U.S. Shale Growth Could Offset Venezuela Shortfall

The continued strong growth of U.S. shale oil will soften the blow from the recent U.S. sanctions on Venezuela’s state-owned oil company, Petróleos de Venezuela SA (PDVSA; Caracas), says the International Energy Agency (IEA) as it once again raised its estimates for non-OPEC supply on the back of robust U.S. shale flows, reports S&P Global Platts. The Paris-based IEA, a market watchdog, also trimmed its forecast for OPEC crude oil demand this year, but nonetheless kept its growth estimate for demand in 2019 unchanged at 1.4 MMbbld.

However, U.S. liquids output is forecast to rise by 1.52 MMbbld this year, consolidating the nation as the world’s biggest oil producer with average production hitting nearly 17 MMbbld, IEA said in its latest monthly oil market report. The most recent forecast is about 200,000 bbld higher than previously estimated after stronger-than- expected U.S. shale and natural gas liquid output in the fourth quarter of last year was carried through to 2019, an IEA official said.

U.S. liquids output jumped by a massive 2.2 MMbbld last year as shale rebounded on firmer prices. Although U.S. oil supply growth is set to slow this year following a near 40% fall in crude prices in the 2018 fourth quarter, IEA noted that U.S. crude production alone this year is expected to grow by more than Venezuela’s current output of around 1.26 MMbbld. “Sanctions are already making it difficult for PDVSA to export oil,” IEA said. “Even so, headline benchmark crude oil prices have hardly changed on news of sanctions. This is because, in terms of crude oil quality, markets may be able to adjust after initial logistical dislocations.”

IEA’s comments echo similar observations by the Energy Information Administration, which predicted in late February that U.S. crude oil production growth will offset decreases in OPEC production and the impact of sweeping sanctions on Venezuelan crude flows through 2020. But IEA cautioned that crude quality, rather than quantity, will be an important issue moving forward, high-lighting that the loss of Venezuela’s predominantly heavy, sour grades will be felt most acutely by the market due to U.S. sanctions.

While supply of U.S. oil output, predominantly light and sweet, continues to inch higher, heavy, sour barrels remain tightly supplied, squeezing U.S. Gulf Coast refiners that are mostly geared toward processing heavier crudes. “Crude oil quality is another issue and, in the wider context of supply in the early part of 2019, it is even more important,” the IEA report added. It noted that since the U.S. sanctions against PDVSA were rolled out in January, the premium of Mars heavy crude over West Texas Intermediate light, sweet has soared from $4.50/bbl to more than $7.50/bbl.

On market fundamentals, IEA said the global oil market is on the way to rebalancing, noting a slight drop in stocks in Organization for Economic Cooperation and Development (OECD) countries in December, but acknowledged there was a major stock build in non- OECD nations in the second half of 2018. At the end of December, OECD oil company stocks were 5.6 MMbbl below the November level at 2.858 MMbbl, and up 4.6 MMbbl compared with the end of 2017.

On demand, IEA has oil consumption rising to 100.6 MMbbld in 2019 from 99.2 MMbbld last year. Unlike other oil forecasting agencies, it expects global demand to grow faster this year than in 2018 owing to “lower prices and the startup of petrochemical projects in China and the U.S.” But, it warned that “slowing economic growth will, however, limit any upside.”

IEA revised its non-OPEC supply growth number for 2019 up to 1.8 MMbbld, from 1.6 MMbbld in January’s report due to the higher expected U.S. shale growth. Similarly, it also revised upward the corresponding non-OPEC supply growth estimated for 2018 to 2.7 MMbbld. The organization noted that OPEC’s compliance on a supply-cut deal that began in January was 86%, but its output-curtailment allies posted much lower levels of adherence at 25%.

However, IEA said the “call on OPEC,” or demand for OPEC crude, will average 30.7 MMbbld in 2019, 130,000 bbld less than what it produced in January and down 900,000 bbld from the agency’s previous estimate. OPEC production in January was 30.83 MMbbld, a fall of 930,000 bbld from the prior month “with Saudi Arabia, UAE, and Kuwait cutting by more than promised.” Global supply also fell 1.4 MMbbld to 99.7 MMbbld in January as the OPEC/non-OPEC and Alberta cuts took effect, the IEA report said.

(SOURCE: The

, March 4, 2019)