Oil prices crept up in recent weeks as traders anticipated coordinated action from a group of petrostates to set an upper limit on production, so when delegates from those nations failed to agree on this “freeze” deal in Doha on Sunday, it seemed like oil markets were due for another dip into the $30 range. Instead, prices have stayed surprisingly buoyant, and in fact both Brent and WTI crude benchmarks jumped roughly 3 percent in trading on Tuesday. So what’s going on here?
Well, while petrostates couldn’t settle on a plan to intentionally constrict global supply, a number of disruptions from major producers around the world is accomplishing that same goal. As the FT reports, Venezuela’s unraveling economy is now threatening its crude output:
Analysts believe chronic power shortages in the country could soon affect the oil sector, with output declining 100,000-200,000 barrels per day this year.
Dangerously low water levels at Venezuela’s giant Guri dam — which provides more than a third of the country’s electricity — may also force the country to shut the site to avoid turbine damage, which is likely to hit oil production and could force officials to redirect some oil exports towards electricity supplies and diesel generators. […]
“We have to consider that Venezuela is less than 20 days away from a major power production disruption,” Olivier Jakob of Petromatrix, a Swiss-based consultancy, wrote in a recent report. “Crude and product production could be negatively impacted and the country might have to increase imports of petroleum products for generators.”
But if Venezuela is on the brink of a supply drawdown, other major producers are already there: a workers strike in Kuwait has cut the petrostate’s output from 3.8 million barrels per day down to 2.5 mbpd, while a pipeline problems in Nigeria have led to a 400,000 bpd reduction.
Even if the delegates assembled in Doha this weekend had been able to agree on a production freeze, they wouldn’t have been able to induce the sorts of cuts that various national difficulties have foisted on the market. OPEC may no longer be relevant, but that doesn’t mean that cheap oil is here to stay—supply disruptions can do what market fixing seemingly no longer can.