Oil pushed up by deepening OPEC cuts, sanctions on Venezuela

Venezuela's President Nicolas Maduro gestures during a news conference at Miraflores Palace in Caracas Venezuela

Opec oil production falls as Saudi Arabia slashes output

USA prices were also supported by a report from the American Petroleum Institute (API) on Tuesday showing that crude inventories fell by 998,000 barrels in the week to 8 February to 447.2 million, compared with analyst expectations for an increase of 2.7 million barrels.

The result is that prices of medium and heavy crudes have surged relative to their lighter counterparts since the middle of January. Even 1.5 million barrels puts Iran's economy in a bind and anything less than that will make the budget hard to manage. In that letter to OPEC on January 29th, a day before United States inclined sanctions on Venezuelan state-owned oil firm PDVSA, Maduro wrote, "Our country hopes to receive the solidarity and full support of the member countries of OPEC and its ministerial Conference, in the fight we are now having against the illegal and arbitrary intrusion of the United States in the internal affairs of Venezuela".

The report put average Iranian crude output for the Q4 2018 at 3.004 million barrels per day indicating a near 600,000-bpd fall compared to the figure for Q3. US shale producers have cut back on production, while crude imports in the USA over the past four weeks are down 7.5% from a year ago and tanker tracking data indicate a decline in Saudi crude shipments.

The increase came despite falling net imports, which dropped to the lowest on record, as domestic crude production remained at peak levels for the fifth straight week.

Sanctions announced last month prohibit US corporations and persons from financial transactions with state-owned oil company PDVSA.

Venezuela has tried to find alternative customers, especially in Asia, but under United States pressure many buyers there are also shying away from dealing with PDVSA.

In the meantime, the political rift between Venezuela and the United States continues with the US sanctions against the South American nation giving prices a slight boost.

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Most analysts expect that the OPEC+ supply curtailment deal will ultimately rebalance supply and demand and provide support for higher oil prices.

Venezuela accounted for 1 million bpd of heavy-sour crude production out of a worldwide total of 7 million bpd in 2017 ("World Oil Review", ENI, 2018). Saudi Arabia slashed oil production by 350,000 barrels per day.

Numerous region's refineries are new and are optimised to process heavy and sour crudes.

Mid-distillates are especially prized at the moment with the forthcoming introduction of new bunker fuel regulations by the International Maritime Organization from the start of 2020.

The sudden embargo on Venezuela's exports has therefore sent refiners in the United States and elsewhere scrambling to find alternative supplies compatible with their equipment. "This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations", the group added.

Overall, global supply fell by 1.4 mbd to 99.7 mbd in January, according to the IEA, which said cuts imposed by authorities in the province of Alberta in Canada, which is not party to the Vienna Agreement, also contributed to the reduction.

John Kemp is a Reuters market analyst.

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