The global oil market is a delicate thing. While roughly 100 million barrels per day (BPD) move around the world, the slightest change in the level of either supply or demand can wreak havoc on oil prices. That was abundantly evident last fall, when crude prices crashed 40% after supplies outpaced demand by around 2 million BPD because U.S. sanctions on Iran weren't as powerful as promised.
Crude prices, however, have sharply reversed course in 2019, thanks in part to OPEC's decision to reduce its output. That might only be the beginning because supplies from Venezuela, which have already fallen off a cliff, are at risk of tumbling further as that country's economic and humanitarian crisis deepens. Add those supply concerns to faster-than-expected demand growth, and oil prices could spike in the coming months, which could fuel big gains in the stock prices of financially weaker oil producers.
OPEC, in coordination with several non-member nations, reduced its output to start this year, which helped get oil market fundamentals back into balance. However, the International Energy Agency's (IEA) latest monthly report on the oil market contained a stark warning. The IEA pointed out that "during the past week, industry operations [in Venezuela] were seriously disrupted" by power outages in the country, and that "ongoing losses on a significant scale could present a challenge to the market."
The country has been producing about 1.2 million BPD, which is a sizable decline from the 2 million BPD it was pumping out in 2017 and well below its peak of 3 million BPD in the late 1990s. Output, however, could decline much further due to the country's electricity crisis because oil pumps need power to produce. It's possible that supplies could drop by more than half if Venezuela doesn't quickly restore power to the poorer rural areas where it pumps out the bulk of its oil.
If that were to happen, it could significantly disrupt the oil market, causing prices to spike further, especially since oil demand has come in higher than expected so far this year. According to a forecast by investment bank Goldman Sachs, oil demand is on pace to grow by nearly 2 million BPD during the first quarter, blowing past its estimate of a 1.1 million BPD increase. While the IEA isn't quite as bullish since it hasn't altered its full-year forecast, the potential for faster-than-expected demand growth coming at a time of a possible supply shortage could fuel a big spike in oil prices -- at least until OPEC starts reversing its earlier production cuts.