- OPEC said on Tuesday production fell by nearly 800,000 barrels per day in January.
- The expected drawdown comes at the same time that US sanctions restrict supply from Iran and Venezuela.
- Leaving refiners with few other options, those conditions could squeeze supply of heavy crude.
As Middle Eastern oil producers follow through with plans to slash production, US energy sanctions have raised concerns about global supply of heavy crude.
Output has been falling in the countries that ship heavy crude to the US, with OPEC posting on Tuesday an expected drawdown in January output. As part of a deal reached last year to coordinate production cuts, the cartel said its output fell by 797,000 barrels a day last month to near its target.
That comes at the same time the Trump administration imposes sanctions against Venezuela’s state-owned oil industry, a major source of heavy crude shipments to the US. The Treasury Department has also issued sanctions on crude exports from Iran, the fourth-largest OPEC producer.
“I think the US Treasury Secretary may be overly optimistic about the ability of other producers to fill the gap,” Helima Croft, head of commodities research at RBC, said in a recent interview.
The sanctions and OPEC cuts have threatened heavy crude supply, which is favoured by some US refiners on the Gulf Coast and processed differently than the US shale that has helped send domestic stockpiles to record levels.
Saudi Arabia is one of the only countries that could surge heavy crude output, according to Croft, but has vowed to move the opposite direction. The unofficial OPEC leader led the cartel’s January drawdown and is expected to continue cutting production.
That country is set to cut output in March to around 9.8 million barrels per day, Energy Minister Khalid al-Falih told the Financial Times on Tuesday, about a half a million fewer than it had originally planned. Additionally, exports would fall to 6.9 million barrels per day.
Analysts and market observers say the outlook for supply remains uncertain. Oil prices have climbed about 20% from lows reached at the end of 2018, with the international benchmark Brent trading just under $US63 per barrel.
“Well, there’s a lot of variables here and there’s a lot of things that could lead to a real crunch,” BP CEO Bob Dudley told CNBC on Tuesday, responding to a question about whether OPEC cuts could stabilise prices.
On the demand side, the cartel lowered its forecast but still expects an increase of 1.24 million barrels per day this year.
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