Sinking Venezuela to lift oil price

Opec’s November end meeting turned out to be a dampener of sorts for those looking for news. The official comment on the inclusion of Nigeria and Libya was confused to say the least. The crux of the meeting was the extension agreement by the two major participants, Saudi Arabia and Russia. While most eyes were on the likely agreement on putting a cap on Libyan and Nigerian oil output, the outcome ended with no surprises.

And that in itself is reason enough for the bulls to regain some lost momentum, over the last week. Recall that the world is fast moving towards rebalancing, and the shale rebound has not been as strong as earlier anticipated. The inventories have also come down, especially that in the US, mainly on the back of lower production and strong demand.

Talking of demand, China’s re-found appetite for oil consumption has injected a fresh wave of optimism. China’s demand for oil is now expected to remain strong for at least the entire 2018, and that is a long period in oil markets. To top it off, Opec’s compliance levels have been exceedingly good, beating most estimates, and in most cases, exceeding the promised cuts.

But the real deal is likely to come from outside the Opec nations. The once mighty, and still a big force in world oil market, Venezuela is fast losing steam.

The South American country’s economic troubles have impacted the oil industry to a great degree, evident from the huge fall in oil output. What once used to be 3 million barrels a day a decade ago has now come down tanking to 1.8 million barrels a day of oil output from Venezuela.

And this is not even the worst yet, as most investors and experts expect Venezuela to undergo steeper falls, and that too, pretty soon. Venezuela is in real danger of losing another 0.2 to 0.3 million barrels a day by as early as 1Q2018.

This would essentially mean, a world with an oil supply lesser than the growing demand, that too, in times of strong Opec compliance.

Last but not the least is the Jerusalem issue, which could add fuel to fire.

Tensions have heightened in most oil producing countries in the Middle East. While an outright response of refusing to trade oil in the US dollar is less likely, the market expects some more geopolitical risk premium to be added to the rally, especially in the near term.