Oil supply cushion insures against Venezuela output loss
Until recently, Venezuela’s oil production had stabilized at about 1.2 million b/d. However, the country’s recent electricity crisis has paralyzed it for substantial periods of time. In its Oil Market Report for March, the International Energy Agency warned that, as Venezuela’s industry operations were seriously disrupted by the crisis, ongoing losses could present a challenge to the oil market.
Nevertheless, “in the event of a major loss of supply from Venezuela, the potential means of avoiding serious disruption to the oil market is theoretically at hand,” IEA said.
As IEA noted, 1.2 million b/d, Venezuela’s current oil production level, also is the size of the output cuts agreed by the Organization of Petroleum Exporting Countries and some non-OPEC producers. The cuts were implemented in January and compliance by OPEC reached 94% in February, with Saudi Arabia cutting back by about 170,000 b/d more than required. The non-OPEC countries are complying more slowly at a rate of 51%, with Russia reducing its output very gradually.
Due to the cuts, OPEC members are sitting on about 2.8 million b/d of effective spare production capacity (Iran and Venezuela are excluded from the calculation), with Saudi Arabia holding two thirds of it. Much of this spare capacity is composed of crude oil similar in quality to Venezuela’s exports.
Before the seriousness of the situation in Venezuela became apparent, IEA’s oil balances for this year’s first half, which have not changed much since its last OMR, suggested that the market was tightening.
Based on solid oil demand growth, modest declines in OPEC production due to Iran and Venezuela, and rising US output, the market could show a modest surplus in this year’s first quarter before flipping into a 500,000-b/d deficit in the second quarter. This does not consider Saudi Arabia’s announced plans to reduce its exports further in April.
Key IEA numbers
Global oil demand growth slowed sharply in fourth-quarter 2018 to 950,000 b/d due to lower demand from the Organization for Economic Cooperation and Development, which declined by 300,000 b/d year-on-year. Large declines were seen in Europe and Asia along with slower growth in the Americas.
However, IEA’s estimates for global oil demand growth in 2018 and 2019 are unchanged at 1.3 million b/d and 1.4 million b/d, respectively. “The economic growth assumptions underpinning our forecasts are largely unchanged, although we see further weakness emerging in Europe,” IEA said.
Global oil production fell by 340,000 b/d in February as OPEC and non-OPEC cuts deepened. Output of 99.7 million b/d was still up a hefty 1.5 million b/d from a year ago, led by non-OPEC and the US. Non-OPEC growth will slow from 2018’s record 2.8 million b/d to 1.8 million b/d in 2019.
OPEC crude oil production in February dropped by 240,000 b/d to 30.68 million b/d on losses in Venezuela and lower output from Saudi Arabia and Iraq. Outperformance by Saudi Arabia and its gulf allies with supply cuts pushed OPEC compliance to 94%.
Global refining throughput returned to growth, with the first quarter of 2019 expected to be up 800,000 b/d year-on-year. China accounts for more than 90% of the increase, while weaker performance in other regions supported product cracks, resulting in the first gains in refinery margins since November.
OECD commercial oil stocks rose 8.6 million b/d on the month in January to their highest level since November 2017. However, the increase was lower than the seasonal norm. Preliminary data for February point to a sharp drop in inventories.
Brent futures reached a 4-month high, above $67/bbl, in mid-March on reduced production from OPEC. Tighter medium-heavy supplies boosted crudes such as Mars and Dalia and sent the Brent-Dubai EFS to a 9-year low.
