Latin America’s Oil Output Shocks

Summary: Latin America’s major oil producers have seen declines of almost 400,000 bpd y/y. Without Brazil, production trends in the region would be more dramatic. The 130,000 bpd increase y/y is the result of delayed investments.Taking rig count as a forward-looking indicator, we can say that Latin America will stop declines in the best-case scenario, but in the medium term.

 

Oil has been one of the volatile commodities driving and being driven by the risk on and off sentiments. Lately, oil price changes have resulted from the supply side, characterized by both nonrecurring events and adjustments to inventory gluts and investment cuts.

 

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

 

From Avengers attacks in Nigeria, to wild fires in Canada and false promises in OPEC meetings, oil built a rally that several missed. Latin America has been one of the variables leading to a more constructive oil price story. And the region will continue to do so offsetting part of the output increases coming from the Middle East.

Output and change Argentina Brazil Colombia Ecuador Mexico Venezuela
As of June 2016 (kbpd) 500 2,530 890 550 2,180 2,360
y/y change (kbpd) -30 130 -120 10 -70 -300
y/y change (%) -6% 6% -12% 2% -3% -11%
y/y change in rigs -40% -63% -73% -67% -69% -20%
Source: LATAM PM with Baker Hughes, OPEC and Reuters data

 

Latin America’s major oil producers have seen declines of almost 400,000 bpd y/y, which account for most of the regional decline (rest of the countries produce less than 200,000 bpd and the change has not been significant). The number of rigs drilling new wells also indicates that future production in the region will continue to contract.

But as many other indicators in the region, trends are heterogeneous.

Smaller producers Argentina and Ecuador have maintained production relatively constant around half million barrels per day each. Together, they are down 20,000 bpd. Although they have tried to create incentives to boost production and investment, rigs show that the trend going forward is not up.

Venezuela alone contributed with a 300,000 bpd decline. Oil prices have generated a vicious cycle to the downside between oil production and fiscal balances. Cash-strapped Venezuela has not been able to invest and service providers threaten with scaling back production. The county’s outlook should continue falling without a major oil price rebound.

In Colombia, terrorist attacks and one of the largest cuts in investments have generated a decline of 120,000 bpd y/y. The oil price collapse has shut down almost 75% of Colombia’s rigs, which explains why production has been unstoppable. Colombia has seen 12% of its oil production disappear in the last 12 months, comparable only to the imploding Venezuelan economy.

Third in terms of falling production is Mexico, but the 70,000 y/y decline is actually part of a larger progressive output decrease that the North American country has had in the last 10 years. This decline has brought oil production from almost 3.5Mbpd to an expected 2Mbpd by the end of 2017. The decline is primarily due to the extinguishing Cantarell. This field was once jewel of the crown that produced 2Mbpd in 2004. However, oil prices have also taken a toll on Pemex’s investment and prospects of the new oil tenders resulting from Peña Nieto’s 2013 Energy Reform. In such a context, medium term oil production in Mexico is not positive either.

Without Brazil, production trends in the region would be more dramatic. The 130,000 bpd increase y/y is the result of delayed investments kicking in Brazil’s pre-salt fields, which still have more to deliver in the short term. With this trend, Brazil became the largest oil producer surpassing both Mexico and Venezuela. It remains to be seen whether the output growth rates seen in these costly fields will be eventually affected by low oil prices.

 


LATAM PM’s Take: Going forward, the regional trend depends on whether Brazil can offset the combined declines of Mexico and Venezuela. Taking rig count as a forward-looking indicator, we can say that Latin America will stop declines in the best-case scenario, but in the medium term.

Compared to developments in Canada and Nigeria, perhaps declines in Latin America are not as significant for a supply of 94Mbpd. However, the nonrecurring events in Canada and Nigeria it make easier for them to restore production. Even U.S. shale production responds quicker to oil prices than Latin America’s oil output, which requires investment, tenders and in some cases legislation to bring new production online. In a context of a rising oil demand, Latin America is contributing to reach a faster balance in the oil market.

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