OPEC Oil Production Slides As Venezuela Output Tumbles

OPEC's April monthly report was released this morning and unveiled more of the same: expectations of rising global demand (which will soon be dented as global growth fizzles, impacting the need for commodities, especially in China and EMs), coupled with declining production by OPEC producers (really Venezuela whose oil output is collapsing as the insolvent, hyperinflating state grinds to a halt), even as shale producers continue to win market share from OPEC, but really mostly Saudi Arabia.

We start at the top, where OPEC optimism once again dominated, as the cartel sees a tighter market with rising demand even as its own output drops largely thanks to one nation:

  • 2018 world oil demand estimate raised by 60k b/d, to 98.70m b/d, revised higher by 1.63mmbpd
  • 2018 world oil demand y/y growth little changed at 1.63m b/d, or 1.7%

At the same time, March non-OPEC supply was seen 380kbpd higher M/M, with total non-OPEC supply averaging 66.2mln bpd. Most of this was Shale.

In total, world oil supply in March increased by 180k bpd to average 98.15mln bpd, an increase of 2.15mln bpd Y/Y.

And yet, at the same time, the OPEC-14 group crude output fell 201k b/d in March to 31.958m bpd, the lowest in one year.

While several nations saw their production decline in March, including Angola, Venezuela, Algeria and Saudi Arabia, it was and continues to be a Venezuela story.  Amusingly, OPEC Sec Gen Barkindo steamrolled through the nuances, and claimed that OPEC production cut compliance had soared to 150% in March, when all he meant was that Venezuela production continues to plunge.

Barkindo also said that a longer-term alliance between OPEC/Non-OPEC to be discussed in June, and said he was Barkindo confident the supply cut deal will be extended beyond 2018, adding that he sees the oil market rebalancing in Q2/Q3 2018, whereas previously he saw it rebalancing by end-2018.

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Finally, the latest OPEC report had an interesting sidebar on China's new crude oil futures, which it wondered if it will become "a new regional crude benchmark." This is what it said:

On 26 March 2018, China launched its first crude futures contract as the country seeks to extend its influence over the pricing of oil sold into Asia. Over the past decade, China has emerged as a major force in the oil market, surpassing the US as the world’s biggest crude importer in 2017, taking in 8.5 mb/d.

The contract is made up of seven medium-sour crudes prevalent in the local market - six freely traded Middle East grades (Basrah light, Dubai, Masila, Oman, Qatar Marine and Upper Zakum) and China’s Shengli crude. Given that the seven grades of crude accepted for delivery in the INE are heavier and more sour than Brent and WTI, it could be a far more useful marker for China and other major regional importers.

Marking a successful start, more than 40 million paper barrels of oil were traded on the first day of China’s new crude oil futures contract. The new contract launched by the Shanghai International Energy Exchange (INE) attracted  interest from retail and institutional investors, Chinese independent refiners, also known as teapots, and international traders. At one stage the volume of trades being done on the INE exceeded those of global rivals Brent and WTI. However, the daily volumes have thus far averaged around 25,000 contracts. The official goal behind the INE is to have a crude futures contract to help the price discovery process and assist enterprises in avoiding risks, while establishing a regional benchmark as an alternative to European Brent and Dubai Oman.

On the other hand, the extent to which the INE contract is independent from government interference is currently the main risk factor facing western investors, which is in addition to a currency risk, given that the INE is settled in yuan. Another issue is liquidity, given the limited number of potential buyers for physical delivery at the bonded storages in China. Nevertheless, the new contract is expected to be useful as a hedge for physical purchases, as well as for arbitrage plays, which could significantly boost DME Oman contract volumes.

Once established, China’s reference crude price could act as a regional benchmark for negotiations of spot or term crude oil prices, of which about 60% are supplied by OPEC Member Countries (Graph 1 - 6). At this level of imports from OPEC, Middle Eastern producing nations will be watching closely as they could, in time, face pressure from their Chinese buyers to adopt this benchmark for pricing their physical crude contracts.

Despite the upbeat start, the INE contract still has a long way to go to build up a history and reputation. Volumes and open interest will be the key measures of success and should be closely monitored going forward.

 

Comments

Government nee… kralizec Thu, 04/12/2018 - 09:12 Permalink

CIA gonna need some more war machines and independent contractors to pull those triggers.  Their Houthi teams are busy these days shooting rockets at oil tankers .  Their ISIS squads are fully engaged across the Middle East.  Havent heard much from the Niger Delta Avenger CIA farm team.  Are they available for a little war in Venezuela?!?

In reply to by kralizec

silverer Thu, 04/12/2018 - 07:53 Permalink

Guess that socialist system-feeding "free oil" is just not getting it. It's supposed to come out of the ground and make the country rich without any investment of capital or productivity from skilled workers. Just like how marijuana grows itself, eh? Silly socialists. Once you're done raping nature for the freebies, is anybody willing to work?

Privyet_Jet Thu, 04/12/2018 - 07:54 Permalink

This has nothing to do with them having the largest oil reserves in the world, being hostile to their neighbors to the north, or being in the Americas.

Cloud9.5 Privyet_Jet Thu, 04/12/2018 - 08:48 Permalink

There are a lot of factors here at play.  The political system and its ongoing war with the central bankers is definitely part of it.  When the word gets out that you have this massive oil reserve and then you encourage bankers to put up the money to start up production, you have made a deal with the devil.  Then once production gets started you nationalize your oil production and stiff the bankers, you can expect some blow back.  Since the U.S. is owned by the central banks, you can expect them to put sanctions on your economy on the banker’s behalf.

The way that Venezuela has run its oil business is no different than the way Saudi Arabia has run Armaco.   For the Saudis everything is owned by the royals.   For the Venezuelans everything is owned by the party.   The system works as long as production is profitable.   Once it is not, the newly created totally useless plutocracy and the attendant government entitlement programs cannot be sustained.  At that point the system begins to fracture.

American shale oil production has driven a stake into the heart of these two oil producers.   Shale oil production is a flash in the pan, but the flash may last long enough for these two countries to collapse.  We will have to wait and see.

In reply to by Privyet_Jet

just the tip Cloud9.5 Thu, 04/12/2018 - 09:05 Permalink

your last paragraph is the first common sense analysis of the shale phenomena i've read on ZH.  very brief and concise i might add.  ZH commenters have tight oil derangement syndrome and refuse to see it for what it is.  if they see the phrase "tight oil" they start screaming their entire neighborhood is going to go bankrupt.

In reply to by Cloud9.5

youngman Thu, 04/12/2018 - 09:37 Permalink

The only increase in the output  Venezuela is going to have in the future is scrap metal as the locals tear apart the well heads and refineries and cut it up into scrap metal to sell to the Chinese for 10 cents a pound.....