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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Are Oil Markets Tightening Too Fast?

Oil Rig

OPEC’s oil production fell yet again last month, helping to further tighten the oil market.

The group’s collective output fell by a whopping 201,400 barrels per day in March, compared to a month earlier. It was the largest single-month decline since November and it took OPEC’s combined production down to 31.958 million barrels per day (mb/d), which is the lowest level in a year.

To be expected, Venezuela lost a significant chunk of output, falling by 55,300 bpd, taking production down to 1.488 mb/d, according to OPEC’s latest Oil Market Report. But the ongoing production losses in Venezuela are not really surprising. The surprise was that output fell by rather large volumes elsewhere, including Algeria (-49,500 bpd), Angola (-81,700 bpd), Iraq (-13,100 bpd), Libya (-37,200 bpd) and Saudi Arabia (-46,900 bpd).

Some of those countries have seen production fluctuate, perhaps due to maintenance, and it isn’t obvious that the losses are set to stick around for a while. But Venezuela is producing almost 500,000 bpd below its target as part of the OPEC agreement, which means the combined OPEC compliance rate is way above 100 percent.

As Bloomberg notes, the ongoing losses of Venezuelan output and the danger to Iran’s oil production from U.S. sanctions could result in twice as much supply taken off of the market than OPEC intended. It should also be noted that the U.S. is reportedly considering sanctions on Venezuela, which could make the losses there even worse. Related: Oil Prices Surge After Houthi Missile Attacks On Riyadh, Aramco Facilities

Oil demand looks strong at 1.65 mb/d, an upward revision of 30,000 bpd from last month’s report. Soaring demand is tightening the oil market faster than many expected at this point, and demand is a crucial variable that has heavily influenced oil prices in the past few years, perhaps more so than some people think.

All of this means that the oil market is tightening significantly. OPEC estimates that the commercial oil inventory surplus in OECD countries has fallen to just 43 million barrels above the five-year average, down from over 300 million barrels a year ago. In other words, almost 90 percent of the inventory glut has disappeared.

Those numbers have been thrown around for a while, and to be sure, there are some problems with them. The importance of the five-year average has been watered down over time because the metric increasingly encompasses surplus years. It amounts to a moving of the goal posts.

A more poignant figure comes from OPEC’s latest report. Bloomberg notes according to OPEC data, oil inventories could decline at a rate of 1.3 mb/d in the second half of 2018, which would dramatically tighten the market this year. It is also a much more bullish figure than analysts thought a few months ago when U.S. shale output really kicked into high gear.

Still, all signals suggest OPEC will try to keep the cuts in place through the end of this year. Saudi Arabia is reportedly targeting an $80 oil price, so for now, the group is not worried about over-tightening the market. To be sure, however, there is a tension for OPEC as it drains inventories and pushes up oil prices. The risk is that U.S. shale will grow at a faster rate than expected. In fact, output in the Permian is skyrocketing right now because OPEC pushed oil prices above the breakeven threshold for most of the industry. Related: Saudi Arabia’s $80 Oil Target Could Backfire

Even as OPEC production declined by 200,000 bpd in March, total global oil supply actually rose by 180,000 bpd – largely due to U.S. shale. So, as OPEC backs out production, U.S. shale simply fills the void.

But there are several things working in OPEC’s favor, which could allow it to stomach higher shale production. First, demand is strong. Second, geopolitical unrest is adding a premium to oil prices. Third, some of the losses are involuntary, especially in the case of Venezuela. That is bad for Venezuela, but for the cartel’s stronger members, it works to their benefit. Finally, U.S. shale could run into bottlenecks that could prevent higher output even if oil prices rise further.


In other words, even as OPEC members appear to be losing out to U.S. shale, they will likely still see the upside to keeping the cuts in place and driving oil prices up further.

By Nick Cunningham of Oilprice.com

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  • Mamdouh G Salameh on April 13 2018 said:
    I agree with you, Mr Cunningham, that global oil markets are tightening thus driving the recent surge of oil prices. The ongoing losses of Venezuelan oil production are not making it worse for Venezuela’s economy because of the rise in oil prices. But they are helping tighten the global oil market.

    What is driving oil markets is a robust economy, an accelerating global demand for oil and also a virtual re-balancing of the oil market.

    Geopolitical tension around the world could add a few dollars to the oil prices but only if the market is balanced. A weak demand for oil or a glut will nullify the impact of geopolitics on oil prices as was the case during the period 2014-2017.

    The oil market trusts OPEC’s and Russia’s commitment to the OPEC/non-OPEC production cut agreement and also trusts Saudi Arabia and Russia when they confirm that not only the agreement is here to stay but it will continue in one way or another for many years to come.

    The oil market also knows that US withdrawal from the Iran nuclear deal will not cost Iran a single barrel of oil exports. Iran will accept the petro-yuan as payment for its oil exports thus bypassing the petrodollar. This will virtually nullify the impact of any new US sanctions against it.

    One important factor is that the oil market is ignoring the bearish news of rising US oil production because it no longer believes in EIA’s claims.

    Based on the prospects for the global economy in 2018 and 2019, I would say the global oil market could absorb an oil price of $80. There you have it.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Johnny on April 13 2018 said:
    It is time to start talking about 10 years average.5 years average has been achieved even earlier than planned.
  • Disgruntled on April 13 2018 said:
    "In other words, even as OPEC members appear to be losing out to U.S. shale, they will likely still see the upside to keeping the cuts in place and driving oil prices up further."

    It's ECON101. It's better to sell less oil for more than more oil for less. US shalemen, are you paying attention?
  • John Brown on April 13 2018 said:
    First of all the corrupt moron democrats in the USA should take a look at what socialism has achieved in Venezuela. After the hero and idol of the Democrats Chavez/Maduro turned the richest country in Latin America, with the greatest oils reserves in the world, into a socialist paradise it ceased to be able to feed itself or even keep its only real source of income flowing, oil. Now the country is starving. Socialism at its best, and Obama and the Democrat had us on the same path for 8 years of misery. Thank Goodness we turned in time, and thank Goodness Obama and the Democrats couldn't destroy our energy industry no matter how hard they tried because we are still a free nation despite their best efforts.
    That aside oil prices are being manipulated up, but so what. Saudi Arabia wants $80 a barrel oil for its Aramco IPO and it looks like it will get it. However, WTI over $60 means the U.S. industry can let it rip. My bet is that if WTI goes over $70 the U.S. will overcome any bottle necks and get our oil and gas to market. It also is great for renewable energy giving them a window in which they will be more competitive with highly priced oil, and continue to lower their costs. My only question is why would anybody sink hundreds of billions into Aramco because the price of oil has been temporarily manipulated to $80 or more a barrel. What will that investment be worth if OPEC/Russia have to continually idle more and more capacity as oil flows from the USA and elsewhere, and renewables surge in market share. Oil is simply not a scarce resource anymore, and higher prices now due to artificially limiting supply mean a lot more supply in the not so distant future. Technology has made it easier and cheaper to recover oil once thought non-recoverable at a reasonable price, but also to get it to market in months rather than years.
  • Kishore Kumar on April 13 2018 said:
    OPEC agent Mamdouh G Salameh spotted again.

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