Global supply outages stand at exceptionally high levels, even as Brent struggles to stay above $60 per barrel.
Saudi Arabia impressed with its quick turnaround of the Abqaiq facility, but supply disruptions persist in several other major oil-producing countries. For now, weak demand and the prospect of an economic recession loom large over oil markets, which has allowed elevated supply risk to recede into the background.
Supply disruptions pile up
The Abqaiq attack illustrated geopolitical risk to global oil markets in crystal-clear fashion. After all, it was the largest supply disruption in history. In September, global oil production fell sharply by 1.5 million barrels per day (Mb/d), according to the IEA. Oil traders quickly moved on from the disruption after Saudi Aramco made clear that the outage would be brief.
However, there is still a remarkable amount of capacity idled or disrupted due to some combination of sanctions, conflict and unrest.
In Venezuela, production is falling once again after a several-month hiatus. Venezuela had managed to stabilize production following the failed coup attempt by opposition leader Juan Guaidó in April. Monthly output totals averaged just over 700,000 barrels per day (b/d) between May and August. However, production fell sharply in September, dropping by 150,000 b/d, according to the IEA.
Venezuela could lose another 300,000 b/d in the next few weeks if the Trump administration decides to scrap a waiver granted to Chevron, which exempts the company from U.S. sanctions and allows it to continue to operate in the country. The U.S. extended the waiver back in July for another three months, putting it on track for expiration in a week’s time. Venezuela’s production is already down more than 2 Mb/d in the last two years, but the expiration of the Chevron waiver could lead to additional losses.
Iran has lost a similar amount, also due to U.S. sanctions. Iranian oil exports plunged to 260,000 b/d in September, according to IEA estimates, down from around 2.6 Mb/d on the eve of U.S. sanctions roughly 18 months ago.
Libya’s oil production has proved surprisingly consistent, despite months of civil war. The longer the war drags on, the more both sides become stretched and depleted, which increases the odds of disruptions to oil flows. There are reports that the National Oil Corp. based in Tripoli has restricted fuel supplies to eastern cities over fears that it was simply fueling the Libyan National Army (LNA), but such a move risks retaliation. For now, both sides have an interest in keeping oil operations uninterrupted.
Protests brought Iraq to a standstill earlier this month, and at least 110 people were killed after a security crackdown, with thousands more wounded. The unrest took place in Baghdad but also in the oil rich southern city of Basra. Similar protests over corruption and economic stagnation rocked Basra last year. Oil production has not been affected to date.
Meanwhile, in Ecuador, indigenous-led anti-austerity protests disrupted oil flows temporarily, forcing the state-led oil company to declare force majeure. After Ecuador’s President Lenin Moreno backtracked on the proposed removal of fuel subsidies, protesters declared victory. Government officials said that production should be back to normal within 15 days.
Then there is the small matter of the Saudi-Iranian conflict, which reached new heights after the Abqaiq attack. The attack sparked fears of a regional hot war, but after the U.S. refrained from retaliating on behalf of Saudi Arabia, Riyadh has purportedly explored some diplomatic options with Tehran.
Saudi officials have seemingly lost faith in U.S. security assurances, and while Riyadh and Tehran have backed away from the brink, the current dynamic is set up in such a way that the odds of conflict remain uncomfortably high. Iran’s back is against the wall due to aggressive U.S. sanctions, and experts say that its strategy is to disrupt oil flows. On October 11, an Iranian oil tanker was hit by missiles, according to Iranian officials, a reminder that risk cuts both ways.
“Almost one month after the attacks against Khurais and Abqaiq there is still nothing to suggest that anything resembling a resolution to the crisis is within reach,” Torbjorn Soltvedt, Principle MENA Analyst at Verisk Maplecroft, wrote in a recent report. In a previous report published in September, Soltvedt said that progress on reducing security risk to Saudi oil assets “will be measured not in weeks or months, but years.”
Risk looms, but oversupply dominates
The Abqaiq attack raised concerns about adequate supplies since much of the world’s spare capacity is concentrated in Saudi Arabia, and much of that was knocked offline by the unprecedented attack. “With global oil supply disruptions already at exceptionally high levels due to supply losses in Venezuela and Iran, the blow to Saudi crude processing capacity makes any retaliation path dangerous to the market,” Bank of America Merrill Lynch said in a report last month. “True, there are emergency stocks available across the OECD and China. But oil spare capacity around the world is minimal outside of Saudi Arabia.”
There has been a bit of hand-wringing from some analysts regarding the lack of response from the market. “There should be talk of a geopolitical premium on top of oil prices,” the IEA said in its October Oil Market Report. “For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production coming on stream.”
Indeed, the weakening global economy is paramount. Despite the large volume of capacity knocked offline or otherwise idled, oil traders are ignoring signs of risk and are laser-focused on various economic data points.
And rightly so. The IEA cut its oil demand forecast to just 1 Mb/d in its latest Oil Market Report, a figure that some analysts still view as overly optimistic. For instance, Standard Chartered estimates 2019 demand growth at just 0.517 Mb/d, or half of what the IEA predicts.
As a result, rather than fears of inadequate supply, there are growing questions about the possibility of deeper cuts from OPEC+ in order to head off a worsening supply glut.
At the same time, the massive supply glut may not materialize if U.S. shale continues to stagnate. “With US oil drilling lower YTD by 19.8%, in our view completions in key regions will soon fall below the level necessary to cancel out m/m declines (around 0.6mb/d) from existing shale wells,” Standard Chartered said in a report. “There appears to be an incentive for OPEC to hold its fire for now, and instead to allow the current financial stress in the US oil industry to run on through the capex and drilling planning season.”
For now, with ample stockpiles of crude and weak demand growth, oil prices are showing very little life. The IEA cautioned against complacency. “We might have quickly returned to business as usual, but security of supply remains very relevant,” the agency said.