The Fuse

Market Buoyed by OPEC+ Rhetoric and Falling Venezuelan Production

by Alex Adams | @alexjhadams | May 19, 2019

On May 19, OPEC and its allies held their ministerial monitoring committee (JMMC) in Jeddah, Saudi Arabia. Although the Saudi energy minister told reporters he was recommending “gently” driving down oil inventories, he added the cartel would not rush to any decision ahead of their June meeting in Vienna. However, any decision to reduce oil inventories will be greatly helped by Venezuela’s declining oil production, which has just fallen to its lowest levels since January 2003.

Despite the fact that no clear recommendations were made, the announcement at the JMMC of the cartel’s intention to maintain production cuts had an immediate effect on oil prices. U.S. West Texas Intermediate crude futures rose 34 cents to settle at $63.10 a barrel, after hitting $63.81, the highest price since May 1. Brent crude futures fell 24 cents to settle at $71.97 a barrel, having earlier touched $73.40, its highest price since April 26. The UAE’s energy minister, Suhail al-Mazrouei, earlier told reporters that producers are able to fill any market gap, meaning there was no need to relax the current program of supply cuts.

There remains discord between top producers Russia and Saudi Arabia on extending the production cuts

According to Saudi energy minister Khalid al-Falih,  the reason OPEC and its allies, which includes petrostates like Russia, decided not to take any firm decision at the JMMC was because of the fragility of the oil market. Aside from the large number geopolitical conflicts currently unfolding in the Persian Gulf region, from tanker attacks, infrastructure sabotage, and rising US-Iran tensions, including President Trump’s threat to “end” Iran in a recent tweet—there remains discord between top producers Russia and Saudi Arabia on extending the production cuts.

Russian energy minister Alexander Novak told CNBC that while the country is “supportive” of continuing its cooperation with other OPEC+ nations, “this continuation could depend to various extents on how the situation unfolds… and what the forecasts for supply and demand will be on the market.” Signaling a departure from the Saudi plan of maintaining cuts, Novak added, “If it turns out that there will be a shortfall in the market then we will be prepared to examine options linked with a possible increase in production.”

If the decision is taken next month by OPEC to maintain production cuts into the second half of the year, these efforts will be made easier by Venezuela’s continuing production decline. This week, the U.S. Energy Information Administration (EIA) announced that the country’s oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of 2019. The EIA adds that this average “is the lowest level since January 2003,” when production at PDVSA was largely brought to a halt by a nationwide strike and civil unrest.

There is little optimism that Venezuela can reverse its production decline

There is little optimism that Venezuela can reverse its production decline. In fact, the EIA predicts the country’s crude oil production will continue to fall throughout the rest of 2019 “and [these] declines may accelerate as sanctions-related deadlines pass.” The deadlines, the EIA states, included an April 28 deadline provisions that third-party entities stop using the U.S. financial system stop to transactions with PDVSA by April 28, and an upcoming July 27 deadline that that U.S. oil companies, including oil service companies, involved in the oil sector, must cease operations in Venezuela by July 27.

Venezuela’s chronic oil worker shortage and the departure of U.S. oilfield service companies will exacerbate the Venezuelan oil industry’s problems in the second half of 2019. Production operations are being further hampered by power outages, which began on March 7, and they are likely damaging the country’s oil infrastructure. Venezuela’s heavy oil upgraders, which process much of the country’s crude oil for transport, were shut down in March during these outages.

Although no firm decisions have been made on production output goals for the second half of 2019 by OPEC and its OPEC+ allies, there are a number of issues that will remain unaltered regardless of the decision: OPEC output will be dragged down further by falling Venezuelan production, and rising geopolitical tension in the Persian Gulf will push prices higher.