There is never a dull moment in the oil industry.
Last week saw dramatic developments in Venezuela. After a stream of mass rallies, an outflow of refugees to neighboring countries, rampant inflation, food shortages and inadequate medical supplies, the president of the National Assembly, Juan Guaido, invoked a constitutional provision declaring himself “interim president” of the republic. Nicolas Maduro, the incumbent who, for the time being, retains the support of the military, refused to step down.
The US, Canada, Brazil and Australia have all recognized Guaido as Venezuela’s president; the UK, France, Germany and Spain have threatened to follow suit unless Maduro accepts fresh elections within eight days. Caracas responded by severing diplomatic ties with Washington, amid threats of oil sanctions from President Donald Trump.
But despite the drama, oil prices traded almost horizontally throughout the week. Brent crude ranged between $60 – $63 per barrel, and opened only slightly weaker in early Asian trading on Monday.
Developments in Venezuela could have led to an oil price rally, but were countered by several fundamentals.
All three major energy agencies, the International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC) and the Energy Information Administration (EIA), felt oil markets were slightly oversupplied in December. The IEA still believes global oil demand will grow by 1.4 million barrels per day (bpd) in 2019, but concerns remain about downward revisions of global oil demand forecasts, in line with the International Monetary Fund’s 0.2 percentage point revision to its 2019 global economic growth forecast last week. At the same time, non-OPEC supply grew significantly throughout 2018; the IEA expects total liquid production to grow by 1.3 million bpd in 2019, with US production playing a major part.
Developments in Venezuela could have led to an oil price rally, but were countered by several fundamentals.
Cornelia Meyer
Venezuela’s standing in the oil industry has been diminished amid its internal troubles. Chronic mismanagement and underinvestment in the state-run oil company Petroleos de Venezuela S.A. (PDVSA) has led to a decline in production of around 2 million bpd over the last 10 years; in December, production peaked at 1.1 million bpd, according to OPEC.
Yet US oil sanctions might not have a big impact, as Venezuela’s exports will likely be redirected to India or China, the latter possibly accepting oil as in-kind interest payments on debt. Indeed, it is only through Chinese and Russian credit that Venezuela’s economy has not come to a standstill already.
The biggest losers of oil sanctions, meanwhile, would be refineries in the Gulf of Mexico that depend on supplies of heavy crude from Venezuela. Canadian and Mexican heavy crude is more expensive, while substituting heavy crude with lighter US production is not an option.
While Venezuela’s importance as a crude supplier has diminished, it still has the world’s largest reserves, with 303 billion barrels according to BP’s Annual Statistical Review.
While developments in Venezuela did not move the market significantly last week, the OPEC+ alliance between 24 OPEC nations and affiliates led by Russia, has had considerable impact on global oil prices since December. Mainly, this is due to OPEC withdrawing 750,000 bpd to counter oversupply, triggered by a combination of increased US production and waivers on Iranian sanctions. OPEC + plans to withdraw more barrels in coming months, implementing an agreement reached in Vienna on Dec. 7 to curb production by 1.2 million bpd.
This will lead to tightening in the market in February. Where we go from there will depend on demand growth, non-OPEC supply growth and how the US proceeds on waivers for Iranian sanctions when they are reviewed in April.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
