Energy Prospectus

LONDON (Reuters) - OPEC oil supply hit a four-year low in April, a Reuters survey found, due to further involuntary declines, sanctions-hit Iran and Venezuela and output restraint by top exporter Saudi Arabia. < Note that the increased sanctions on Iran would not have much impact on their exports in April. Iran's exports are expected to decline from 1.2 million BPOD in Q1 to under 700,000 BOPD by the end of Q2. Additional declined in Iran's exports in Q3 depend on how much pressure the U.S. can put on China and Turkey. - Dan.

More from Reuters:
The 14-member Organization of the Petroleum Exporting Countries pumped 30.23 million barrels per day (bpd) in April, the survey showed, down 90,000 bpd from March and the lowest OPEC total since 2015, the Reuters survey showed.

The survey suggests that Saudi Arabia and its Gulf allies are maintaining even larger supply cuts than called for by OPEC’s latest deal, shrugging off pressure from U.S. President Donald Trump. On Friday, Trump said he had called OPEC to tell the group to bring down prices.

Brent crude oil is trading above $73 a barrel (WTI at $64/bbl this morning) and hit a six-month high above $75 last week, boosted by Saudi supply restraint and curbs in Venezuela and Iran, which face U.S. sanctions that are limiting their exports.

“The Iran sanctions come on top of already fragile supplies and raise concerns about tightening markets,” Norbert Ruecker of Swiss bank Julius Baer said.

OPEC, Russia and other non-members, an alliance known as "OPEC+", agreed in December to reduce supply by 1.2 million bpd from Jan. 1. OPEC’s share of the cut is 800,000 bpd, to be delivered by 11 members - all except Iran, Libya and Venezuela.

In April, the 11 OPEC members bound by the agreement achieved 132 percent of pledged cuts, the survey found, compared to 145 percent in March, due to higher production in Nigeria and small increases in Saudi Arabia and Iraq.
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MY TAKE: My "guess" is that OPEC won't do anything until Q3. Their next meeting is set for June when they will decide to extend the production quota agreement or not. I think they will adjust the quotas to make up for Iran's decline and extend it through December.

From Raymond James Energy Sector Team in Houston:

"Saudi Arabia and (to a lesser extent) the UAE have played the key role in reducing OPEC output. In fact, Saudi alone is responsible for over 1 million bpd of the peak-to-trough cuts over the past six months! As shown in the table to the left below, after peaking in November 2018 at about 11 million bpd, Saudi production has since fallen to about 9.8 million bpd in March. So, why is this actual cut so much larger than the roughly 300,000 bpd pledged cut? There are several reasons, including:
1) Saudi had increased production through much of 2018 in anticipation of a greater reduction in Iranian exports in late 2018. Saudi felt totally bamboozled by Trump's "bait and switch" tactics that the administration used when it granted unexpected waivers to certain importers of sanctioned Iranian crude;
2) Saudi felt partially responsible (or at least gullible) for helping trigger the 4Q18 meltdown in oil prices; and
3) when social costs are taken into account, we calculate that Saudi needs Brent in the mid-$80s for the government budget to break even.
Regardless of the reasons, it is clear that Saudi (and the UAE) were very unhappy with the 4Q18 oil price collapse, so they have cut supplies much more than their stated pledges. Going forward, we expect that Saudi will be very cautious about increasing supplies at least until either $80+ Brent pricing or clear evidence that Iranian exports are falling with the removal of waivers".

More from RJ:

"The meltdown of the Venezuelan oil industry continues unabated and has fallen faster than we were modeling a few months ago.
The Venezuelan internal crisis, obviously horrific for its people, has been the single most bullish supply-side driver for the global oil market over the past four years (since 2015). The 1Q19 average of 1.1 million bpd of production (not exports) is down a staggering 1.4 million bpd or 56% from mid-2015 levels - a decline unprecedented in magnitude for a country that is not actually at war (until this week). While output has temporarily fallen as low as 500,000 bpd amid periodic power blackouts, we are conservatively modeling only a modest decline of ~30,000 bpd per quarter for the rest of 2019, followed by stabilization in 2020. Clearly this could be too optimistic without regime change. Whether Venezuelan production ever rebounds will obviously be a function of the political landscape. The conventional wisdom from early 2019 - that the Maduro regime is on its last legs - has been replaced by the stark realization that he probably isn't going anywhere anytime soon, as the challenge from Juan Guiado has fizzled out, at least for now."

MY TAKE: Even if Maduro agrees to step down (or is killed), Venezuela is in terrible shape and it will take years to fix their production problems. If the country falls into a civil war has the potential to be a human tragedy of a scale we have never seen in the Western Hemisphere. Over 5,000,000 refugees cannot be handled by the surrounding countries.

PS: I went to Venezuela 20+ years ago when it was in "good shape" and I thought it was a hell-hole then.

"Finally, the Libyan civil war persists and may even be escalating. As shown in the table to the left above, 1Q19 production was down 10% after the Sharara field - the country's largest - was shut after an armed militia temporarily seized control. In recent weeks, the warlord General Haftar's militia launched a major assault (including airstrikes) against the capital, where the U.N.-backed government is based. Given that most of the oilfields are distant from the current fighting, we are not modeling any meaningful reduction in Libyan supplies. Depending on how the tactical situation evolves, however, oil tankers may have no choice but to avoid Libya altogether. This is a mild wildcard. As shown in the table to the right above, we model production averaging 1.1 million bpd but would not be surprised if it fell to 800,000 bpd or even less."

Global oil inventories are fall and the rate of decline will accelerate:
"On a normalized "days of consumption" basis, global oil inventories are also poised to fall to dangerously low levels in 2020. As we track global inventories to judge how tight the oil market is, let’s underscore that rising global consumption means that the world needs higher than "historical average” inventories to manage the increasing supply chain logistics. When we normalize OECD inventories by looking at them on a "days of consumption” (DOC) basis (as shown below), we find that 30 days of consumption has been the long-term average. Furthermore, the light blue line shows that there has historically been a close inverse correlation between inventories on a DOC basis and oil prices. The previous low in DOC was around 27.5 days of consumption (or ~8% below normal) in late 2013 and coincided with $100+ oil prices. More importantly, our latest global oil model suggests global inventories will fall to much more bullish levels than the lows seen in 2013." < RJ sees a desperately short crude inventory situation brewing, with 2020 global inventories falling to an unprecedented 24.5 days of consumption by the end of 2020 - down from a bit over 28 days as of 1Q19.