Nick Cunningham: The biggest oil collapse in history
Venezuela's oil production plunged to new lows in December,
surprising even some of the most pessimistic forecasts.
According OPEC's secondary sources data — provided by independent groups — Venezuela's oil production fell by another 82,000 barrels per day (bpd) in December, taking output down to 1.745 million barrels per day (mb/d). That is certainly a bad result, but not drastically different from the pace of declines from the months before.
However, data that came directly from the Venezuelan government says that the country's output plunged by a massive 216,000 bpd in December, dropping to 1.621 mb/d. It's a staggering figure, and points to a more serious collapse.
OPEC provides those two sources of data — secondary sources and direct communication — in its monthly reports, and sometimes the data directly from the country can be overstated or understated, which can be the result of differing data collection practices, but also sometimes depends on some political motivations.
At times, Venezuela has submitted inflated numbers relative to the secondary figures, perhaps to obscure the state of decline.
In this context, the fact that Venezuela itself says that its production declined by such an enormous number is notable. The reason for the sharp drop off is unknown. There are endless reasons that would explain plunging output — debt, no cash to invest or even maintain production, crumbling infrastructure, a worker exodus — so the figures could very well be accurate. The December numbers could also be a one-off exaggeration, maybe to downplay the expected forthcoming declines this year.
Either way, Venezuela's production losses are serious and worsening. Over the course of 2017, Venezuela's oil production fell by 649,000 bpd, a loss of 29 percent. Those losses offset around two-thirds of the gains that came from the U.S. over the same timeframe. The WSJ points out that it was probably the worst loss of oil production in a single year in recent history — Russia's production fell by 23 percent after the collapse of the Soviet Union and Iraq lost roughly the same percentage after the U.S. invasion in 2003. There aren't other examples of such a massive erosion of oil production in such a short period of time.
The Venezuelan crisis adds some fuel to the fears from within OPEC that their production cuts are biting faster than expected, which could make the inventory drawdowns overshoot at some point.
The sudden tightening also raises fears that OPEC is handing over too much room for rival producers, i.e., U.S. shale. OPEC admitted this scenario is already starting to play out — in its monthly report, OPEC revised up its forecast for non-OPEC supply this year to 1.15 mb/d, an increase of 0.16 mb/d from last month's report. The reason: “higher growth expectations for the U.S. and Canada,” OPEC said.
What is remarkable is that the feeling that the oil market is tightening too much, too fast comes less than two months after OPEC decided to extend its production cuts for another year.
Now, OPEC's monitoring committee is expected to meet in just a few days in Oman, and oil market watchers are paying more attention to this gathering than they otherwise would because some small cracks in OPEC's resolve are starting to show . A growing number of investment banks are starting to predict that OPEC will abandon the cuts one way or another, whether through cheating or via some official exit strategy agreed to before the end of the year.
“There is an unintended consequence from this higher price,” said Ed Morse, head of commodities research at Citigroup Inc., according to Bloomberg . “OPEC are fearful of not only the shale response, but of deep water and of oil sands from Canada.”
Morse argues that OPEC will likely sit tight for the time being, citing more work needed on bringing inventories back to the five-year average. Indeed, several oil ministers from OPEC member countries said as much in the past week. That message will likely be repeated after the upcoming meeting in Oman in a few days' time.
But Morse of Citi argues that at the June meeting, the group may decide to start gradually ramping up production over the summer.
By Nick Cunningham of Oilprice.com
Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA. . Petroleumworld does not necessarily share these views.
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