Moreover, Iraq and Saudi Arabia have contributed 170,000 b/d in additional cuts between them in February alone. However, having already limited production near their original 2019 target, they may now be missing the opportunity to capture market share ahead of increasing demand.


What is more, the impact of sanctions on crude supply may increase. Despite the fact that Iran is exempt from OPEC’s cuts, in just 6 weeks waivers for Iranian crude will expire. Some of Iran’s biggest customers, such as China, India, Japan and South Korea, are partially exempt from the current oil sanctions the US placed on Iran, however this may change.

In fact, IEA data has showed that Iranian crude production fell to 2.85 million b/d in February, its lowest level since Q1 2015, when Iran was under previous sanctions. In 2018 Iran exports averaged about 2.5 million b/d, with more than 1 million b/d of that going just to China and India. The fact that the US has not yet revealed if any of these waivers will be extended, it leaves those countries possibly having to substitute over 1 million b/d of replacement barrels from elsewhere.

However, looking elsewhere may not be as easy as it sounds. Obvious sources such as Venezuela and Iraq are already under sanctions or participating in Opec cuts. This may now leave Opec wondering whether deeper cuts are appropriate, considering many refineries in the region are optimized for heavier crudes

Gibson Shipbrokers explain.

The tightness in the heavy crude market is also getting worse by greater US appetite, who will need to replace Venezuelan barrels with those heavy grades already in short supply. Incremental supplies from Canada are also fewer, due to government enforced production cuts.

In addition, Reuters has recently reported that the US plans to cut Iran’s exports by another 20% to below 1 million b/d, citing that they were unwilling to cut anymore over price hike worries. Nonetheless, analysts believe that India could cut all imports of Venezuelan crude to meet US sanctions in return for more waivers on importing Iranian crude. If this happens, it could starve Venezuela of their last major 'cash' buyer, but at the same time it could lead to a headache for some Indian refiners that prefer Venezuelan grades. However, the situation in Venezuela looks like it will get worse before it gets better.

Finally, the report from Gibson Shipbrokers says that the heavy crude market is incredibly tight and production cuts come at a time when demand for heavy grades is growing. This is important as more demand for heavy grade crudes will have to be sourced from elsewhere, especially considering the fact that we start to exit the Asia-Pacific maintenance season and new refineries come online.

This means that with production cuts coming from the main heavy grade producing regions, refiners may have to look to the West to replace their missing barrels supporting tonne mile demand from West to the East.

With US production posting strong growth this year, Opec cuts are to be largely offset, perhaps justifying Opec’s current stance even if there’s a mismatch on the grades

the report concludes.

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