Oil markets weigh chances of Venezuelan regime change
Head of Commodity Strategy
Summary: The oil market's attention has shifted from crude stocks to the dramatic political situation unfolding in Venezuela where opposition leader Juan Guaido has declared himself acting president with several countries including the US and Brazil recognising him as head of state.
The Energy Information Administration, the International Energy Agency and Opec all kept their 2019 outlooks for global demand growth stable in January's oil market reports. Downward revisions, however, are now likely to surface following the mentioned downgrade from the IMF and the OECD’s composite leading indicator, which in November dropped to 99.3 points, a six-year low and a level that has previously signaled recession.
While the weakness during the past 24 hours was driven by forecasts for rising crude and product stocks, the market's attention has since shifted to Venezuela. President Maduro’s dreadful regime, which has driven the population into poverty and misery, is finally seeing a strong challenge from Juan Guaido, the elected leader of the National Assembly. He has declared himself acting president under article 233 of the Constitution, which authorises him to become interim president in the event of “serious misconduct” on the part of the elected president. Shortly after declaring himself as head of state, the US and other nations, including Canada and Brazil, recognised him as the rightful leader.
Maduro responded by cutting diplomatic relations with the US and ordering all personnel to leave within 72 hours. This was rebuffed by the US State Department with Secretary of State Michael Pompeo issuing the following tweet with a link to the official statement:
The outcome of this uprising could have a major impact on the global oil market. The deteriorating economic outlook and lack of foreign investments in its ageing oil industry have triggered a collapse in production during the past few years. Venezuela’s abundant heavy crude reserves are just what the world needs at a time where the US barrel is getting lighter and lighter due to rising shale production.
A political and potentially a military stand-off with the US could trigger another drop in production while raising geopolitical tensions, not least considering the support Maduro enjoys in Moscow and Beijing. The longer-term outlook, should Maduro be deposed, could see production eventually return to its former level and beyond. In the short-term, the US may respond to an escalated situation by cutting imports of Venezuelan crude, currently around 500,000 barrels/day.
The first month WTI to gasoline spread trades at $6.25/bbl, the lowest since October 2013 and well below the five-year seasonal average above $14/bbl.
Rising gasoline stocks and falling refinery margins at a time of seasonal slowdown in refinery demand could cause a price negative rise in crude stocks.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.