Sell on Mid-East tension rallies seems to be the preferred strategy these days

Risk off across the board with oil down 2%. Trading strategies looks fixed at sell-on-rallies ignited by Mid-East tensions. It is of course a risk-off day today so everything is red and Brent crude joining in by selling off 2% to USD 76.8/b . But the sense of oil market dynamics these days is that it jumps on Mid-East tensions when they flare up and then sell off on the back of weakening fundamentals as US commercial crude and product stocks inches from below the 2015-19 average through most of 2023 to now lately a jump of 23 m b above that reference. It has been a steady trend towards normality from 1 Sep 2023 when US commercial stocks were 35 m b below the mentioned average to now above that average. So trading strategy on oil seems to favor ”sell on Mid-East tension rallies”. The total meltdown of natural gas prices is also giving the oil market some chills and fear that the ”energy boom” from 2021-22-23 is now fading rapidly amid a global economy with bob-bob growth where US interest rates are still very high and a headwind to growth both in the US and elsewhere. So what is left of the part of the energy crisis which was ignited by Russia/Ukraine is still low mid-dist inventories. That is the only part of US commercial inventories which are still below the 2015-19 average.

Bjarne Schieldrop, Chief analyst commodities, SEB

Nominal or inflation adjusted historical oil prices versus US inventories calls for a current fair oil price of either USD 63/b or USD 75/b respectively. Crude oil prices are strongly related to US commercial crude and product stocks. If there has been no oil production productivity gains since 2008 then it is fair to inflation adjust historical oil prices when they are compared to historical inventories. Then USD 75/b for Brent crude is probably a fair price vs. latest US inventories. If however oil production productivity growth has been on par with inflation since 2008, then the cost of oil production has basically stayed unchanged both in real and nominal terms. In that case on shouldn’t inflation adjust historical prices since 2008 and instead use nominal prices when comparing to historical inventories. In that case the fair price of Brent crude given current US inventories is probably closer to USD 63/b.

But add some premiums for Mid-East tensions and low US SPR. But then you probably need to make some positive additions. Some for the tensions in the Middle East and risk to supply there. Some for the added inventories needed and costs involved in transporting more oil around Africa. Some for US SPR inventories which are at only 50% of capacity but that may not matter too much since the US these days is a significant exporter and do not need the SPR as much any more. 

But make some subtraction for current bearish trend. But then lastly some subtractions: One due to the ongoing bearish trend in US commercial inventories amid a lukewarm global economy. And one for the chill from a total meltdown in natural gas prices with the fear that oil fundamentals and prices will follow suite.

These reflections are about current trends and dynamics and not a change in SEB outlook. These reflections are not about what we think oil price will average overall in 2024, but all about a current snapshot, current situation of oil market dynamics.

It has been a steady deterioration in US commercial crude and product stocks since 1 September 2023 to now a jump above the 2015-19 seasonal average.

Source: Graph and calculations by SEB, data by US EIA through Blbrg

Inflation adjusted Brent crude oil prices since 2008 in scatter plot vs. total US commercial crude and product stocks indicating a fair price of Brent crude currently at USD 75/b given current inventories.

Source: SEB calculations and graph, Blbrg data, US EIA data

Nominal Brent crude oil prices since 2008 in scatter plot vs. total US commercial crude and product stocks (excl. SPR) indicating a fair price of Brent crude currently at USD 63/b given current inventories.

Source:  Source: SEB calculations and graph, Blbrg data, US EIA data

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