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Oil markets 'may be able to adjust' to Venezuela sanctions: IEA

London — Crude quality rather than quantity will be an important issue moving forward, the International Energy Agency said Wednesday, adding that the global market may be able to adjust to the recent US sanctions on Venezuelan state oil company PDVSA.

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In its monthly oil market report, the IEA kept its growth estimate for oil demand in in 2019 unchanged at 1.40 million b/d while it cut its call on OPEC estimate for 2019 sharply and continued to increase its non-OPEC supply growth forecast.

IEA highlighted that in 2019 the US alone will grow its crude oil production by more than Venezuela's current output, which is "why benchmark crude oil prices have hardly changed on news of the sanctions."

"This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations," the report said. "In quality terms, it is more complicated. Quality matters."

It raised its estimate of the US' crude output growth this year to 1.1 million b/d, from 1 million b/d in last month's report,

The report said that sanctions against Iran and Venezuela, along with supply cuts by OPEC and Canada's Alberta province are all directly impacting "the supply of heavy, sour oil."

While the supply of US oil output which is predominantly light and sweet continues to inch higher, the heavy sour barrels remains tightly supplied.

"Crude oil quality is another issue, and, in the wider context of supply in the early part of 2019, it is even more important," the report added.

IEA said that due to this divergence, refiners have to pay more for heavy barrels.

"Since the US sanctions against Venezuela were announced, the premium of Mars (heavy crude) over WTI (light sweet crude) has soared from $4.50/b to over $7.50/b," the report added.

SUPPLY, DEMAND ESTIMATES

Demand in 2019 is expected to rise to 100.60 million b/d from 99.20 million b/d last year, it said.

Unlike other oil forecasting agencies, it expects global demand to grow faster this year than in 2018 due to "lower prices and the start-up of petrochemical projects in China and the US."

However, it warned that "slowing economic growth will, however, limit any upside."

The IEA upwardly revised its non-OPEC supply growth number for 2019 to 1.8 million b/d, from 1.6 million b/d in last month's report, "mainly due to higher US output."

Similarly, it also revised upward the corresponding growth estimate for 2018 to 2.7 million b/d.

The IEA noted that OPEC's compliance to the supply cut deal which began last month was 86% but its allies posted much lower levels of adherence at 25%.

However, the IEA said the "call on OPEC", or demand for OPEC crude, will average 30.70 million b/d in 2019, 130,000 b/d less than what it produced in January and down 900,00 b/d from the agency's previous estimate.

OPEC production in January was 30.83 million b/d, a fall of 930,000 from the previous month, "with Saudi Arabia, UAE and Kuwait cutting by more than promised."

Global supply also fell 1.40 million b/d to 99.70 million b/d in January as the OPEC/non-OPEC and Alberta cuts took effect.

The report said global markets were on the way to rebalancing, noting a slight drop in oil stocks in the OECD developed countries in December, but acknowledged that there was a major stock build in non-OECD countries in the second half of 2018.

"At end-December, OECD oil company stocks were 5.6 million barrels below the November level at 2,858 million barrels, up 4.6 million barrels compared with end-2017," it added.

Meanwhile, on the downstream side, IEA said refinery runs are expected to grow by 1.2 million b/d but noted that in December refining throughput fell 700,000 b/d year-on-year "instead of an expected increase due to lower activity in Asia's four largest refiners: China, India, Japan and Korea."

-- Eklavya Gupte, eklavya.gupte@spglobal.com

-- Edited by Jonathan Dart, newsdesk@spglobal.com