Soaring oil demand is tightening the market
OPEC's oil production fell yet again last month, helping to further tighten the oil market. The group's collective output fell by a whopping 201,400 barrels per day in March, compared to a month earlier. It was the largest single-month decline since November and it took OPEC's combined production down to 31.958 million barrels per day (mb/d), which is the lowest level in a year.
As Business Insider writes in an article "Soaring oil demand is tightening the market", to be expected, Venezuela lost a significant chunk of output, falling by 55,300 bpd, taking production down to 1.488 mb/d, according to OPEC's latest Oil Market Report. But the ongoing production losses in Venezuela are not really surprising. The surprise was that output fell by rather large volumes elsewhere, including Algeria (-49,500 bpd), Angola (-81,700 bpd), Iraq (-13,100 bpd), Libya (-37,200 bpd) and Saudi Arabia (-46,900 bpd).
Some of those countries have seen production fluctuate, perhaps due to maintenance, and it isn't obvious that the losses are set to stick around for a while. But Venezuela is producing almost 500,000 bpd below its target as part of the OPEC agreement, which means the combined OPEC compliance rate is way above 100 percent.
As Bloomberg notes, the ongoing losses of Venezuelan output and the danger to Iran's oil production from U.S. sanctions could result in twice as much supply taken off of the market than OPEC intended. It should also be noted that the U.S. is reportedly considering sanctions on Venezuela, which could make the losses there even worse.
Oil demand looks strong at 1.65 mb/d, an upward revision of 30,000 bpd from last month's report. Soaring demand is tightening the oil market faster than many expected at this point, and demand is a crucial variable that has heavily influenced oil prices in the past few years, perhaps more so than some people think.
All of this means that the oil market is tightening significantly. OPEC estimates that the commercial oil inventory surplus in OECD countries has fallen to just 43 million barrels above the five-year average, down from over 300 million barrels a year ago. In other words, almost 90 percent of the inventory glut has disappeared.
Those numbers have been thrown around for a while, and to be sure, there are some problems with them. The importance of the five-year average has been watered down over time because the metric increasingly encompasses surplus years. It amounts to a moving of the goal posts. A more poignant figure comes from OPEC's latest report. Bloomberg notes according to OPEC data, oil inventories could decline at a rate of 1.3 mb/d in the second half of 2018, which would dramatically tighten the market this year. It is also a much more bullish figure than analysts thought a few months ago when U.S. shale output really kicked into high gear.
Still, all signals suggest OPEC will try to keep the cuts in place through the end of this year. Saudi Arabia is reportedly targeting an $80 oil price, so for now, the group is not worried about over-tightening the market. To be sure, however, there is a tension for OPEC as it drains inventories and pushes up oil prices. The risk is that U.S. shale will grow at a faster rate than expected. In fact, output in the Permian is skyrocketing right now because OPEC pushed oil prices above the breakeven threshold for most of the industry.