Venezuela’s oil industry is collapsing fast. No wonder then that OPEC is finally talking about perhaps raising production to make up for Venezuela’s overdelivering on production cuts. As Reuters reported yesterday, the cartel is “looking closely” at the country’s oil production to make sure it is low enough for other members to step in and start pumping more.
If OPEC is talking about taking action, this means it is not too happy with oil prices at the current level, which at the time of writing was US$79.36 a barrel for Brent and US$72.51 a barrel for WTI.
The energy ministers of Saudi Arabia and the UAE already said as much: they last week said there was no fundamental reason for Brent to trade at over US$80 a barrel—there was enough supply to compensate for any losses when U.S. sanctions against Iran kick in later this year. Now, other OPEC officials are practically admitting that Brent at US$80 or more may not be the best price level for anyone.
This is an interesting development. Venezuela’s oil production is now at the lowest in about seven decades, at just 1.4 million bpd, and all signs point towards a further decline after the re-election of Nicolas Maduro and the very good chance for more punitive action from Washington, which will no doubt target the country’s battered oil industry. Even without any further sanctions from the U.S., Venezuela has no money to maintain its oil production let alone increase it.
OPEC should be grateful to Venezuela: thanks to this inexorable slide in Venezuelan oil production, the cartel exceeded its overall production quota under the cuts deal, in some months by a wide margin, pushing prices to four-year highs. Venezuela’s oil industry collapse also compensated for higher than agreed production in some OPEC members such as Iraq. As a result of all this, we got Brent at US$80, which is what some OPEC members wanted. Related: Oil Majors Double Down On Refining
Now, OPEC is considering taking action, and this is telling. Despite the upbeat rhetoric from Khalid al-Falih and a number of investment bank commodity analysts who have argued in recent weeks that before oil prices start hurting demand, Brent could climb above US$100, OPEC is already considering action with Brent at US$79. Could it be that these upbeat predictions were a little bit off the mark?
If we leave geopolitical risk aside, the fundamental factors driving prices higher in the last couple months were tightening supply from OPEC thanks to the cuts and Venezuela, and stronger demand, especially in Asia. Also, analyst estimates—however wildly different—of lost Iranian supply following the reintroduction of U.S. sanctions helped. This stronger demand, by the way, has been one of the top arguments of oil bulls in support of their expectations that even Brent at US$100 won’t hurt demand.
But: China has made it clear it will continue buying crude for Iran, with or without U.S. sanctions, so the effect of these sanctions on supply is likely to be a lot milder than the last time when the West imposed sanctions on Iran. China, in other words, has secured the supply to match its demand even with OPEC production at current levels and it will likely prefer Iranian crude to other OPEC crude because it can pay for it in yuan. Related: India To Saudi Arabia: We Need Stable And Moderate Oil Prices
India has asked Saudi Arabia for assurances that oil prices will remain “stable and moderate,” noting that US$80 is “way above reasonable”. The message could not be clearer: Brent at US$80 is already a problem for the world’s third-largest consumer. Al-Falih, therefore, assured his Indian counterpart Dharmendra Pradhan, that OPEC will make an effort to "ensure availability of adequate supplies to offset any potential shortfalls."
So, OPEC is right to look closely at oil industry developments in Venezuela, although there will hardly be any surprises coming from there. The time may have come to start easing the production quotas, as Russia’s Alexander Novak suggested at an earlier meeting with OPEC ministers. Oil is still a buyers’ market.
By Irina Slav for Oilprice.com
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