The oil markets are shrugging off the threat to global oil supplies from Iran and Venezuela, with rising U.S. inventories assuaging concerns about market tightness.
The failed coup attempt in Venezuela set off a round of finger pointing, with U.S. officials blaming members of the Venezuelan military for getting cold feet, though independent analysts have questioned whether the Trump administration got played or trusted faulty intelligence. But the story is not over, and top Trump officials, particularly National Security Adviser John Bolton, are fixated on toppling President Maduro.
The turmoil is likely set to continue, and the failed coup attempt earlier this week complicates the task facing the Venezuelan opposition. As the instability drags on, the more likely Venezuela’s already declining oil production will suffer even greater disruptions.
In fact, the failure of Juan Guaidó and the setback to one of the Trump administration’s key foreign policy offensives probably means that Washington will only escalate from here. “The White House will likely look to further erode the country’s oil export revenue by compelling consuming countries like India to curb their Venezuelan purchases,” RBC Capital Markets saidin a note. “Washington may also demand that U.S. energy companies cease operating in the country and that European firms stop providing diluents and other services to (Venezuelan state-owned oil firm) PDVSA.”
RBC says that Venezuela’s oil production could potentially even fall to zero by the end of the year. It sounds unthinkable, but RBC says Maduro hanging on “is quite plausible given the substantial support Maduro is receiving from Moscow as well as the fact that junior officers have been the principal defectors.” As Maduro stays in power, Washington will tighten the noose, which could put all of Venezuela’s oil exports at risk.
Venezuela’s oil sector continues to decline and was in a steep freefall even before this week’s coup attempt. “Production in Venezuela now amounts to only around 800,000 barrels per day. It has thus plunged by almost 400,000 barrels per day in just three months’ time, and is likely to fall further,” Commerzbank wrote in a note on Thursday.
Some analysts have argued that a quick resolution in Venezuela (which seems unlikely at this point) would be bearish for oil because it may lead to a halt in the country’s declining oil sector. However, the vast damage to infrastructure, oil facilities, and the extreme lack of investment would make any turnaround highly difficult and ultimately a long-term project. “[W]e do not think that any change of regime in Venezuela will lead to any significant medium-term increase in output; the problems are too profound to be solved instantly,” Standard Chartered wrote in a note.
Yet, despite all of this chaos, oil prices fell sharply on Thursday, with oil traders seemingly focused much more on rising U.S. inventories than the disorder in Venezuela. Inventories in the U.S. jumped by 10 million barrels, belying the narrative that the oil market is tightening.
“Amid this host of bullish catalysts is one deepening pocket of weakness — U.S. oil stocks are swelling due to an upswing in crude inventories,” Stephen Brennock, an analyst at PVM Oil Associates Ltd. in London, told Bloomberg.
The increase in inventories and the fall in oil prices should take a lot of pressure off of OPEC+, which is only weeks away from having to decide whether or not to extend the production cut agreement. Less than two weeks ago, the U.S. announced its decision to let all waivers on Iran sanctions expire, which quickly turned the focus on how OPEC+ would respond. The U.S. government said that it received assurances from Saudi Arabia and the UAE to compensate for disruptions.
It’s hard to avoid the conclusion that Iran and Venezuela will indeed suffer from severe outages in the next few months. That should tighten the oil market significantly, the recent increase in U.S. inventories notwithstanding. But with oil traders currently dismissing the supply risk, OPEC+ has room to maneuver, and may decide to keep the cuts in place beyond June in order to avoid further price declines.