OPEC faces uphill battle to balance oil market

Platts– OPEC would need to boost its crude oil production by more than 1 million b/d in order to balance the global market over the coming 18 months, according to an analysis of market forecasts.

* OPEC needs to raise output over 1 million b/d to balance market

* Venezuela, Iran supply risks weigh

* Oil stocks could draw by 400,000 b/d in 2019

* EIA sees OPEC covering supply threat next year

As OPEC and its key oil producer allies prepare to meet in Vienna this week, the producers club is faced with a tough decision to offset the impact of US sanctions on Iran?s oil and further declines in Venezuelan output by raising its production.

Assuming a 500,000 b/d OPEC production hike from July and a second 500,000 b/d increase from October, global oil stocks could still see draws averaging almost 400,000 b/d to the end of 2019, analysis based on the latest projections by the International Energy Agency shows.

The IEA on Wednesday said it is expecting a gradual slide in Venezuelan output from current levels of 1.36 million b/d to 800,000 b/d by the end of 2019. It also sees US sanctions on Iran, due to begin in November, causing the loss of 900,000 b/d of Iranian crude output next year.

Even on its own estimates, OPEC expects global demand to average 2 million b/d higher in the second half of 2018 than in first six months of the year. As a result, OPEC’s figures suggest the market needs more than 33 million b/d of its crude to balance the market in H2, compared to current levels of 31.7 million b/d.

The figures suggest OPEC may need to consider making a larger rather than a more modest upward adjustment to production when it meets with Russia, and other key non-OPEC producers on June 22.

Output hike ‘inevitable’

Saudi Arabia’s oil minister Khalid Al-Falih said Wednesday he wants a gradual rollback of the group’s production cuts, currently scheduled to run to the end of 2018. At the same time, Russia?s energy minister Alexander Novak said the OPEC-led producers could consider a phased reversal of up to 1.5 million b/d of combined production cuts.

A range of proposals are on the table, however, and price hawks Venezuela and Iraq are not in favor of raising production, perhaps unsurprisingly, as neither has spare capacity and both stand to lose from weaker oil prices.

That OPEC and its key allies need to act to ease global oil supplies in the coming months does, as Falih put it on Wednesday, seem “inevitable”. According to the IEA’s latest outlook, oil markets could be undersupplied by some 1.5 million b/d over the next 18 months if OPEC fails to agree on a production increase this week.

Under that scenario, however, the production cut deal would at least unwind as scheduled at the end of 2018, returning part of the cuts to the oil market. Excluding Venezuela and Iran, that would mean some 1.3 million b/d of additional supply on the market compared to October 2016 levels when the cut deal was agreed, according to S&P Global Platts estimates.

Still, with the loss of up to 900,000 b/d of Iranian oil next year and Venezuela oil-dependent economy in free-fall, oil markets would still struggle.

Capacity constraints

The potential supply shortfall is by no means clear and a significant divergence existing between the IEA and OPEC forecasts.

According to OPEC figures, the group needs to raise output by 1.2 million b/d in the second half of 2019 to 33.35 million b/d in order to balance the oil market.

Under the IEA’s outlook, which is more bullish on non-OPEC supply and OPEC NGLs, the “call” on OPEC’s crude is actually 50,000 b/d lower in the second half of 2018 than the 31.95 million b/d average in the first six months.

Both scenarios are more bullish, however, than the market balance outlook presented by US’ Energy Information Administration last week.

On Tuesday, the EIA said it expected OPEC crude output to increase slightly to average 32.1 million b/d in 2019, as falls from Venezuela and Iran are offset by higher output from Persian Gulf producers, primarily Saudi Arabia. As a result, the EIA forecasts global oil inventories will rise by 210,000 b/d in 2019, which “will put modest downward pressure on crude oil prices in the second half of 2018 and in 2019

Nevertheless, the onus now falls on OPEC’s few Middle East producers with spare capacity to offset expected losses from Iran and Venezuela.

“Volume increases look like they will be needed to avoid the market tightening further in H2 2018,” HSBC’s head of oil and gas equity research Gordon Gray said in a note last week. “The prospect of higher OPEC supply is already focusing attention not just on how concentrated spare capacity has become.”

The Paris-based agency also estimates OPEC’s spare capacity at roughly 3.41 million b/d, with Saudi Arabia holding 60% of the total.

With Iran and Venezuela out of the picture, the group’s spare capacity could drop to just 2.5 million b/d by mid-2019, the IEA believes, the lowest level since the end of 2016.

“It is possible that the very small number of countries with spare capacity beyond what can be activated quickly will have to go the extra mile,” the agency concludes.