Oil gets a boost from Saudi output pledge, declining U.S. inventories

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"Oil production is rapidly falling and companies that normally resell Venezuelan crude have not found ways to mitigate the effect of the U.S. sanctions", Barclays bank said.

In the report, OPEC cut its forecast for 2019 world economic growth by 0.2 percentage point to 3.3 percent and highlighted a range of headwinds, including a slowdown in global trade.

Venezuela sanctions have arrived in a market that was already likely to be short of medium and heavy crudes because of USA sanctions on Iran and OPEC's output cuts.

The reduction came mostly from the world's top oil exporter and Opec kingpin Saudi Arabia, which cut 350,000 barrels per day, followed by the United Arab Emirates and Kuwait. Consequently, it is likely that OPEC production would have seen a notable drop in production in January, with Saudi Arabia bearing the brunt of it. American supply growth this year will exceed Venezuela's total output, the IEA said, another signal that OPEC's efforts to buoy prices may ultimately prove self-defeating.

Crude supply will average 12.41 million barrels a day this year and 13.2 million in 2020, the U.S. Energy Information Administration said on Tuesday, up more than 300,000 barrels a day from the previous month's estimates.

Prices of the American reference for the sweet light crude oil are prolonging the recovery on Wednesday, trading at shouting distance from the $54.00 mark per barrel ahead of the EIA report.

However, analysts are warning that record United States supply and anticipated economic slowdown later this year might start capping the world's oil markets.

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Venezuela has tried to find alternative customers, especially in Asia, but under U.S. pressure many buyers there are also shying away from dealing with PDVSA.

"Some recent positive developments could support the global economy at its current level, including the recovery in oil prices, possible progress in U.S. Saudi Arabia, are intending to push more barrels into the market to offset shortfalls" of heavier grades of crude, the IEA warned.

"Even so, headline benchmark crude oil prices have hardly changed on news of the sanctions".

For refineries that have invested in delayed coking units, however, heavy crudes can yield large volumes of middle distillates (gasoil, diesel and jet fuel).

Refineries are built to handle a certain quality of crude, and those which process so-called heavy crude from Venezuela, Canada or the Middle East can not be easily converted to treat the light shale oil that is now being produced in greater quantities in the United States.

John Kemp is a Reuters market analyst.

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