Energy Prospectus

"OPEC production for May was flat at 31.9m bpd which represents a 2.1m bpd decrease from its 34.1m bpd peak in November 2016." OilPrice.com

Question: If OPEC is not producing up to their current quota, why does the market believe they have excess production capacity?

A wave of OPEC supply, or more losses?
“We think it likely that the oil market will face the loss of 1.5 million barrels per day (mb/d) from current OPEC supplies by the end of 2018, 0.5mb/d from Venezuela and 1mb/d from Iran…Such a supply loss would strain global spare capacity and bias price risks to the upside.” – Standard Chartered

Demand in the driver’s seat:
“We continue to forecast 1.8 [mb/d] in 2018 global oil demand growth, ahead of the IEA forecast of 1.4 [mb/d]. Global GDP is tracking above 4.0%, supporting robust demand statistics in the US, China, India and Southeast Asia. Strong oil demand trends support our Brent forecast of $75-$80/bbl for the remainder of the year.” – Goldman Sachs

Reuters reported European refiners are winding down oil purchases from Iran, closing the door on a fifth of the OPEC member's crude exports after the U.S. imposed sanctions on Tehran, company and trading sources said.

Although European governments have not followed Washington by creating new sanctions, banks, insurers and shippers are gradually severing ties with Iran under pressure from the U.S. restrictions, making trade with Tehran complicated and risky. Iran's crude sales to foreign buyers averaged around 2.5 million b/d in recent months, according to data collected by Reuters and EU statistics office Eurostat. The bulk of the exports go to Asia. Total (TOT-NC), Europe's largest refiner, does not intend to request a waiver to continue crude oil trading with Iran after Nov. 4, according to people with direct knowledge of the matter. That effectively means it will be unable to keep purchasing Iran crude.

On 6/7/2018, Reuters reported Venezuela is nearly a month behind delivering crude to customers from its main oil export terminals, according to shipping data, as chronic delays and production declines could breach state-run PDVSA's supply contracts if they are not cleared soon. The oil company in recent days has raised the prospect that deliveries could be interrupted to some of the world's largest refiners if it fails to end a tanker bottleneck contributing to a sharp decline in oil exports, the lifeblood of the OPEC-member nation. Tankers waiting to load more than 24 million barrels of crude, almost as much as PDVSA shipped in April, are sitting off the country's main oil port, according to the data. The backlog is so severe the company has told some customers it may declare force majeure, allowing it to temporarily halt contracts, if they do not accept new delivery terms.

On 6/6/2018, Reuters reported Venezuela has released two local executives of U.S. oil major Chevron (CVX-NC) jailed since mid-April during a corruption probe in the oil sector, authorities and the company said on Wednesday. The arrests of Carlos Algarra and Rene Vasquez by intelligence agents at Chevron's Puerto La Cruz offices spooked other foreign companies operating in the OPEC nation in partnership with state oil company PDVSA. "They are free," the state prosecutor's office said in an email to Reuters, adding that both had been given unspecified alternative conditions to jail. Chevron said in a statement that its two employees had been released on Wednesday, adding: "Our colleagues are in good health and have been reunited with their families."

Raymond James on June 11, 2018:
In advance of Venezuela's presidential election in May, there had been a plausible chance of a game-changing result, but the election ended up maintaining the status quo: shortages of toilet paper… and also the world's steepest declines in oil production. In Mexico, which will elect a new president and congress on July 1, some degree of political change is a certainty, and a major shift towards economic nationalism is looking very likely.

If, as the polls consistently show, Andrés Obrador wins the presidency, Mexico's energy reform (dating back to 2013) will be in his administration's crosshairs. Although this reform has resulted in only modest amounts of foreign investment thus far, the prospect of a harsher regulatory landscape under Obrador carries downside risk for the country's oil production over the long run.