumulative production will still rise by 5.7 mb to a total of 85 mb in October.

Iraqi production debt versus quotas will likely rise by 5.7 mb in October if OPEC+ only lifts the overall quota by 500 kb/d in October. Here assuming historical production debt did not rise in September. That Iraq lifts its production by 190 kb/d in October to 4.47 mb/d (August level + 190 kb/d) and that OPEC+ unwinds 500 kb/d of the remining quotas in October when they decide on this on 5 October.

Fortsätt läsa

Analys

Modest draws, flat demand, and diesel back in focus

Publicerat

7 dagar sedan

den

26 september, 2025

Redaktionen

U.S. commercial crude inventories posted a marginal draw last week, falling by 0.6 million barrels to 414.8 million barrels. Inventories remain 4% below the five-year seasonal average, but the draw is far smaller than last week’s massive 9.3-million-barrel decline. Higher crude imports (+803,000 bl d WoW) and steady refinery runs (93% utilization) helped keep the crude balance relatively neutral.

Ole R. Hvalbye, Analyst Commodities, SEB

Yet another drawdown indicates commercial crude inventories continue to trend below the 2015–2022 seasonal norm (~440 million barrels), though at 414.8 million barrels, levels are now almost exactly in line with both the 2023 and 2024 trajectory, suggesting stable YoY conditions (see page 3 attached).

Gasoline inventories dropped by 1.1 million barrels and are now 2% below the five-year average. The decline was broad-based, with both finished gasoline and blending components falling, indicating lower output and resilient end-user demand as we enter the shoulder season post-summer (see page 6 attached).

On the diesel side, distillate inventories declined by 1.7 million barrels, snapping a two-week streak of strong builds. At 125 million barrels, diesel inventories are once again 8% below the five-year average and trending near the low end of the historical range.

In total, commercial petroleum inventories (excl. SPR) slipped by 0.5 million barrels on the week to ish 1,281.5 million barrels. While essentially flat, this ends a two-week streak of meaningful builds, reflecting a return to a slightly tighter situation.

On the demand side, the DOE’s ‘products supplied’ metric (see page 6 attached), a proxy for implied consumption, softened slightly. Total demand for crude oil over the past four weeks averaged 20.5 million barrels per day, up just 0.9% YoY.

Summing up: This week’s report shows a re-tightening in diesel supply and modest draws across the board, while demand growth is beginning to flatten. Inventories remain structurally low, but the tone is less bullish than in recent weeks.

Fortsätt läsa

Analys

Are Ukraine’s attacks on Russian energy infrastructure working?

Publicerat

1 vecka sedan

den

24 september, 2025

Redaktionen

Brent crude rose 1.6% yesterday. After trading in a range of USD 66.1 – 68.09/b it settled at USD 67.63/b. A level which we are well accustomed to see Brent crude flipping around since late August. This morning it is trading 0.5% higher at USD 68/b. The market was expecting an increase of 230 kb/d in Iraqi crude exports from Kurdistan through Turkey to the Cheyhan port but that has so far failed to materialize. This probably helped to drive Brent crude higher yesterday. Indications last evening that US crude oil inventories likely fell 3.8 mb last week (indicative numbers by API) probably also added some strength to Brent crude late in the session. The market continues to await the much heralded global surplus materializing as rising crude and product inventories in OECD countries in general and the US specifically.

The oil market is starting to focus increasingly on the successful Ukrainian attacks on Russian oil infrastructure. Especially the attacks on Russian refineries. Refineries are highly complex and much harder to repair than simple crude oil facilities like export pipelines, ports and hubs. It can take months and months to repair complex refineries. It is thus mainly Russian oil products which will be hurt by this. First oil product exports will go down, thereafter Russia will have to ration oil product consumption domestically. Russian crude exports may not be hurt as much. Its crude exports could actually go up as its capacity to process crude goes down. SEB’s Emerging Market strategist Erik Meyersson wrote about the Ukrainian campaign this morning: ”Are Ukraine’s attacks on Russian energy infrastructure working?”. Phillips P O’Brian published an interesting not on this as well yesterday: ”An Update On The Ukrainian Campaign Against Russian Refineries”. It is a pay-for article, but it is well worth reading. Amongst other things it highlights the strategic focus of Ukraine towards Russia’s energy infrastructure. A Ukrainian on the matter also put out a visual representation of the attacks on twitter. We have not verified the data representation. It needs to be interpreted with caution in terms of magnitude of impact and current outage.

Complex Russian oil refineries are sitting ducks in the new, modern long-range drone war. Ukraine is building a range of new weapons as well according to O’Brian. The problem with attacks on Russian refineries is thus on the rise. This will likely be an escalating problem for Russia. And oil products around the world may rise versus the crude oil price while the crude oil price itself may not rise all that much due to this.

Russian clean oil product exports as presented by SEB’s Erik Meyersson in his note this morning.

The ICE Gasoil crack and the 3.5% fuel oil crack has been strengthening. The 3.5% crack should have weakened along with rising exports of sour crude from OPEC+, but it hasn’t. Rather it has moved higher instead. The higher cracks could in part be due to the Ukrainian attacks on Russian oil refineries.

Ukrainian inhabitants graphical representation of Ukrainian attacks on Russian oil refineries on Twitter. Highlighting date of attacks, size of refineries and distance from Ukraine. We have not verified the detailed information. And you cannot derive the amount of outage as a consequence of this.