The oil markets have already seem to have forgotten about the failed Doha summit this weekend, with WTI and Brent regaining all of the ground it lost over the past two days or so. Part of that is because Doha was never going to produce a major result, at least in terms of curtailing excess oil supplies. But a bigger reason is that the oil markets are already in the midst of adjusting, as global supply continues to drop off.
That was coming into view before the Doha debacle, but oil prices often move on newsy headlines, which can have more influence over prices in the short-term. On Sunday, many thought the collapse of Doha would have provided that catalyst, leading to a sell off when the markets opened on Monday. Instead, prices only moved down briefly before bouncing back up.
The most likely reason is that oil traders saw other geopolitical events that more than made up for Doha. First came the news that oil workers in Kuwait knocked off somewhere around 1.5 million barrels of oil production per day (mb/d). The IEA estimated in its April Oil Market Report that the global supply overhang is only set to be 1.5 mb/d through the first half of 2016, and could fall to only 0.2 mb/d in the third and fourth quarters. In other words, Kuwait’s oil workers have temporarily removed the entire worldwide oil glut. Related: 200M Barrels Of Oil Sit In Idle Tankers Waiting To Unload At Chinese Ports
The outage in Kuwait may not last long, as the government has ordered replacement workers. The country’s oil production fell from about 2.8 mb/d to 1.1 mb/d over the weekend. Output was back up to around 1.5 mb/d by Tuesday, but according to the latest reports, the strike is still ongoing.
A smaller but potentially more permanent outage could be unfolding in another OPEC country. The Financial Times reported that the electrical blackouts plaguing Venezuela, which stems from low water levels at some of the nation’s dams, could cut into its oil production. A dam that provides more than one-third of Venezuela’s electricity might need to be shut down because the water levels are so low. If that occurs, it could not only cut off some oil production, but also force Venezuela to burn some of its oil for electricity, hitting oil exports with a double whammy. “We have to consider that Venezuela is less than 20 days away from a major power production disruption,” Olivier Jakob of Petromatrix wrote in a recent report. “Crude and product production could be negatively impacted and the country might have to increase imports of petroleum products for generators.” Related: Canada’s Oil Industry To See 62% Decline In Investment
Venezuela’s oil production is already falling, down from an average of 2.65 mb/d in 2015 to 2.52 mb/d in February. The blackouts, along with a lack of investment, could result in the loss of another 100,000 to 200,000 barrels per day this year, according to Francisco Monaldi of the Baker Institute for Public Policy.
The problems seem to compound on each other. Venezuela’s fiscal crisis has led to international operators not receiving payments. The FT cites the case of Schlumberger, which pulled out of Venezuela last week after Venezuela failed to pay them. The withdrawal of Schlumberger could result in “at least one-fifth of the country’s output exposed to steep declines this year, resulting in output by December dropping by around 150,000 b/d year on year,” according to FGE, an energy consultancy. Related: The Best Risk Free Return In Town
Then there is Nigeria, which has garnered fewer headlines than its fellow OPEC members, but has suffered from supply disruptions as well. Attacks on a key pipeline in February in Nigeria knocked off 250,000 barrels of oil production per day, and left the key oil terminal of Forcados offline. Nigerian President Muhammadu Buhari vowed to fight back against the “vandals and saboteurs,” but the group responsible for the attacks recently said that more attacks would be forthcoming.
The combined supply outages between Kuwait, Nigeria and Venezuela are keeping around 2.8 mb/d of oil production offline, a two-year high. Much of this output could come back online – the huge downed capacity in Kuwait, in particular, could ramp up again quickly – but for now the outages are lifting oil prices. As of midday trading on Tuesday, WTI and Brent stayed above $40 and $43 per barrel, respectively, erasing all the losses from the Doha hangover.
By Nick Cunningham of Oilprice.com
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