From Reuters/MarketWatch
Venezuela’s crude-oil output is collapsing in the wake of the nation’s economic crisis, making the country the biggest wild card in OPEC’s effort to balance global supply and demand, the International Energy Agency said Thursday in a monthly report.
Within the Organization of the Petroleum Exporting Countries, “the biggest risk factor is, and will likely remain, Venezuela,” the IEA said in its monthly oil market report.
The OPEC member’s oil output slid to 1.55 million barrels a day in February, down 60,000 barrels month-on-month, and 540,000 barrels a day below the level seen a year earlier, according to the Paris-based IEA.
The production declines come on the heels of an economic crisis in the nation, which suffers the world’s highest inflation. But it helps OPEC in its effort to eliminate a global glut of crude.
“With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit,” the IEA said.
The IEA on Thursday, however, continued to forecast a climb in non-OPEC oil production of close to 1.8 million barrels a day in 2018. It blamed most of that rise, or 1.5 million barrels a day, on U.S. output growth. For February, the IEA estimated that U.S. production climbed 135,000 barrels day to a record 10.2 million barrels a day.
“U.S. gains in production more than offset Venezuela’s decline,” said James Williams, energy economist at WTRG Economics. Year over year, U.S. production was up over 1.2 million barrels a day, while Venezuela was down about 350,000 barrels a day.
Venezuela’s 2 Risks: lack of investment in new oil production, a potential coup/civil war/revolution
Still, the Latin American nation, which boasts the world’s largest oil reserve, poses two risks, said Williams: “declining production because of lack of investment in new wells and poor maintenance of existing wells and infrastructure” and a “total collapse of production due to a [potential] coup, revolution or civil war.”
That would come against a backdrop of strong global oil demand. The IEA lifted its global oil demand expectations by 100,000 barrels from last month’s forecast. It expects demand to grow by 1.5 million barrels a day this year to 99.3 million barrels a day.
Williams said that there is enough OPEC spare capacity to cover the loss of Venezuelan production, “but shipping delays would mean a shortage for a while—and a short-lived $10-$20 spike in oil prices.”
On Thursday, April West Texas Intermediate crude CLJ8, +1.72% settled at $61.19 a barrel on the New York Mercantile Exchange—up 1.3% for the year so far. May Brent crude LCOK8, +1.54% settled at $65.12, down 2.6% year to date.
Taking OPEC as a whole, the group’s compliance with the production-cut agreement stood at 147% in February of this year—the highest level since the pact was implemented in January 2017.
Williams pointed out that OPEC would still be in compliance with its output cuts even without Venezuela’s continual production decline. The IEA said that even if Venezuela’s production was at its allocated level, the group’s compliance would still be close to 100%.
Still, Venezuela’s production woes certainly support “OPEC’s goals of reaching the five-year average for petroleum stocks” said Williams.
