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The Russian Oil Decline

By: Energy Capital Research Group
Harvest Exchange
October 8, 2018

The Russian Oil Decline

Oil Supply Tailspin

I have previously explained the breakdown of global crude oil production. As the date for renewal of US sanctions against Iran approaches (November 4), the market presumes there will be constriction on the supply side moving forward.

Supply is driven less by aggregate production and more by how much volume actually makes it into the global market. It’s exports, not straight lifting figures, that tell the real story. That story is now all about supply side constraints resulting in higher crude oil prices.

Continuing export declines from Venezuela, Libya, and Nigeria will combine with some significant declines from Iran. I have already explained how the first three nations will provide some 1.9 million barrels a day (mbd) in lost export volume before the end of the year, while the Iranian decline would result in a further 1.4 mbd from mid-summer figures.

That 3.3 mbd total now appears to be low. Accelerating dives in exports from Venezuela will be greater than anticipated. Sources at the Venezuelan state oil company PDVSA confirmed earlier this month that they expected production to decline to about a third of what it had been less than two years ago. That figure will now cascade further to the south.

That production has imploded and is now unravelling down to about 1.2 mbd. New projections say it may be less than 1 mbd by the end of the year. That would cut exports by at least 1.5 mbd since mid-2016 figures and about 1 mbd this year alone.

Meanwhile, the Libyan civil war is likely to cut daily exports by about 850,000 barrels. All told, before the real impact of Iranian sanctions next month, the market stands to lose at least 1.9 mbd.

In addition, the Iranian picture is looking even more stark. My initial estimates for how much will be cut in exports from Teheran appears to have been too low. Exports in September total 1.8 mbd, down from 2.3 mbd in July. I now project that the daily total will be 875,000 by early December.

That totals from just these few sources a net loss of over 3.3 mbd from the global oil supply. Putting this in perspective, there exists about 2.8 mbd of readily available excess capacity in OPEC. Over 60% of that is Saudi.

Now we are not in a “peak oil” frenzy. There is plenty of excess capacity available to non-OPEC producers. The world is hardly running out of oil. But the amount available for quick injection into the market is another matter.

Riyadh may add additional volumes to the supply side, but they also have a vested interest in keeping the price of crude high. Aside from Saudi reserves available for a rapid move into global trade, there are two other primary options.

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Originally Published at: The Russian Oil Decline