Almost a week on from OPEC’s theatrical deal with Russia and others to cut oil supply, the market just isn’t feeling it. Brent crude traded below $60 a barrel on Thursday morning, having closed last Friday at almost $62. Skepticism about the group’s ability to deliver persists, and such hopes as there are on the part of bulls rest largely on involuntary cuts from the likes of sanctioned Iran and collapsing Venezuela.
The latter, in particular, hit a grim milestone last month.
Since the first round of supply targets kicked in at the start of 2017, I’ve been tracking cumulative adherence by the original 11 OPEC members subject to them. In broad terms, that group held a theoretical 948 million barrels of crude oil off the market through the end of November, which is actually more than the 814 million the targets implied, for compliance of 116 percent (all data are taken from OPEC’s monthly reports, using secondary sources). Beneath this, however, the real story was that, for much of the period, Saudi Arabia, Angola and Venezuela went above and beyond to curb supply.
That changed this summer, when Saudi Arabia began to raise production aggressively. In November, its output breached 11 million barrels a day, versus a target of 10.1 million, and its cumulative contribution dipped sharply to 292 million barrels withheld. Venezuela’s collapse, on the other hand, kept right on going, and its cumulative cuts jumped to 296 million barrels — surpassing those of Saudi Arabia for the first time.
It is shocking that Venezuela has surpassed Saudi Arabia in absolute terms; its production was less than one-fifth that of OPEC’s de facto leader when the cuts were agreed. In terms of compliance, the picture is even starker:
Little wonder Venezuela was made exempt from targets in last week’s updated agreement. Not that it matters for practical purposes. There is little to stop Venezuela’s downward spiral from continuing. On Thursday, the International Energy Agency took an ax to demand forecasts for the country as its economy looks set to end 2019 at half the size it was in 2013 in real terms. If your first thought is that this frees up more supply for export, bear in mind that domestic demand fell by perhaps 80,000 to 90,000 barrels a day this year, but production is down nearly 600,000 barrels a day for the year through November. And potential U.S. sanctions over President Nicolas Maduro’s efforts to change Venezuela’s constitution could add further pressure in 2019.
When it comes to judging the success of OPEC’s updated cuts in putting a floor under oil prices, remember the heaviest lifting is being done by those too weak to do anything else.