Venezuela Production in "Free Fall" as Citi Sees Supply Crunch Coming

Tuesday November 6, 2018

Although the analytical consensus of the crude market has shifted from worry of supply tightening to oversupply on the basis of a weakening in global demand and the prospect of the U.S. sanctions against Iran not being calamitous as originally feared, a few vocal proponents of the tightening theory are still being heard.

The most obvious is Iran, whose oil minister on Tuesday predicted that trouble lies ahead for oil consumers: Bijan Zanganeh told the ministry's news agency that "The issued waivers have not been enough for the market demands... Unfortunately difficult days are predicted for oil consumers around the world in coming months."

Zanganeh was referring to the U.S. earlier this week granting waivers to Iran's biggest oil clients - China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey - which allow them to import at least some oil for another 180 days.

Reuters noted that while Iran's oil exports have fallen sharply since the summer when U.S. president Donald Trump declared he would re-impose sanctions on Tehran, "with waivers in hand, the Middle Eastern nation's major buyers could scale up orders as soon as next month."

Those who foresee market tightening also point to Venezuela's crude production being in "free-fall": on Tuesday, Fatih Birol, executive director of the International Energy Agency, said the Bolivian republic's output could soon fall below 1 million barrels per day (bpd), but he expressed his hope "that prices do not rise again because this will not really be good news for the global economy, which is very fragile."

Finally on Tuesday, defying the latest analytical consensus and apparently unimpressed by reports of record output from producing nations, Ed Morse, global head of commodities research for Citigroup Inc., warned that an average price of $80 per barrel for crude this quarter is "realistic," with spikes to $90 or even $100 being possible if further disruptions worsen what he calls a supply crunch.

Morse justified his stance by pointing out that the sanction waivers don't allow unlimited purchases.: "How much oil is being granted from Iran to each of those eight countries? We can only surmise until we get a tweet from somebody in the government."

He added that supply disruptions can be expected in Nigeria and Libya as well as Venezuela.

While Morse may be accurate in his prediction of the countries most likely to experience production disruptions, it's unclear to what extent they will negatively impact the massive volumes coming from nations such as Russia, which last week revealed its October output averaged 11.412 million bpd, just shy of a Soviet era record 30 years ago of 11.416 million bpd.