Unplanned oil production outages among countries outside the Organization of the Petroleum Exporting Countries (OPEC) fell to 64,000 barrels per day (b/d) in August, the lowest level since the U.S. Energy Information Administration (EIA) began tracking global production outages in 2011. Unplanned outages in major non-OPEC oil producers such as the United States, Russia, and Canada have abated, leaving Sudan and South Sudan as the only remaining non-OPEC producers with unplanned outages in August. The decline in non-OPEC unplanned outages may have contributed to the resilience of the global oil market following the disruption of almost 5.7 million b/d of Saudi Arabian crude oil production on September 14, 2019.
EIA tracks both OPEC and non-OPEC production outages. In its estimates of outages, EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks. EIA’s estimates of unplanned production outages are calculated as the difference between estimated effective production capacity (the level of supply that could be available within one year) and estimated production. EIA publishes historical unplanned production outage estimates in EIA’s Short-Term Energy Outlook (STEO).
The duration of any supply outage mainly depends on the cause of the disruption. When an outage is related to weather, natural disasters, labor strikes, technical failures, or accidents, the disruption generally ends within weeks, such as is often the case in non-OPEC countries. Disruptions tied to political disputes or conflicts—such as in Sudan and South Sudan—often last for years.
South Sudan declared independence from Sudan in July 2011, but it remained dependent on Sudan to export its oil through Sudan's pipelines. In 2012, South Sudan shut in its oil production, mainly because of a dispute with Sudan over oil transportation fees via the pipelines. The countries resolved the dispute, and South Sudan restarted oil production in 2013, but armed conflict persists in both countries as unresolved issues on domestic and interstate relations linger. South Sudan has revived some of its production in 2019, lowering its total disrupted volumes.
Other than in Sudan and South Sudan, the largest outages in the past year in non-OPEC member countries were the result of unplanned maintenance and weather events. In Russia, flows on the Druzhba pipeline—which supplies Russian Urals crude oil to Europe—were suspended at the end of April 2019 because contaminated crude oil entered the pipeline, disrupting about 100,000 b/d in production. These disrupted volumes were fully restored by July 2019.
U.S. crude oil production has been disrupted this year because of unplanned maintenance and hurricanes. U.S. unplanned disruptions peaked in July at nearly 400,000 b/d when Hurricane Barry caused the precautionary evacuation of platforms and oil rigs in the Gulf of Mexico. This disruption was quickly alleviated. By contrast, Hurricane Dorian, which did not track across the Gulf of Mexico, did not affect U.S. crude oil production.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2019
Note: OPEC disruptions include crude oil only. OPEC is the Organization of the Petroleum Exporting Countries.
Unplanned production outages among OPEC members (which includes Saudi Arabia), however, have remained relatively high. In August, OPEC unplanned crude oil production outages were about 2.7 million b/d, with Iran accounting for 2.1 million b/d of the total. OPEC liquids production in August totaled 35 million b/d, or about 35% of total global production, compared with non-OPEC production of 66 million b/d. The next edition of EIA’s Short-Term Energy Outlook, to be published on October 8, will include updated estimates of OPEC and non-OPEC unplanned production outages.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2019
Note: Non-OPEC disruptions include crude oil and other liquid fuels. OPEC disruptions include crude oil only.
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Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.
Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.
When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.
This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.
In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.
The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.
By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)
Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b
Headlines of the week
Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.
The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can.
This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.
The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.
The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis.
Current OPEC membership: