Will Supply Disruptions Actually Dent The Global Oil Glut?

The big question this week is whether supply disruptions will make a dent in the oil market’s ever-present global supply glut.

The answers in a nutshell: disruptions in Nigeria, Canada, and Libya are likely transient, whereas Venezuelan production poses a long-term problem. U.S. production will continue its slow decline, even if oil prices reach $50. On the other side, Iranian production will continue to increase—slowly—and Saudi Arabia will increase production rapidly. As for where the price of oil is headed – your guess is as good as mine.

The 1.65 mbpd . Both Shell (NYSE:RDSa) and Chevron (NYSE:CVX) have suspended oil production in areas affected by this activity.

which it appears to be doing in a recent series of arrests) and placate the militant separatists, then the country should be able to recover production in the short-term. The fact that the issues are political rather than structural suggests that oil investment and production should not suffer for long.

In fact, Exxon (NYSE:XOM) have stunted its oil production by at least 188,000 bpd. The dire economic situation in Venezuela promises to exacerbate and prolong their production failures. There is no guessing how low Venezuela’s production levels may get in the coming months due to extreme austerity and economic and political upheaval.

Of all the supply disruptions addressed here, Venezuela’s will have the most significant impact on the market, because the problems facing its oil production are structural and have been brewing for many years. Other than securing a temporary bandage via an “oil for loans” deal with China for about $50 billion, the Maduro government does not seem to have any plans to alleviate the situation. Right now, estimates indicate Venezuela would need sustained prices of $80 per barrel just to get production back up to 2015 levels. Until Venezuela improves its production capacity, it cannot bring in the revenue it needs; and Venezuela cannot improve its production capacity until it brings in more revenue.

Iranian oil production appears to be up at 4 mbpd, but additional capacity online from its Shaybah field shortly and from its Khurais field in 2018. Shaybah alone will bring an additional 1 mbpd to the market.

United States

American oil production continues to slowly decline as additional shale oil companies file for bankruptcy. Since 2016 , about 69 oil and gas producers in North America have filed for bankruptcy protection. Despite the recent rise in the price of oil, the financial troubles continue. Fourteen oil companies have filed for bankruptcy since April, some with debt in the billions of dollars. Even with oil prices edging towards $50 (a price which may not be sustained), more firms are likely to file, leading to further decreases in production and the continued slow process of consolidation.

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Written By: Ellen Wald, PhD