Crude horizon is getting clogged. Screws are being tightened. The output cut regimen adopted by the Organisation of Petroleum Exporting Countries and its allies including Russia (Opec+) is yielding results.
In the meantime, the US embargo on Venezuelan crude has begun to hurt the markets too as the country’s production has fallen off the cliff. US sanctions on the state oil company PDVSA are also working. In the last three weeks of March, the US imported zero barrels of crude from Venezuela; sharp declines from the weekly imports of around 600,000 barrels per day (bpd) before sanctions were announced in late January.
Consequently, the Venezuelan output has reportedly plunged to a 74-year low last month. The International Energy Agency (IEA) is reporting the Caracas’ output to be below 1 million bpd now.
Lower output from sanctions-hit Iran is also putting upward price pressures on the oil markets. Before the onset of sanctions last June, as per the Bloomberg Tanker Tracker, Iranian crude exports were around 2.1m bpd. Once sanctions kicked in, it went down to 1.978m bpd by the end of October 2018. And then, as the sanctions regime got stringent early last November, the output is now averaging 1.094m bpd. And in case the Trump administration opts to rescind the waivers given to eight countries, Tehran’s exports could go down even further.
These reasons were enough to make crude markets, tight and still tighter. But the emerging Libyan scenario is another spanner at work. With a surge in violence, chaos has gripped the nation and its output is on a decline. Exempted from Opec’s supply cut agreements due to its civil conflict, Libya was enjoying its highest output levels in five years in the second half of 2018. Production had touched 1.28m bpd mark in November, up from roughly 500,000 bpd last June.
Yet, courtesy of the raging civil war, output slipped again to 900,000 bpd in February. Libya is the largest African crude producer. In the ‘70s, it was pumping 3m bpd. Before Gaddafi’s ouster in 2011, the north African country was producing 1.6m bpd. Now that the battle for oil riches of the country is raging, its crude output is getting a severe hit.
One could recall the International Energy Forum meeting at the now infamous Ritz-Carlton hotel in Riyadh when the Gaddafi regime was about to be toppled. This correspondent remains a witness to the extreme concern among the global oil ministers, urging Opec to open their taps. Libyan output was essential in maintaining global demand-supply balance, ministers were seen stressing.
Finally, the then Saudi oil minister Ali al-Naimi had to intervene assuring that Saudi Arabia was ready to meet the requirements of all the customers. Markets today seem faced with the same scenario; supply is tight and prices are rising. This is a difficult scenario for Opec and its allies. Already, there are hints that crude taps could be opened, sooner rather than later.
As per Reuters, last week one of the key Russian officials to foster a supply pact with the Opec, Kirill Dmitriev signaled that because of improving market conditions and falling stockpiles, Russia at the next Opec+ meeting in June, would insist on raising output.
Russia seems just fine with current oil prices and is not in desperate need for higher prices like Saudi Arabia. Russian oil companies are also not in favor of such an extension. In fact, Russian President Vladimir Putin too demurred, when asked recently on the possible extension of cuts in the second half of 2019.
Meanwhile, Saudi Arabia is also hinting at evaluating the scenario in June. Energy Minister Khalid al-Falih told media it was too early to say whether the agreement would be extended beyond the end of June, adding that next month would be crucial in determining where Opec+ would go in the second half of the year.
“The joint ministerial monitoring committee (JMMC) will be a key decision point because we will certainly by then know where the consensus view is and, more importantly, before we ask for consensus, we will know where the fundamentals are pointing,” he said. JMMC is set to meet in May.
Will Trump take a decision on waivers next month, before the Opec June meeting or delay it to see their next move, before deciding his next move on the crude chessboard? That would be an interesting watch, in this ongoing cat and mouse game on the global energy chessboard.
Published in Dawn, April 14th, 2019