Have OPEC/Non-OPEC Now Covered Almost 2 Mmb/d Of Iran Cuts And Venezuela Declines?

Its been a good month for oil prices that has been driven by the indications that US sanctions will hit Iran’s exports more than expected.  It is why we posted our Sept 28 blog “Both China And India May Be Giving In And Reducing Iran Oil Imports, A Big Plus To Oil Prices”.  WTI ~$75 and Brent ~$85 are strong oil prices.  We continue to be bullish on oil prices and expect continued strength, but this week’s multiple positive oil supply items point to a holding of oil prices near current levels.  There were several positive global oil supply indications (from Saudi Arabia, Russia, Angola, Libya, Nigeria, and US) that point to OPEC/non-OPEC now covering ~1.926 mmb/d of potential Iran cuts and Venezuela declines.  This is a big increase from a week ago.  Adding ~1.926 mmb/d is a big supply add, but may fall short of Iran and Venezuela reductions being more like ~2.14 mmb/d.  However, absent a supply interruption, the larger than expected supply adds are likely enough to keep a lid on oil prices given that global oil demand will start to seasonally decline as we get to year end.  The IEA forecasts Q1/19 oil demand to be 1 mmb/d lower than Q4/18.    The other reminder is that oil markets are increasingly set up for an oil price spike in Q2/19 or Q3/19 as the normal seasonal increases in global oil demand kicks in in Q2/19 and Q3/19.  The IEA forecasts Q3/19 oil demand to be up 2.1 mmb/d vs its Q4/19 forecast.

Iran exports pre US sanctions were 2.4 mmb/d of crude oil and 0.3 mmb/d of condensate.  The US sanctions were announced in May and we used May as the starting point as we don’t believe the sanctions had any impact on May production and exports for Iran or other countries.   Oil data varies each month, but pre US sanctions, the monthly Iran oil exports were (all figures are approximate) China 0.7 mmb/d, India 0.7 mmb/d, Europe 0.6 mmb/d, South Korea 0.25 mmb/d and Japan 0.15 mmb/d.  A good example of the monthly variances is Japan, we used an average of ~150,000 b/d but there have been months ~50,000 b/d and over 200, 000 b/d.  Below is the table we created from the Bloomberg survey of OPEC oil production.

Bloomberg Survey Of OPEC Oil Production

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Source: Bloomberg

We estimate US sanctions likely to cut Iran oil exports by at least ~1.7 mmb/d of crude oil.  The big oil market developments last week were the indications that both China and India had given in and were reducing their oil imports from Iran.  This was the reason why we posted our Sept 28 blog “Both China And India May Be Giving In And Reducing Iran Oil Imports, A Big Plus To Oil Prices[LINK]which includes our views on all Iran’s major oil export areas and why we now expect Iran sanctions to cut Iran’s oil exports by ~1.7 mmb/d assuming China and India both cut their Iran oil imports by ~50%.

We assume Venezuela is down 0.440 mmb/d by year end vs May.  Based on this week’s Bloomberg survey data for OPEC Sept production, Venezuela was 1.260 mmb/d in Sept, which was down 180,000 b/d from 1.440 mmb/d in May, but down 710,000 b/d YoY vs Sept 2017.  We continue to see signs that Venezuela oil declines are continuing.  One of the reports this week was the Bloomberg terminal story on Wed that noted Venezuela’s Sept imports of diluent (naptha) was down 31% MoM to 66,700 b/d.  The diluent is blended with Venezuela heavy crude to make the oil export quality, and less diluent means less exports. Plus this week, the reports that the south dock at the main Jose export terminal won’t be fixed until mid-Nov vs the Oct 1 expectations.  These events provide support for our long standing call for Venezuela oil production to decline to 1 mmb/d by year end ie. there is another 0.260 mmb/d of declines to come, which would put Venezuela declines down by 0.440 mmb/d in total from May thru year end.

A big oil supply week means OPEC/non-OPEC have covered ~1.926 mmb/d of the total ~2.14 mmb/d need to cover for Iran cuts and Venezuela declines.  The reason why we wrote this blog is that it was a big week for stronger than expected global oil supply news from Saudi Arabia, Russia, Libya, Nigeria, Angola and the US. This almost perfect storm of oil supply news point to OPEC/non-OPEC increasing oil supply by ~1.926 mmb/d from May thru the end of 2018.   This covers almost all of our estimated ~2.14 mmb/d of Iran cuts and Venezuela declines.

Saudi Arabia is now up ~700,000 b/d since May. The big oil supply news this week were the reports that Saudi Arabia energy minister al Falih in Moscow saying Saudi Arabia was just below 10.7 mmb/d and right at its all time record oi production.  Earlier this week, Bloomberg’s survey of OPEC production for Sept had Saudi Arabia up 80,000 b/d in Sept to 10.530 mmb/d, or up 560,000 b/d since May.   This means that the Saudi Arabia is now up ~700,000 b/d since May.

