If timing is everything, why does OPEC seem to keep getting it so wrong? The group’s 2019 oil output cuts got off to a flying start in January and they’re going to get bigger, just as U.S. sanctions on Venezuela start to bite.
The problem for the producers, and their allies in the wider OPEC+ group, is that they don’t wield nearly as much control over the market as some people accuse of them of doing. And that makes getting the timing of their actions right almost impossible. Unexpected external factors just seem to keep cropping up and, at least recently, many of them seem to originate with Uncle Sam.
The surge and then crash in oil prices in the second half of last year is a case in point.
Back in June, President Donald Trump tweeted that he had asked Saudi Arabia’s King Salman to boost the country’s production to counter the “turmoil & disfunction [sic] in Iran and Venezuela.” The king duly obliged, but prices kept on rising, driven in part by Trump’s avowal to cut Iran’s oil exports to zero when sanctions came into effect in early November.
Saudi production levels — which are pretty much locked in at least a month in advance, once customers have submitted their orders for how much they want to buy — hit a record 11.07 million barrels a day to coincide with the start of the Iran sanctions. Imagine their surprise when Secretary of State Michael Pompeo announced that the U.S. had granted waivers from sanctions to eight of Iran’s top customers, allowing them to continue buying more than a million barrels a day of the nation’s crude and condensate.
But that wasn’t the only thing that tipped market sentiment from fear of shortage to concerns about a glut. Much less widely reported was the change in the assessment of U.S. production over the summer. An end-October report, which fed into November projections by the Energy Information Administration, showed output had increased by 670,000 barrels a day between June and August. Before those reports, the picture was very different — the data had shown growth slowing to a crawl over the summer.
That may not seem like a huge amount in the grand scheme of things, but it was enough to add more than 45 million barrels of unanticipated supply in the five months to November. That’s more than an entire year’s worth of production from OPEC’s smallest member, Equatorial Guinea.
Add that volume to historical balances and the output increases from Saudi Arabia, Russia and the United Arab Emirates, and it’s no surprise that by November the market was starting to look oversupplied.
Roll forward to December, when OPEC and friends — after a hefty push from Russia — agreed to pare production by a combined 1.2 million barrels a day from the start of January, with a starting point that was, for most countries, their level in October.
No sooner had they started to implement those cuts than Trump slapped sanctions on exports of crude from Venezuela and purchases by the Latin American nation of the diluent it needs to blend with its heavy oil to make it flow. The U.S. was the only supplier last year of the heavy naphtha that works best. If President Nicolas Maduro can’t find a replacement somewhere else — and he won’t find one easily — the impact on the country’s output will be swift.
Even if he does find willing suppliers, they will be much further away than the Gulf coast of America. Given that his country has little diluent in storage, a shortage is almost inevitable. Don’t be surprised if Venezuela’s production falls by another 500,000 barrels a day over the next couple of months under the present government. And if that government is replaced, don’t expect the recovery to be as quick.
And when that recovery does come, don’t be surprised if it follows hard on the heels of a decision by OPEC+ to raise output. If the timing goes awry again we can expect another roller-coaster year for oil prices.