Tuesday, October 16, 2018
The International Energy Agency’s (IEA) September 2018 Oil Market Report comments that if Venezuelan and Iranian exports continue to fall, markets could tighten and oil prices could rise without offsetting production increases from elsewhere. The agency observes that since the previous edition of its report, the price of Brent crude fell close to $70/bbl then rebounded to flirt with $80/bbl. 
“Two reasons for the swing are that Venezuela’s production decline continues, and we are approaching Nov. 4, 2018 when U.S. sanctions against Iran’s oil exports are implemented. In Venezuela, production fell in August to 1.24 MMbbld and, if the recent rate of decline continues, it could be only 1 MMbbld at the end of the year.”
IEA added that evidence provided by tanker tracking data suggests that Iran’s exports have already fallen significantly, “but we must wait to see if the 500,000 bbld of reductions seen so far will grow.” The agency reiterates that if Venezuelan and Iranian exports do continue to fall, markets could tighten and oil prices could rise without offsetting output increases from elsewhere. Noted is that supply from some countries has grown since the Vienna meetings in June. In August, Saudi Arabia and Iraq combined saw production rise by 160,000 bbld. In Iraq’s case, exports have grown to such an extent that they are greater than Iran’s production, and there is still about 200,000 bbld of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government.
Based on its August estimates of production, IEA said OPEC countries are sitting on about 2.7 MMbbld of spare production capacity, 60% of which is in Saudi Arabia. “But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be ‘easy’ to bring online, will be available to coincide with further falls in Venezuelan exports and a maximization of Iranian sanctions.”
IEA outlines that it is not just a question of volume. Refiners used to processing Venezuelan or Iranian crude will compete to find similar quality barrels to maintain optimal refinery operations. Alternative supplies of lighter crude might not be ideal for this reason.
“Even before we factor in any further fall in exports from Venezuela or Iran, record global refinery runs are expected to result in a crude stock draw of 500,000 bbld in the fourth quarter of 2018. Any draw will be from a basis of relative tightness. In the OECD (Organization for Economic Cooperation and Development), stocks at end-July were 50 MMbbl below the five-year average.”
IEA expands that “if we are looking for additional barrels from elsewhere to help compensate for further export declines from Venezuela and Iran the picture is mixed.” Brazil was supposed to be one of the big production success stories of 2018, but various problems have stymied growth to the extent that output will rise by only 30,000 bbld this year versus a first estimate of 260,000 bbld. On the upside, the U.S. continues to show stellar performance with total liquids output expected to grow by 1.7 MMbbld this year and another 1.2 MMbbld in 2019. However, companies are not adjusting their production plans, despite higher prices due to infrastructure bottlenecks, and this is unlikely to change in the near future. “Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom,” EIA observes.
“Finally, Libyan production surged back in August 2018 to 950,000 bbld, not far below the 1 MMbbld level that was achieved for almost a year prior to the\ recent disturbances. However, as we have seen in the past few days with attacks on NOC (National Oil Corp.) headquarters, the situation is fragile.”
As far as oil demand is concerned, IEA writes, following an increase of 1.4 MMbbld in 2018, growth next year will be 1.5 MMbbld. “Even so, in 2018 we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the U.S. as prices rise; European demand in the period May-July 2018 was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters. As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the U.S. dollar raising the cost of energy. In addition, there is a risk to growth from an escalation of trade disputes.”
IEA concludes that “we are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya, and the days to Nov. 4 will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70/bbl to $80/bbl in place since April 2018 could be tested. Things are tightening up.”
(Source: The Weekly Propane Newsletter, October 15, 2018. Photo Courtesy: AP Photo/Gary Kazanjian, File)
“Two reasons for the swing are that Venezuela’s production decline continues, and we are approaching Nov. 4, 2018 when U.S. sanctions against Iran’s oil exports are implemented. In Venezuela, production fell in August to 1.24 MMbbld and, if the recent rate of decline continues, it could be only 1 MMbbld at the end of the year.”
IEA added that evidence provided by tanker tracking data suggests that Iran’s exports have already fallen significantly, “but we must wait to see if the 500,000 bbld of reductions seen so far will grow.” The agency reiterates that if Venezuelan and Iranian exports do continue to fall, markets could tighten and oil prices could rise without offsetting output increases from elsewhere. Noted is that supply from some countries has grown since the Vienna meetings in June. In August, Saudi Arabia and Iraq combined saw production rise by 160,000 bbld. In Iraq’s case, exports have grown to such an extent that they are greater than Iran’s production, and there is still about 200,000 bbld of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government.
Based on its August estimates of production, IEA said OPEC countries are sitting on about 2.7 MMbbld of spare production capacity, 60% of which is in Saudi Arabia. “But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be ‘easy’ to bring online, will be available to coincide with further falls in Venezuelan exports and a maximization of Iranian sanctions.”
IEA outlines that it is not just a question of volume. Refiners used to processing Venezuelan or Iranian crude will compete to find similar quality barrels to maintain optimal refinery operations. Alternative supplies of lighter crude might not be ideal for this reason.
“Even before we factor in any further fall in exports from Venezuela or Iran, record global refinery runs are expected to result in a crude stock draw of 500,000 bbld in the fourth quarter of 2018. Any draw will be from a basis of relative tightness. In the OECD (Organization for Economic Cooperation and Development), stocks at end-July were 50 MMbbl below the five-year average.”
IEA expands that “if we are looking for additional barrels from elsewhere to help compensate for further export declines from Venezuela and Iran the picture is mixed.” Brazil was supposed to be one of the big production success stories of 2018, but various problems have stymied growth to the extent that output will rise by only 30,000 bbld this year versus a first estimate of 260,000 bbld. On the upside, the U.S. continues to show stellar performance with total liquids output expected to grow by 1.7 MMbbld this year and another 1.2 MMbbld in 2019. However, companies are not adjusting their production plans, despite higher prices due to infrastructure bottlenecks, and this is unlikely to change in the near future. “Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom,” EIA observes.
“Finally, Libyan production surged back in August 2018 to 950,000 bbld, not far below the 1 MMbbld level that was achieved for almost a year prior to the\ recent disturbances. However, as we have seen in the past few days with attacks on NOC (National Oil Corp.) headquarters, the situation is fragile.”
As far as oil demand is concerned, IEA writes, following an increase of 1.4 MMbbld in 2018, growth next year will be 1.5 MMbbld. “Even so, in 2018 we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the U.S. as prices rise; European demand in the period May-July 2018 was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters. As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the U.S. dollar raising the cost of energy. In addition, there is a risk to growth from an escalation of trade disputes.”
IEA concludes that “we are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya, and the days to Nov. 4 will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70/bbl to $80/bbl in place since April 2018 could be tested. Things are tightening up.”
(Source: The Weekly Propane Newsletter, October 15, 2018. Photo Courtesy: AP Photo/Gary Kazanjian, File)
