Oil prices jumped to two-week highs on Tuesday morning, rising on the back of severe outages in Venezuela and the ongoing production cuts from OPEC+.
A devastating electricity blackout swept over Venezuela late last week, crippling daily life for much of the country. PDVSA’s oil exports have been severely disrupted, and while data is scarce, output may have plunged by half to about 500,000 bpd, according to Energy Aspects. “Operations halted at main facilities, reducing output of main synthetic grades and blended Merey to almost zero,” Energy Aspects wrote in a note.
“There’s a vicious circle,” the International Energy Agency’s head Fatih Birol told Bloomberg on the sidelines of the IHS CERAWeek Conference in Houston. “Since the oil isn’t exported, there’s not revenue, since there’s not revenue you cannot invest in infrastructure.”
The big question is how long the outage will last. The U.S. State Department announced the withdrawal of its remaining embassy personnel in Caracas. That could reduce the potential for conflict, since any incursion on American personnel could be used as a pretext for an escalation, possibly even military intervention. However, the withdrawal cuts both ways. Removing American diplomats could get them out of harm’s way, clearing the way for bolder action. Worryingly, U.S. Secretary of State justified the withdrawal by saying that keeping them in Venezuela had become a “constraint” on U.S. policy.
The outages have global implications. Oil prices surged at the start of the week, with WTI jumping above $57 per barrel, and Brent above $67 per barrel.
Meanwhile, the OPEC+ cuts remain in place, and Saudi Arabia has suggested that it would maintain output well below its required levels. As part of the Vienna agreement in December, Saudi Arabia agreed to limit output to 10.3 million barrels per day (mb/d). However, as of March, Saudi officials said that they would only produce 9.8 mb/d. More recently, Saudi Arabia indicated it would maintain the 9.8 mb/d level through April, a sign that even as oil prices inch up, Riyadh would rather err on the side of doing too much rather than too little.
Saudi oil minister Khalid al-Falih also indicated that the OPEC production cuts could remain in place beyond June.
Combined, Venezuela and Saudi Arabia have provided a jolt to the market. “Oil prices are rising for the second day in a row…They are continuing to receive tailwind from yesterday’s announcement by Saudi Arabia that it will significantly restrict oil supply in April,” Commerzbank wrote in a note on Tuesday. “This shows Saudi Arabia’s resolve to keep the oil market balanced by keeping oil supply tight. Additional buoyancy has come from news that the massive power outage in Venezuela, that has been ongoing for five days now, is also hampering the country’s oil exports.”
On top of that, U.S. oil production actually fell slightly in December, an indication that the blistering growth rate could be “taking a breather after a six-month-long streak of all-time highs,” Barclays wrote in a report. The U.S. averaged 11.85 mb/d in December, down roughly 60,000 bpd from November levels. The decline came as a surprise after consecutive months of rapid growth.
It is too early to come to any conclusions, and one month’s worth of data does not indicate a trend, but the collapse of oil prices in November and December may have slowed the trajectory of the U.S. shale patch. Spending cuts and pressure from investors are forcing a lot of companies to curtail their ambitions.
To be sure, ost forecasts still call for another year of massive output growth. The EIA sees production jumping by another 1.4 mb/d. But other analysts said that the spending cuts could result in output undershooting those estimates. “Fundamentally I think supply estimates for the U.S will disappoint,” Ben Dell, managing partner at Kimmeridge, told CNBC.
“We expect production growth to remain relatively soft during H1 19 but pick up pace in the second half,” Barclays said.
In short, there are several factors working in a bullish direction, especially when compared to more pessimistic forecasts from a few months ago. Demand has held steady, defying dire forecasts for an imminent collapse due to a souring economy. The OPEC+ cuts, combined with unexpected outages, are tightening up the market. And while there is a great deal of uncertainty, U.S. shale could potentially slow down.
While inventories have yet to demonstrate a decline following the OPEC+ cuts, the market appears to be tightening up. Next up: Waivers on U.S. sanctions on Iran are a little more than two months away from expiration, which offers another land mine for global supply.