If anything can be counted on in the oil and gas industry these days, it is that the governments of Venezuela and the US are not going to see eye-to-eye on very much at all.
Just look at how they reacted to the announcement of production cuts of about 520,000 b/d by the Organizations of Petroleum Exporting Countries, cuts made as part of a broader move by the group to reduce what it terms “excess oil” on global markets.
Almost immediately, the White House issued an announcement saying that it “certainly disagreed” with the OPEC decision to lower output and renew its call for Congress to act on legislation that boosts domestic energy production.
At the same time, Venezuela said it “trusts” that OPEC members will respect the production and quota cut agreement. Said Oil Minister Rafael Ramirez, “When OPEC reaches a consensus, we expect that it’s (to be) respected.”
Grinding political axes
The White House wants to characterize the OPEC cuts within its preferred framework, as part of the instability of overseas suppliers and on that basis wants to urge more exploration and production at home.
Venezuela, like one or two other OPEC members, has its own axe to grind, recognizing that reduced production will raise prices, dent the US economy and—indirectly at least—further dent its nemesis at 1600 Pennsylvania Avenue.
OPEC itself preferred to skirt any political over or undertones to its decision. As always, it wants to characterize such decisions as resting solely on the basis of supply and demand. In this case, apparent oversupply dictates reduced production.
OPEC’s decision will not affect consumers “in any way,” according to the group’s president, Chakib Khelil, who explained that, “there is oversupply...(oil) stocks are very high. We will have overhang by the end of this year and it will be even worse early next year.”
Is demand slowing?
Is Khelil just blowing smoke? That’s up for grabs, maybe, but there are signs around the world that demand is slowing and that current production rates could lead to an oversupply.
Consider the Far East, where three Japanese refiners, which control about 35% of the country’s total oil processing capacity, plan to cut output.
Confirming concerns that a reversal in the weakening local and global demand for fuels isn’t likely very soon, Showa Shell Sekiyu KK, Cosmo Oil Co., and Idemitsu Kosan Co. all have decided to curtail output.
Why? Because they are said to be facing excess capacity and slowing demand from major consumers such as China, where consumption is declining possibly on account of a slowdown in the US, the world’s biggest economy, and a major user of Chinese goods.
Forget the squabble between Washington, DC, and Caracas. Consider it a bit of wrangling over the backyard fence. OPEC may or may not be right, but there are numbers out there to back it up.
