Analys

Will OPEC drop the ball in 2018?

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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

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Analys

Breaking some eggs in US shale

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4 dagar sedan

den

5 augusti, 2025

Redaktionen

Lower as OPEC+ keeps fast-tracking redeployment of previous cuts. Brent closed down 1.3% yesterday to USD 68.76/b on the back of the news over the weekend that OPEC+ (V8) lifted its quota by 547 kb/d for September. Intraday it traded to a low of USD 68.0/b but then pushed higher as Trump threatened to slap sanctions on India if it continues to buy loads of Russian oil. An effort by Donald Trump to force Putin to a truce in Ukraine. This morning it is trading down 0.6% at USD 68.3/b which is just USD 1.3/b below its July average.

Bjarne Schieldrop, Chief analyst commodities, SEB

Only US shale can hand back the market share which OPEC+ is after. The overall picture in the oil market today and the coming 18 months is that OPEC+ is in the process of taking back market share which it lost over the past years in exchange for higher prices. There is only one source of oil supply which has sufficient reactivity and that is US shale. Average liquids production in the US is set to average 23.1 mb/d in 2025 which is up a whooping 3.4 mb/d since 2021 while it is only up 280 kb/d versus 2024.

Taking back market share is usually a messy business involving a deep trough in prices and significant economic pain for the involved parties. The original plan of OPEC+ (V8) was to tip-toe the 2.2 mb/d cuts gradually back into the market over the course to December 2026. Hoping that robust demand growth and slower non-OPEC+ supply growth would make room for the re-deployment without pushing oil prices down too much.

From tip-toing to fast-tracking. Though still not full aggression. US trade war, weaker global growth outlook and Trump insisting on a lower oil price, and persistent robust non-OPEC+ supply growth changed their minds. Now it is much more fast-track with the re-deployment of the 2.2 mb/d done already by September this year. Though with some adjustments. Lifting quotas is not immediately the same as lifting production as Russia and Iraq first have to pay down their production debt. The OPEC+ organization is also holding the door open for production cuts if need be. And the group is not blasting the market with oil. So far it has all been very orderly with limited impact on prices. Despite the fast-tracking.

The overall process is nonetheless still to take back market share. And that won’t be without pain. The good news for OPEC+ is of course that US shale now is cooling down when WTI is south of USD 65/b rather than heating up when WTI is north of USD 45/b as was the case before.

OPEC+ will have to break some eggs in the US shale oil patches to take back lost market share. The process is already in play. Global oil inventories have been building and they will build more and the oil price will be pushed lower.

A Brent average of USD 60/b in 2026 implies a low of the year of USD 45-47.5/b. Assume that an average Brent crude oil price of USD 60/b and an average WTI price of USD 57.5/b in 2026 is sufficient to drive US oil rig count down by another 100 rigs and US crude production down by 1.5 mb/d from Dec-25 to Dec-26. A Brent crude average of USD 60/b sounds like a nice price. Do remember though that over the course of a year Brent crude fluctuates +/- USD 10-15/b around the average. So if USD 60/b is the average price, then the low of the year is in the mid to the high USD 40ies/b.

US shale oil producers are likely bracing themselves for what’s in store. US shale oil producers are aware of what is in store. They can see that inventories are rising and they have been cutting rigs and drilling activity since mid-April. But significantly more is needed over the coming 18 months or so. The faster they cut the better off they will be. Cutting 5 drilling rigs per week to the end of the year, an additional total of 100 rigs, will likely drive US crude oil production down by 1.5 mb/d from Dec-25 to Dec-26 and come a long way of handing back the market share OPEC+ is after.

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Analys

More from OPEC+ means US shale has to gradually back off further

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5 dagar sedan

den

4 augusti, 2025

Redaktionen

The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly.

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

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Analys

Tightening fundamentals – bullish inventories from DOE

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1 månad sedan

den

26 juni, 2025

Redaktionen

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Ole R. Hvalbye, Analyst Commodities, SEB

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.