The deal OPEC struck in 2016 to clear a global glut by halting a significant chunk of oil production took almost a year of bargaining and brinkmanship. By year-end, the group may have lost the same amount of crude unintentionally.
Saudi Arabia and Russia, for years oil-market rivals, assembled a coalition of 24 OPEC nations and non-members to eliminate the surplus created by the U.S. shale boom. The accord has exceeded expectations. Excess inventories will be gone in two to three months, according to the International Energy Agency, and Brent crude prices are above $70 a barrel, the highest in three years.
The collapse of Venezuela’s oil industry has aided the wider group’s efforts. The nation’s daily production of 1.5 million barrels is 560,000 barrels lower than October 2016 — the starting point specified in the cuts agreement. That’s more than five times its pledged reduction.
The Latin American country’s economic crisis shows no sign of abating and output may slump to 1.1 million barrels a day by the end of the year, according to consultant Rapidan Energy Group in Washington. The decline will be even steeper if the U.S. follows through on threats to impose new sanctions after elections scheduled for May, Rapidan said.
The loss of that much Venezuelan crude would tighten oil markets significantly more than OPEC and its allies intended. The growing tensions between the U.S. and Iran could make the supply deficit even more severe.
Next month, President Trump will review America’s commitment to an international agreement that restricted Iran’s nuclear activities in exchange for relief from sanctions. He has been fiercely critical of the accord and recently fired top officials who were supportive of the deal, replacing them with more hostile figures.
There’s a 70 percent likelihood that Trump will abandon the pact and reintroduce sanctions on oil sales, said Mike Wittner, head of oil market research at Societe Generale SA. That would curb Iran’s exports by about 500,000 barrels a day, he estimates.
Under the terms of the 2016 OPEC deal, Iran didn’t have to reduce production because it was still recovering from the last round of international sanctions. So a half-million-barrel drop in its output, combined with the loss of 900,000 barrels a day of Venezuelan crude beyond its pledged reduction, would double the group’s intended cut.