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Oil slides further by nearly 3% to below $70

  
Analysis, Crude

Oil tumbles further as the risk sentiment keeps more defensive

WTI D1 19-07
Not a good look for risk trades so far in European trading as sentiment continues to erode further, with oil suffering a further drop to start the new week.
Price is now dropping below $70 in a fall by close to 3%, as a stronger dollar (softer risk mood) weighs further following the drop after OPEC+ formalised a deal over the weekend.
I’m still siding with a more bullish long-term outlook for oil but the latest pullback is not one that should be underestimated.
With risk trades potentially pulling back further, we could see a sharper drop if there is a daily break below $70 before longs may feel more comfortable coming back in closer to the 100-day moving average (red line), now seen @ $66.20.

Credit Suisse raise their oil price forecasts

  
Analysis, Crude

On Brent, forecast to approximately $70/bbl in 2021 (from their previous projection of approximately $66.50/bbl)

  • $69/bbl in 2022 (from $68/bbl)
  • ‘long term’ forecast to $62/bbl (from $60/bbl)
On WTI oil
  • approx $67/bbl in 2021, from circa $62/bbl
  • $66/bbl in 2022 (from $63/bbl)
  • long term $59/bbl (from $55/bbl)
In very brief (from a longer note) CS say:
  • Bottom Line: We are raising our Brent and WTI price forecasts since supply/demand fundamentals continue to improve
  • While demand continues to surprise to the upside. OPEC + and US E&Ps have shown strong discipline.
  • As global crude oil stocks draw in 2H21, we see support of higher crude oil prices

OPEC+ agrees to deal that will see 400k bpd added monthly

  
Analysis, Crude

New baselines will take effect in April but hikes will be limited to 400k bpd

After a quickly-called ministerial meeting yesterday and a short meeting, OPEC+ agreed to a plan to increase production in 400k bpd increments through year-end.
The previous meeting grew contentious when the UAE demanded a higher baseline quota starting in May. That left OPEC in disarray but earlier this week there were reports that Saudi Arabia had made a deal with the UAE.
That was true as UAE’s baseline was adjusted to 3.500 mbpd from 3.168 mbpd. That was less than the +3.6mbpd they were pushing for but the more-important news is that Iraq, Russia, Saudi Arabia and Kuwait were also granted higher baselines for a total of 1.63 mbpd.
Importantly, ministers say this increase won’t hit all at once in May, with production hikes to be limited to 400k bpd, though beyond December, the size of the hikes weren’t agreed. The group also extended its deal until year-end 2022 and has provisions for returning Iranian oil.
New baselines will take effect in April but hikes will be limited to 400k bpd
“higher baselines will have no effect on balances, as our sources tell us that monthly production increments will be capped at 0.4mbd even after higher baselines are granted to some countries from May 2022.” according to Energy Aspects today and that’s in line with how the statement is worded.
Saudi Prince Abdulaziz said there is now a process in place and that any country with baseline grievances can go through it. That could lead to higher baselines for Algeria and Nigeria as well. He also said that by September of next year the full 5.8 mbpd in curbed pandemic production could be restored.
Overall, this adds some certainty to the oil market on the supply side. It’s the demand side though that’s cloudy because of the growing threat from variants and slow reopenings.

Goldman Sachs is bullish on oil following the reports of a Saudi/UAE deal

  
Analysis, Crude

Oil prices have dropped away since the reports that Saudi Arabia and the United Arab Emirates have reached a compromise over OPEC+ policy.

The deal should unlock an increased supply of crude into a tight oil market.
Justin was on top of the news as it broke yesterday:
  • Saudi Arabia, UAE reportedly reach compromise over oil output deal
Goldman Sachs say that the expected OPEC+ deal would be a bullish catalyst. The firm has maintained its Brent forecast at $80 per barrel.

Reports are the US-Iran nuclear talks will not resume until mid-August

  
Analysis, Crude

A resolution of these talks would (in time) lead to Iran supplying more oil.

But, that looks a way off if these latest headlines are accurate.
Reuters report, citing an unnamed diplomatic source:
  • Iran won’t resume talks until its new president takes over
  • Iran has conveyed this timing to European particiapants
  • talks unlikely to resume before the middle of August

US weekly EIA oil inventories -7897K vs -4359K expected

  
Analysis, Crude

Weekly US oil inventories

  • Prior was +6866K
  • Gasoline +1039 vs -1786K exp
  • Distillates +3657K vs +0.877K exp
  • Refinery utilization -0.4% vs +0.5% exp
  • Cushing -1589K
API data released late yesterday:
  • Crude -4100K
  • Gasoline -1500K
  • Distillates +3700K
  • Cushing -1.6K exp
WTI crude oil was trading at $74.65 ahead of the report after hitting as high as $75.40 today and as low as $74.08 on OPEC news.
This report was delayed twice (for 30 mins each) due to technical issues. This report is modestly bearish due to the product builds. Note that this week is a tough read because it’s coming off the July 4 holiday week.
Implied demand fell by 2.244 mbpd to 19.303mbpd. Overall stocks are at the lowest since January 2020 as excess inventory built up in the pandemic disappears.
CL1

Saudi Arabia, UAE reportedly reach compromise over oil output deal

  
Analysis, Crude

Reuters with the headline, citing an OPEC+ source

Oil slips on the news as both sides reach a compromise, with the UAE to have a higher oil production baseline at 3.65 mil bpd for future oil deals. An OPEC+ meeting is said to be arranged soon to formalise the agreement.
WTI
WTI falls 1.5% to $74.10 but this is a dip worth buying into in my view as much of this is already priced in and it doesn’t really shake up the fundamentals by much.
Update: Oil dips quickly bought up as price jumps back to $74.85 from a low of $74.07.

Oil – OPEC Saudis & UAE rift – but even bigger cracks within the organization loom

  
Analysis, Crude

Check out this article from Platts, its an opinion piece and points to supply issues within OPEC.

  • plans by the OPEC+ group to lift production could run into many members’ practical limits on how much crude they are able to pump
  • Internal disruptions, political disputes, underinvestment and US sanctions have all contributed to many countries’ inability or unwillingness to drill new wells and invest in infrastructure to keep growing their crude flows.
Link to Platts is here, appears to be ungated and worth checking out.
Check out this article from Platts, its an opinion piece and points to supply issues within OPEC.

ICYMI – IEA says oil markets are set to tighten significantly unless OPEC standoff resolved

  
Analysis, Crude

Via its monthly report, released Tuesday, the International Energy Agency (IEA) said oil prices would be volatile until differences were resolved.

The differences boil down to the United Arab Emirates seeking an increase in outs output quota and Saudi Arabia say “No” (I’m simplifying).IEA: 
  • “The OPEC+ stalemate means that until a compromise can be reached, production quotas will remain at July’s levels. In that case, oil markets will tighten significantly as demand rebounds from last year’s COVID-induced plunge” 
  • “The possibility of a market share battle, even if remote, is hanging over markets, as is the potential for high fuel prices to stoke inflation and damage a fragile economic recovery”
 Background to this is: 
  • the glut of oil amassed during the pandemic has been cleared
  • demand is now set to rebound by strong 5.4mb/d
  • thus a deepening supply deficit, which can drive high prices
  • hopes of additional Iranian oil hitting the market appears distant still, the US and Iran are still at an impasse on sanction
  • growth in the US shale output is marginal at best
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