Production cutbacks by OPEC nations are building a supply cushion that could be called upon to mitigate a possible supply shock from an abrupt drop in crisis-hit Venezuela’s output, the IEA said Friday.
With a nationwide blackout that paralysed the country for one week, demonstrating the unreliability of the country’s electricity network, new questions are being raised about Venezuela’s ability to continue to produce and export oil.
In its latest monthly report, the Paris-based International Energy Agency said that Venezuela’s oil industry operations were seriously disrupted by the blackout and warned that “ongoing losses on a significant scale could present a challenge to the market”.
Venezuela’s oil output has long been on a downward spiral thanks to years of underinvestment and mismanagement, with stepped-up US sanctions further trimming exports.
However the IEA also noted that Venezuela’s current oil production of about 1.2 million barrels per day (mbd) is the size of production cuts agreed by members of the OPEC oil cartel and a number of other nations led by Russia, a grouping often called OPEC+.
Overall, it said OPEC members have about 2.8 mbd of spare production capacity, with much of it being similar in quality to oil produced in Venezuela, which means it could be used without much, if any, adjustment by refineries.
“Therefore, in the event of a major loss of supply from Venezuela, the potential means of avoiding serious disruption to the oil market is theoretically at hand,” said the IEA, adding that “production cuts have increased the spare capacity cushion”.
The agency, which advises oil-consuming nations on energy issues, said that thanks to bigger-than-promised cuts by Saudi Arabia and its Gulf allies, the OPEC+ effort to trim output was beginning to work.
Since 2016 the OPEC+ nations have agreed on a series of output limits in an effort to counteract the collapse of oil prices in 2014 caused by overproduction. After oil prices had a rollercoaster ride at the end of last year, OPEC+ agreed to cut production by 1.2 mbd in January to June.
The IEA said OPEC+ production was 0.24 mbd above the target of 44.3 mbd, with overall compliance with reduction targets at 80 percent.
“OPEC’s compliance was a robust 94 percent, compared to 51 percent from non-OPEC,” said the IEA, adding that major producer Russia was continuing to adjust its production gradually.
“If the producers deliver on their promises, the market could return to balance in the second quarter” of this year, said the IEA.
The IEA left unchanged its forecast for non-OPEC supply increasing to 64.4 mbd this year from a revised 62.7 mbd in 2018, a gain of 1.7 mbd.
It left unchanged its forecast for global oil demand growth of 1.4 mbd to an average of 100.6 mbd in 2019.