OPEC squeezes oil output to 4-year low

Kenny Grant
February 14, 2019

"Disruptions have increased with risks that Venezuela's production decline accelerates following the introduction of additional USA sanctions related to the Venezuelan oil industry".

If refiners are unable to source enough heavy and extra heavy crude, they will buy the next best alternative, in this case medium density crudes, so the impact of sanctions is rippling through the entire oil market. WTI Crude, according to Goldman Sachs, will average US$55.50 a barrel, compared with an earlier estimate of US$64.50 a barrel.

"Light crudes naturally yield more gasoline, and together with relatively modest demand-growth, this has driven gasoline stocks sharply higher and crack spreads sharply lower in recent months", Morgan Stanley said.

The global oil market will struggle this year to absorb fast-growing crude supply from outside OPEC, even with the group's production cuts and US sanctions on Venezuela and Iran, the International Energy Agency said in a report on Wednesday.

"In quantity terms, in 2019 the USA alone will grow its crude oil production by more than Venezuela's current output", the IEA said.

In the United States, energy firms last week increased the number of oil rigs operating for the second time in three weeks, a weekly report by Baker Hughes said on Friday.

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Although the US reimposed oil export sanctions last November, it gave a six-month exemption or wavier to eight friendly countries: China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece to continue buying a restricted quantity of Iranian oil, but it is uncertain if Washington will extend the waivers beyond May. The dense crudes are much more hard to refine and tend to contain significant quantities of sulfur and other impurities that are costly to remove.

Global oil supply decreased month-on-month in January by 1.03 million barrels per day (mb/d) to average 99.32 mb/d, preliminary data of the Organization of the Petroleum Exporting Countries (OPEC) showed on Tuesday. The price has largely plateaued since then, in spite of the subsequent imposition of USA sanctions. In quality terms, it is more complicated.

The cartel is broadly on track to keep markets balanced this year, even though demand for its crude will be lower than previously thought, the IEA's report indicated.

A 24-nation alliance known as OPEC+ that formed two years ago has just started another round of output curbs to prevent a supply glut.

In turn, this spurred OPEC and its allies to impose new output restrictions at a meeting in early December, with these cuts to take effect from January.

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