Russia is now up 386,000 b/d since May. The other big oil supply news this week were the reports that Russia hit a new record of 11.356 mmb/d in Sept 2018, which beat the prior all time post Soviet record of 11.247 mmb/d. Russia in Sept is now up 386,000 b/d since May 2018 of 10.970 mmb/d.

Iraq, Kuwait and UAE are up 440,000 b/d since May.  The other key OPEC players to add supply are Iraq, Kuwait and UAE.  Bloomberg’s new survey data had these three collectively down 10,000 b/d in Sept vs Aug, with Iraq up 20,000 b/d, Kuwait down 30,000 b/d and UAE flat.  However, since May, these three countries are up 448,000 b/d since May, including Iraq up 180,000 b/d, Kuwait up 90,000 b/d, and UAE up 170,000 b/d.

Angola should be up 100,000 b/d in Oct/Nov.  The Bloomberg survey has Angola at 1.530 mmb/d in Sept, which is flat to May, but up 90,000 b/d from Aug.  However, Angola oil production dropped down to 1.4 mmb/d in July before increasing to 1.440 mmb/d in Aug and 1.530 mmb/d in Sept.  The increasing Angola oil production is expected and due to Total’s two new Angola oil fields (Kaomba North and Kaomba South) commencing production this summer.  Each field is expected to add 115,000 b/d or 230,000 b/d in total.  We estimate that there is still ~100,000 b/d of added Angola oil production to come from Kaomba North and Kaomba South in Oct/Nov.

Unpredictable Libya and Nigeria were up 100,000 b/d in Sept and are up 300,000 b/d since May.  The other big positive oil supply data this week was Libya and Nigeria.  Bloomberg survey data had Libya at 1.050 mmb/d in Sept, which was up 80,000 b/d vs Aug, and up 60,000 b/d vs May levels of 990,000 b/d.  Bloomberg had Nigeria at 1.800 mmb/d, which was up 20,000 b/d vs Aug and is up 240,000 b/d vs 1.560 mmb/d in May.

Covering 1.926 mmb/d of 2.14 mmb/d should be close enough as oil demand will soon be seasonally declining.  We would feel differently at other times of the year, but in Oct we don’ t believe there has to be full barrel for barrel cover of all Iran and Venezuela cut barrels.  We believe close enough can work and avoid price spikes.  The reason is that oil demand is always seasonally lower every winter. In our recent Sept 18, 2018 SAF 2019 Energy Market Outlook webcast [The webcast is found at:[LINK]], we reminded of the key reason why the impact of Iran cut barrels would ease modestly around year-end – oil demand is seasonally lower in the winter than the fall and summer and this is true every year.  And this is why the Iran cut barrels will be easier to accommodate in Q1/19.  Our slide noted the IEA’s estimate for global oil demand for Q1/19 was 1 mmb/d lower than its oil demand estimate for Q4/18.

Plus increasing US oil production, even constrained, will cover the small shortfall.  The other positive oil supply news this week was the EIA weekly oil data [LINK] showing the US hit another new record US oil production this week reaching a rounded 11.1 mmb/d for Sept 28 week.  This keeps actual and weekly estimated US oil production on track to meet the EIA’s Short Term Energy Outlook 2018 forecast [LINK] that calls for US oil production of 10.53 mmb/d in Q2/18, 10.80 mmb/d in Q3/18, and 11.06 mmb/d in Q4/18.

But there is increasing potential for oil price spikes especially in Q2/19 and Q3/19.  The more Saudi Arabia, Russia, Iraq, Kuwait, UAE produce to full capacity, it creates more potential for oil price spikes with any unplanned supply interruption or disappointment.  But even absent an unplanned oil supply interruption, there is an increasing potential for oil prices spikes in Q2/19 and Q3/19.  The lower Q1/19 oil demand should help mask or ease the impact of the Iran cuts, but we also warn that there increases the setup for oil price spikes in Q2/19 and Q3/19.  Just like global oil demand always is seasonally lower in Q1 every year, it is up in Q2 and Q3 each year.  The IEA estimates Q2/19 oil demand is expected up 1.2 mmb/d in Q2 vs Q1, and then up another 0.9 mmb/d in Q3 vs Q2.  This means that Q3 oil demand should be up 2.1 mmb/d vs Q1/19. This is a big increase, especially in the face of Saudi Arabia, Russia, Iraq, Kuwait and UAE producing even closer to capacity levels. And this is the math problem, where does an additional 2.1 mmb/d come from to cover the normal increasing seasonal oil demand?  Hence, our concern for the potential for price spikes up in Q2/19 and Q3/19 even without any unplanned oil supply interruption.