Venezuela plans to cut production roughly 4% as OPEC prepares to lower output
Venezuela said Tuesday that it plans to cut production by 95 MBOPD, or roughly 4% of its 2.4 MMBOPD of total production, as OPEC prepares to implement its production deal. Starting January 1, OPEC will cut back its output by 1.2 MMBOPD, while non-OPEC countries contribute an additional 0.6 MMBOPD to cuts, in order to raise crude prices to more profitable levels.
“Without prejudicing its international contractual obligations, from Jan. 1 2017, (state oil company) PDVSA and/or its subsidiaries will implement a reduction in the volumes of its main crude sale contracts, all in conformity with existing terms and conditions,” the Energy Ministry said.
Oil Minister Eulogio Del Pino said the output deal should lead to a re-balancing of inventories, after which he forecast Brent crude would settle at a price range of around $60-$70 a barrel and Venezuela’s crude basket between $45-$55 a barrel, reports Reuters.
Venezuelan President Nicolas Maduro said he plans to head out on a tour to solidify support for the new deal as well.
“I am proposing a new system, a new formula to fix markets and oil prices to enable stability, harmony, continuity,” he said on Monday, without giving further details of his itinerary or planned proposal to fellow producers.
“I aspire to at least 10 years of stability with realistic, fair prices of oil, and I am going to achieve it.”
Source: Bloomberg. WTI and Brent crude oil prices
Higher prices could mean less bargain hunting, and lower demand
China, the world’s second-largest oil consumer after the United States, was a major source of demand in 2016 as the country looked to fill its strategic reserves with cheap crude oil. OPEC’s production deal could dampen some of the buying coming from Asia, however, hurting overall demand.
“Emerging market demand, and specifically from China, has been really strong in 2016,” Matt Smith, head of commodities research at shipment-tracking firm ClipperData, told CNBC.
“However, they’ve been on these sort of bouts of bargain hunting and opportunistic purchases to essentially fill their stockpiles, their strategic reserves. And so, as prices rise, and as they’ve risen recently, we’re likely to see less of that bargain hunting next year,” he said.
“Goldilocks scenario” is not a given
All of this assumes that OPEC’s deal will be implemented without a hitch. This “Goldilocks scenario,” as Smith referred to it, is not an absolute guarantee, however. Historically, OPEC members have cheated on production quotas, and as prices continue to rise, the temptation to do so may increase as well.
“From a seller standpoint — from an OPEC standpoint — your propensity to cheat and increase production to take advantage of dollar-denominated sales will increase,” Stephen Schork of the Schork Report said on CNBC. “If OPEC reverts to being OPEC — that is to say 60 to 70 percent compliance — then OPEC is still going to be producing 700,000 to 800,000 barrels of oil … more this January than last January,” he added.
Also threatening the recovery in oil prices is a stronger dollar. The U.S. currency has been increasing in value against others around the world as expectations of higher U.S. interest rates stoke demand for greenbacks.
Source: Bloomberg. USD compared to a basket of other currencies
Oil prices have so far risen along with the dollar following an agreement among producing nations to cut output. But a stronger greenback typically weighs on crude futures because the commodity is priced in the currency. When the dollar rises, crude becomes more expensive to holders of other currencies.
“The risk here, in my mind, is not non-compliance, but how strong the dollar gets,” Wunderlich Director of Equity Research and Chief Market Strategist Art Hogan told Oil & Gas 360® following the OPEC deal.
“The dollar will probably strengthen in 2017, but not at the same rate that [we saw earlier this year.] The recent strength is a knee-jerk reaction to a Fed that is clearly going to be tightening,” Hogan added, saying that the currency markets usually do a good job of self-correcting.
