Venezuela clearly vulnerable to accelerated decline and could tip oil market into deficit territory
The past month has been relatively uneventful in terms of data changes, apart from an increase to the International Energy Agency’s(IEA) demand growth estimate, according to a press release.
Crude oil prices are slightly lower than last month, and have generally been relatively stable for several weeks. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20 per cent higher than in the early part of last year.
Looking at demand, estimate for global growth in 2018 has increased by 90 kb/d taking it up to 1.5 mb/d. Although this is a modest revision, it is interesting that provisional data suggests very strong starts to the year in China and India, which, taken together, accounted for nearly 50% of global demand growth in 2017. Cold weather in some parts of the northern hemisphere in January-February saw an increase in heating demand.
On supply, new and revised data shows very little change in the outlook versus last month. Although US production was lower than expected in Dec., there is no change to overall 2017 number neither to IEA’s outlook for 2018 that expects crude output there to grow by 1.3 mb/d.
IEA’s view is that total non-OPEC production grew by 760 kb/d last year and that it will surge by 1.78 mb/d this year. Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela.
Estimates for Feb. shows output down again, by 60 kb/d. Other countries with a risk factor include Libya, and, to a lesser extent, Nigeria. In Libya, another modest supply gain in Feb. to 1.02 mb/d and, although stability cannot be taken for granted, it appears that the frequency and severity of production interruptions is declining and higher rates of output are being maintained.
Taking OPEC as a whole, quota compliance in Feb. was 147%, but even if Venezuela’s production were at its allocated level, the group’s compliance would still be close to 100%.
Stocks, and specifically OECD stocks, remain the most-cited indicator of oil market re-balancing. In this Report, we note that in Jan. they increased month-on-month for the first time since July.
However, the increase of 18 mb was half the average level for Jan. seen in the past five years. Indeed, the surplus of total OECD stocks against the five-year average fell for the ninth successive month to 50 mb, with products showing a very small deficit.
In the meantime, market re-balancing is clearly moving ahead with key indicators – supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable – pointing in that direction. IEA assumes for scenario purposes that OPEC production remains flat for the rest of 2018, and on this basis there will be a very small stock build in 1Q18 with deficits in the rest of the year.
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.
Moving further into the future than is usual in this Report, in the IEA’s five-year outlook, published in Oil 2018 – Analysis and Forecasts to 2023, we highlighted how in 2017 discoveries of new resources fell to a record low of only 4 bn barrels while 36 bn barrels were actually produced.
IEA also pointed out that in 2018 investment spending is likely to grow only by 6% having barely increased at all in 2017. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth.
After that time, the pace of growth from these countries is less certain, and the market might well need the supplies currently being held off the market by leading producers.