Oil markets weigh chances of Venezuelan regime change

Oil markets weigh chances of Venezuelan regime change

Commodities 7 minutes to read

Ole Hansen

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.

WTI Crude oil remains stuck in a $50 to $55/barrel range with ongoing production cuts from the Opec+ group of nations being offset by global growth worries. Earlier in the week, the International Monetary Fund lowered its global economic forecasts for 2019 and 2020 in response to risks including trade tensions and rising interest rates. However the reduction in global growth from 3.7% to 3.5% was viewed as optimistic given the impact of a prolonged US government shutdown together with a weaker outlook for Europe and not least China, which last year experienced the slowest rate of expansion in almost 30 years.

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 prospect of regime change has been lurking for a long time as Venezuela continued its descent into the abyss. Maduro, just like his predecessor Hugo Chavez, has been kept in power by support from the country’s poorer areas but yesterday’s mass demonstrations where led by protests over failed public services, food scarcity and rising prices.

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.

Later today and one day delayed due to Monday’s Martin Luther King, Jr. holiday, the EIA will publish its Weekly Petroleum Status Report. Last night the American Petroleum Institute published numbers which showed strong rises in both crude and product stocks.

If confirmed by the EIA it would add further pressure on refinery margins that are already lower following weeks of rising product stocks. Last week, total inventories of motor gasoline reached 256 million barrels and a record level is likely to be reached before the seasonal peak in mid-February.

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.

With Venezuelan uncertainty in mind, the outlook for oil remains one of rangebound trading, predominantly within the shown area below. Any geopolitical spike may prove short-lived given the current risks to growth.

Quarterly Outlook Q1 2023: The models are broken

The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.

Steen Jakobsen,
Chief Investment Officer
Read article
Refitting China’s broken growth engine
A political switch in China towards less tough control of its people and companies may kick things back into gear.

Redmond Wong,
Market Strategist
Read article
Broken Europe
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.

Chris Dembik,
Head of Macroeconomic Research
Read article
A painful phase transition
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.

Peter Garnry,
Head of Equity Strategy
Read article
Opportunities in a deglobalising world
New alliances and collaborations outside of China may lead to prosperous times in Asia.

Charu Chanana,
Market Strategist
Read article
Is the ‘balanced’ 60/40 equity/bond portfolio a thing of the past?
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.

Peter Siks,
Investment Coach
Read article
China reopening will drive another strong year for commodities
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.

Ole S. Hansen,
Head of Commodity Strategy
Read article
Latecomers to tightening party, EUR and JPY, may prove safest harbours in the first half
2023 could be a tough year for currencies but EUR and JPY may have some upside.

John J. Hardy,
Head of FX Strategy
Read article
China reopening a boon to Australian assets?
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.

Jessica Amir,
Market Strategist
Read article
Can institutions save crypto before retail vanishes?
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.

Mads Eberhardt,
Cryptocurrency Analyst
Read article

You can access both of our platforms from a single Saxo account.

Try the Demo

Open Account

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Oil markets weigh chances of Venezuelan regime change

Ole Hansen

Share

Latest Market Insights

Quarterly Outlook Q1 2023: The models are broken

The models are broken

Refitting China’s broken growth engine

Broken Europe

A painful phase transition

Opportunities in a deglobalising world

Is the ‘balanced’ 60/40 equity/bond portfolio a thing of the past?

China reopening will drive another strong year for commodities

Latecomers to tightening party, EUR and JPY, may prove safest harbours in the first half

China reopening a boon to Australian assets?

Can institutions save crypto before retail vanishes?

Your browser cannot display this website correctly.