Better and better every day – Crude oil

Brent took a breather ydy following good gains since mid-Jan. Brent crude took a breather and fell back 1.4% yesterday to USD 82.4/b following a gradual rise in Brent crude oil prices from USD 78/b in mid-January to USD 83.55/b last Friday. This morning it is rising to USD 82.7/b (+0.3%). Implied 3mth forward ATM Brent crude volatility sits at 31.2% vs. a median of 32.8% and a mean of 34.8% on average since Jan 2008. The oil market doesn’t look like it is scared too much about what is going on in the Middle East currently.

Bjarne Schieldrop, Chief analyst commodities, SEB

Saudi Arabia opting for price over market share. Aramco has been asked by the Saudi government to halt its ongoing project to lift capacity from 12 m b/d to 13 m b/d by 2027. It may be to save money. But most likely it implies that it sees no need for this extra oil in the global market. Saudi Arabia normally produce 10 m b/d. Now it produces 9 m b/d. It briefly produced 11.6 m b/d in April 2020 amid the price war with Russia (essentially a price war with US shale). So typically it produces 2 m b/d below its maximum capacity. If Saudi Arabia chose to lift its capacity to 13 m b/d it would probably aim to produce 11 m b/d. If it chose to do so then the world would happily consume it but the oil price would be lower and non-OPEC producers with higher costs would have to back off.

The message from this is that Saudi Arabia is aiming for price over volume also in the coming 5 years.

Better and better every day (with respect to call-on-OPEC through 2024). There is a lot of bearish talk on global economic growth and fears and doubts over global oil demand this year. Further a lot of focus on booming non-OPEC+ supply which is increasingly pushing OPEC+ aside and diminishing the group’s market share both in percentage terms and in absolute terms.

There are a million risks and uncertainties for the year ahead which will likely play us all for fools in the end. But amid all these head-twisting uncertainties, let’s look at the oil market base case scenario from the IEA published mid-January. If they are right in their forecast for the global oil market in 2024 it is actually a very good story for OPEC.

My point of view here is: How will the position of OPEC progress through the year of 2024? Will OPEC have to fight with its back against the wall with marginal additional cuts month by month in a loosing battle against weakening demand growth and robust non-OPEC supply growth? That is at least the impression we get reading oil market headlines.

The IEA is however painting a completely opposing view. It is basically saying that through the year of 2024 it is going to be gradually better and better for OPEC every quarter in 2024 as the world will need more and more oil from the group. Yes, call-on-OPEC will on average 2023 to average 2024 decline to 27 m b/d from 27.2 in 2023. But Q4-23 was the low-point progression wise and from there on it will gradually get better and better every day.

This is a point estimate for the year ahead. A key assumption is that booming production growth in the US in 2023 shifts abruptly to basically zero growth from Q4-23 to Q4-24 (same view as the US EIA) and that of course remains to be seen.

The world has seldom looked more uncertain than it does today. The post world war global order is dissolving with proxy wars in Ukraine and the Middle East. China is shifting to a state controlled economy with a contracting population and much lower growth rate. The US Fed funds rate is at the highest level in 23 years: Will we really escape a recession? These uncertainties is a good reminder that oil prices typically trade in a range of +/- USD 20/b around its mean in a year. 

The point-estimate of the IEA may thus turn out to be an illusion in the end, but it is a good starting point of discussion. And if it turns out to be correct, the year ahead for OPEC will be gradually better and better every day.

Call-on-OPEC is getting better and better every quarter as we move through 2024 in the eyes of IEA in its Jan-2024 OMR report.

Source: SEB graph, IEA data

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