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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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OPEC Needs 650,000 bpd To Avoid Global Supply Deficit

OPEC

Oil prices rose again on Wednesday, as fears over the fallout from the Brexit continued to abate. But some potential supply outages also added positive momentum to crude oil.

A potential strike of oil workers threatens oil production in Norway in the coming days. Oil worker unions set a deadline for Friday, July 1 for their wage demands to be met. If negotiations don’t conclude successfully by then, about 7,500 workers will initiate a strike beginning on Saturday. Reuters estimates the strike could affect about one fifth of Norway’s 1.6 million barrels of daily (mb/d) oil production, or just under 300,000 barrels per day. A 2012 strike in Norway temporarily knocked off about 13 percent of the country’s oil production.

Another supply disruption is looming in Venezuela, although this one would be much longer lasting and more difficult to reverse. Oil production has been declining for years in Venezuela, but a more acute outage could be coming this year due to the country’s economic crisis. The Venezuelan government and its state-owned oil company PDVSA are quickly running out of cash, falling into arrears to international companies that help produce oil in the country. Barclays estimates that Venezuela’s oil production could fall by 11 percent this year to 2.1 mb/d. Related: The One Chart That Shows Why Oil Prices Have To Keep Rising

A default looms in the fourth quarter of this year as $4 billion in debt payments fall due for PDVSA. Moody’s wrote earlier this month that the state-owned company is “highly unlikely” to have enough resources to meet that payment. The Venezuelan government has long placed a high priority on meeting debt payments in order not to run afoul of the bond markets. “The situation is becoming more and more difficult for oil services in Venezuela,” Baptiste Lebacq, an analyst at Natixis SA, told Bloomberg.

A default by PDVSA would push the state closer to the brink, and ultimately would probably tip it over into default as well. Looking at credit-default swaps, the market is projecting a 60 percent probability of a default in the next year, according to Bloomberg.

The fiscal calamity likely means that oilfield service companies will go unpaid. Schlumberger has already cut back on operations in Venezuela because PDVSA has failed to pay the company $1.2 billion that it is owed. PDVSA also owes Halliburton about $756 million. “They have been operating in the country for more than 100 years,” Venezuela’s oil minister Eulogio Del Pino said, trying to put a brave face on the problem. “They are not going to leave.”

But if Venezuela cannot pay the companies, oil production will take a hit. While Barclays says that a loss of around 250,000 barrels per day is possible, a much sharper drop off is also conceivable. In the bank’s worst-case scenario, Venezuela’s oil production could plummet to 1.7 mb/d by the end of 2016, or a plunge of more than 600,000 barrels per day. Related: Brexit Puts North Sea Oil In Limbo

Bloomberg estimates that OPEC will need to come up with an additional 650,000 barrels per day if the oil market is to avoid a supply surplus flipping to a deficit. Outages in Venezuela, combined with ongoing disruptions in Libya and Nigeria are going a long way to erasing the surplus.

Still, it is important to note that the outages are not a given. Moreover, Nigeria is already working to bring back some lost production. Repairs and restarts to damaged infrastructure has allowed Nigeria to boost output from 1.3 mb/d to 1.9 mb/d.

And although Venezuela presents a huge risk to global supplies, the market is not exactly tight just yet. According to the EIA’s administrator Adam Sieminski, there is “still too much supply.” He told Bloomberg Surveillance on June 27 that although the surplus is shrinking, there is still some time left before we reach a balance. “We are at least a half a million barrels per day over what demand is. That means inventories are still building slightly,” he said. But he also said things are trending in the right direction. “But this is just on the cusp of changing. In about another two quarters we are going to see those supply and demand lines cross, inventories will start to draw, and that’s probably going to support prices in the market.”

By Nick Cunningham of Oilprice.com

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  • Amtet on June 30 2016 said:
    How does the EIA man know how the supply-demand balance is?
    The majority of oil is used by developing countries.

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