Daily Management Review

Looking for survival, Venezuela proposes cutting OPEC production even more


Trying to stabilize its own catastrophic situation, Venezuela suggested reducing OPEC production to 5 million barrels per day, which is more than 4 times higher than current decline in production. According to experts, the proposal is completely unrealistic. The situation with oil prices could be corrected by the US, but the country is not in a hurry to limit production.

Jorge Andrés Paparoni Bruzual
Jorge Andrés Paparoni Bruzual
Venezuela offers OPEC to cut production by 5 million barrels per day. In addition, the country plans to persuade countries such as Egypt and Turkmenistan to reduce oil production.

Venezuela was one of the first initiators of the already existing agreement to reduce production. Given the deepest economic crisis, this country is probably the most interested in reducing the output. High cost of oil production and low prices force Venezuela to trade at a loss.

Economic policy of the Venezuelan authorities led to the fact that citizens of the country took to the streets with protests.

The agreement of OPEC and 11 independent oil producers made its participants cut production by a total of almost 2 million barrels per day in the first half of 2017 (1.2 million barrels were taken by the OPEC countries, 558 thousand barrels fell on independent producers, with Russia pledged to cut production by 300 thousand barrels per day).

So far, the agreement has been executed without violations, but its effect was not as strong as expected.

According to OPEC, the countries of the cartel produced in aggregate 31.73 million barrels of oil per day in April. Given that in the fourth quarter of 2016, the organization’s producers extracted 33.12 million barrels per day (also according to OPEC). Extension of the agreement will be discussed at the OPEC session on May 25. 

It was assumed that the output cuts would stabilize the barrel price in the corridor of $ 55-60. The quotes have not climbed higher than $ 60 since the beginning of the year, although they approached this mark in January. In the first quarter, there was a tendency to stabilize at about $ 55, but then the oil fell sharply, and further prices showed high volatility, fluctuating from $ 56 to $ 50. At the time of the agreement’s signing (November 30, 2016), the barrel cost about $ 50.

The main role here was played by statistics on extraction and commercial reserves of the United States. OPEC’s latest report, released on May 11, sharply raised the forecast for production growth in countries outside the cartel in 2017 (from 370 thousand to 950 thousand barrels per day). And the main role here was played by America.

Earlier, OPEC forecasted an increase in the American production by 285 thousand barrels per day in 2017. Now, however, the cartel believes that the output will reach 820 thousand barrels.

However, the forecast for growing demand has not changed; it is still expected at 1.27 million barrels per day.

It should be also noted that the growth in production in the United States was mainly caused by the actions of OPEC and its partners, more precisely - results of these actions. American shale mining, being flexible and sensitive to market conditions, immediately reacted to the rising quotations at the beginning of the year. The price hike led to commissioning of new drilling rigs and, as a result, raised the level of production. According to Baker Hughes, number of oil installations in the US increased by eight units, to 712 units, during the previous week.

In early January, number of drilling rigs in America amounted to 529 units, and this was called the maximum since the end of 2015.

May 10, the world's largest oil trader Vitol reported that the oil freeze agreement will not have a positive impact on oil prices unless the US, China and India join the deal.

Moreover, according to the trader, now the agreement seems harmful, as growing shale mining in America puts pressure on prices. This, in turn, is increasing increases the burden on producers who are forced to adhere to the reduction agreements.

The US authorities are not going to take a course to reduce production. On the contrary, US President Donald Trump has repeatedly stated that it should be put up in order to reduce dependence on oil in the OPEC countries (including Venezuela). Supplies from cartel countries provide more than 40% of US oil imports.

As part of the program to increase production, Trump canceled the decree of his predecessor Barack Obama on limiting hydrocarbon production on the shelf, as well as allowed expansion of work on the Atlantic shelf (including additional sections in the Gulf of Mexico), the Pacific and the Arctic Ocean.

source: wsj.com