Production cutbacks by Opec nations are building a supply cushion that could be called upon to mitigate a possible supply shock from an abrupt drop in crisis-hit Venezuela’s output, the IEA said yesterday.
With a nationwide blackout that paralysed the country for one week, demonstrating the unreliability of the country’s electricity network, new questions are being raised about Venezuela’s ability to continue to produce and export oil.
In its latest monthly report, the Paris-based International Energy Agency said that Venezuela’s oil industry operations were seriously disrupted by the blackout and warned that “ongoing losses on a significant scale could present a challenge to the market”.
Venezuela’s oil output has long been on a downward spiral thanks to years of underinvestment and mismanagement, with stepped-up US sanctions further trimming exports.
However the IEA also noted that Venezuela’s current oil production of about 1.2mn barrels per day (mbd) is the size of production cuts agreed by members of the Opec oil cartel and a number of other nations led by Russia, a grouping often called Opec+.
Overall, it said Opec members have about 2.8 mbd of spare production capacity, with much of it being similar in quality to oil produced in Venezuela, which means it could be used without much, if any, adjustment by refineries.
“Therefore, 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,” said the IEA, adding that “production cuts have increased the spare capacity cushion”.
The agency, which advises oil-consuming nations on energy issues, said that thanks to bigger-than-promised cuts by Saudi Arabia and its Gulf allies, the Opec+ effort to trim output was beginning to work.
Since 2016 the Opec+ nations have agreed on a series of output limits in an effort to counteract the collapse of oil prices in 2014 caused by overproduction.
After oil prices had a rollercoaster ride at the end of last year, Opec+ agreed to cut production by 1.2 mbd in January to June.
The IEA said Opec+ production was 0.24 mbd above the target of 44.3 mbd, with overall compliance with reduction targets at 80%.
“Opec’s compliance was a robust 94%, compared to 51% from non-Opec,” said the IEA, adding that major producer Russia was continuing to adjust its production gradually. “If the producers deliver on their promises, the market could return to balance in the second quarter” of this year, said the IEA.
The IEA left unchanged its forecast for non-Opec supply increasing to 64.4 mbd this year from a revised 62.7 mbd in 2018, a gain of 1.7 mbd.
It left unchanged its forecast for global oil demand growth of 1.4 mbd to an average of 100.6 mbd in 2019.
Meanwhile, the oil market will flip into a modest deficit from the second quarter of this year, with Opec possessing a hefty supply cushion to prevent any price rally in case of possible supply disruptions, the International Energy Agency said yesterday.
The IEA, which co-ordinates the energy policies of industrialised nations, kept its forecast of growth in global oil demand this year unchanged at 1.4%, or 1.4mn barrels per day (bpd). Solid growth in non-Opec oil output led by the United States should ensure demand is met, the IEA said.
The Paris-based IEA said the market could show a modest surplus in the first quarter of 2019 before flipping into a deficit in the second quarter by about 0.5mn bpd.
“At the same time, (Opec) production cuts have increased the spare capacity cushion.
This is especially important now as economic sentiment is becoming more pessimistic and the global economy could be entering a vulnerable period,” the IEA added.
The agency said it was particularly concerned about a possible further decline in production in Venezuela, where output has stabilised at 1.2mn bpd in recent months.
It said the degradation of the Venezuelan power system, vital for oil output, was such that it could not be sure whether fixes were durable.
However, in the event of a major loss of Venezuelan supply, the Organisation of the Petroleum Exporting Countries had about 2.8mn bpd of effective spare capacity, the IEA said.
The agency also said rising US output was providing comfort to world markets.
In 2018, the United States contributed 79% of the 2.8mn bpd of non-Opec output growth.
“The relentless pace continues into 2019, when US supply is expected to expand by 1.5mn bpd and account for 83% of non-Opec growth of 1.8mn bpd,” it said.
“What is game changing is that the US in 2021 will become a net oil exporter on an annual average basis.”
With production in Canada also increasing, and most of its exports moving to US refineries, more US crude should be available for export.
In 2019, US seaborne oil trade will move into surplus with net exports rising to nearly 4mn bpd by 2024.