with Agency report
16 May 2018, Sweetcrude, Lagos — The International Energy Agency, IEA, in its latest monthly report Wednesday, warned that any supply cuts could cause prices to rise due to oil supply disruptions in Iran and Venezuela, describing both as ‘major challenge’.
The uncertainty in Iran and drop in Venezuela have prompted oil traders to focus on geopolitics rather than fundamentals, the IEA added.
“The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality,” the Paris-based organization said.
The U.S. President Donald Trump, over a week ago, withdrew the country from the Iran nuclear deal, re-imposing sanctions on the country, not to talk of political and economic disorder in Venezuela.
Both situations have cast doubt over oil supply from Iran and Venezuela.
Neil Atkinson, head of the oil industry and markets division at the IEA, told CNBC’s “Street Signs” that “the stability of the market” could be at stake.
“If there is a large shortfall in Iranian exports then clearly that will have an impact on a market that is already quite tight,” he said.
“And it’s not beyond the realms of possibility that by the end of 2018, production in Venezuela could be several hundred thousand barrels lower than in its today. If that shortfall there coincides with a large shortfall in Iranian exports as the sanctions are implemented that potentially poses a challenge.”
The last time sanctions were imposed in 2012 until 2015, production from the world’s fifth-largest producer fell by about 1.2 million barrels a day (mb/d) “but only time will tell the extent of the disruption this time around, according to IEA.
“In these early days, there is understandable uncertainty about its potential impact on Iran’s oil exports, which are currently about 2.4 mb/d.”
Atkinson stressed that customers for Iranian oil have 180 days to adjust their purchasing strategies and make other arrangements “if that’s what they decide to do.”
“We can’t be sure how much lower Iranian exports will be … We just don’t know, we’ll just have to see how the U.S. implementation of the decision plays out over the next few months,” he said.
In its May report, OPEC put Iran’s daily production at 3.82 million barrels a day, according to both first and secondary sources, making it the third largest OPEC producer and potentially making any supply loss a challenge.
In Venezuela, meanwhile, the IEA noted that “the pace of decline of oil production is accelerating and by the end of this year output could have fallen by several hundred thousand barrels a day.” In April, Venezuela’s crude oil output sunk to 1.42 mb/d, the lowest level since the early 1950s.
Describing Venezuela as being in “freefall,” the IEA said its production collapse was significant.
“The freefall in Venezuela has already pushed compliance with the Vienna Agreement off the charts and, together with losses in Mexico, accounts for almost 40 percent of the 2.5 mb/d that was removed from the market in April. That is before the re-imposition of sanctions by the U.S. on Iran,” it said.
“Continued declines could cut capacity by several hundred thousand barrels a day by the end of this year — just as the market feels the full impact of US sanctions on Iran,” the IEA warned.
A potential loss of Iran output, declining Venezuelan output, and the “double supply shortfall” it presents could prompt other producers to step in to fill the gap, although this comes at a time of production restraint among major oil producers in an attempt to boost prices.
Twenty-four OPEC and non-OPEC producers, most notably Russia, are expected to continue a deal (called the ‘Vienna Agreement’) to cut production by 1.2 mb/d until at least the end of 2018 and the strategy has been working with benchmark Brent crude currently trading around $78 a barrel and WTI almost touching $71.
On whether other producers “could step in to ensure an orderly flow of oil to the market and offset a disruption to Iranian exports,” the IEA said that neither Venezuela nor Mexico can raise output in the short term, “but some of the 1.5 mb/d that have been cut by other producers under the Vienna Agreement might be available to keep markets well supplied.”
Saudi Arabia which is OPEC’s largest producer has said it could step in to fill the supply gap, although analysts are sceptical that the production cuts could affect filling in the gap for losses from Venezuela and Iran.
However, market awaits the next OPEC meeting on June 22 to know what next step the group will take towards bridging the gap.
“Should a decision be taken to remove the cuts, only Saudi Arabia, the United Arab Emirates, Kuwait and Russia are likely to be capable of a quick ramp-up of substantial volumes. The four producers pumped at record rates ahead of the supply cuts and could, in theory, increase output by a combined 1.3 mb/d in short order,” the IEA said.
Saudi Arabia has the largest share of spare production capacity, the IEA said.
“As of April, OPEC’s spare production capacity was 3.47 mb/d — defined as the level that can be reached within 90 days and sustained for an extended period — with Saudi Arabia accounting for roughly 60 percent of the total.”