The showdown in Venezuela and its effect on crude oil production along with a potential U.S.-China trade deal is driving the price of crude oi according to Phil Flynn, senior market analyst at Price Futures Group.
Crude oil prices rose seven days in a row closing at the highest levels since last November.
Oil prices started yesterday’s U.S. session in a soft correction mode on the Energy Information Administration’s (EIA) Drilling Productivity Report, which reported that oil production from the seven major U.S. shale formations is expected to rise in March by 84,000 barrels-per-day. That would drive U.S. shale production to 8.4 million million barrels-per-day, a new record.
Yet, a ZeroHedge report that read “Border Clash Imminent as Maduro Deploys Military to Borders to Block Aid” sent oil reversing sharply higher. There were some that cited a Reuters report that said Nigeria is willing to reduce oil output to help secure higher prices after Saudi Arabia called them out on cheating on production cuts, yet the rally was not really about Nigerian light oil, as much as it is about the heavy oil and the heavy situation in Venezuela.
You can really time the oil rally to the release of the ZeroHedge report. It read: “Venezuela has shut a key maritime border and grounded flights as the Washington-backed coup-leader Juan Guaidó has said that foreign aid will enter Venezuela from neighboring countries by land and sea on Saturday.”
It went on to say that “Maduro has rejected offers of foreign food and medicine, denying there are widespread shortages and accusing Guaidó of using aid to undermine his government in a U.S. orchestrated bid to oust him.”
So, in other words, don’t look at those starving and sick people over there and forget about that exploding inflation, everything here is groovy.
They went on to report that “In comments broadcast on state TV, Defense Minister Vladimir Padrino said the opposition would have to pass over "our dead bodies" to impose a new government. Guaidó, who has invoked the constitution to assume an interim presidency, denounces Maduro as illegitimate and has received backing from some 50 countries. Padrino said it was unacceptable for the military to receive threats from Trump, and said officers and soldiers remained "obedient and subordinate" to Maduro. "They will never accept orders from any foreign government ... they will remain deployed and alert along the borders, as our commander-in-chief has ordered, to avoid any violations of our territory's integrity," Padrino said. "Those that attempt to be president here in Venezuela ... will have to pass over our dead bodies," he said, referring to what he called Guido’s efforts to create a "puppet government."
The report is making it clear to the oil market that it is unlikely this showdown in Venezuela will be solved anytime soon. What is also becoming clear is the fact that not all oil is created equal. U.S. oil and even some European refiners are craving heavy sour oil to max out the products that they need. While it is utterly amazing, that the shale oil producers can raise output to record levels, it still does not yield the type of products to the extent that the market is clamoring for. The heavy oil that used to trade at a discount to the sweet is revered and an extended loss of that oil could cause refiners to run fewer barrels for products.
Oil is also getting boosted by reported progress on a U.S.-China Trade deal. Bloomberg News is reporting that “U.S. and Chinese negotiators are working on multiple memorandums of understanding that would form the basis of a final trade deal, according to a person briefed on the talks. The deal would cover areas including agriculture, non-tariff barriers, services, technology transfer and intellectual property, said the person, who asked not to be identified because the discussions are private. The enforcement mechanism remains unclear but would likely be a threat that tariffs would re-impose if conditions aren’t met, the person said.
No breakthrough is expected during this week’s talks in Washington on major structural issues, the person said, but there is an effort underway to potentially extend a March 1 deadline for U.S. tariffs to rise on Chinese goods. Liu He, China’s chief negotiator is expected to meet with U.S. President Donald Trump on Friday, according to a separate person familiar with the situation.” My take is if we get a deal with China, you will have to add on about $5 dollars-per-barrel for crude from current levels.
There was confusion on the weekly American Petroleum Institute (API) report. The report that gets leaked from subscribers saw some incorrect data released, according to sources. The correct numbers show that U.S. crude oil stocks rose by 1.3 million barrels in the week to Feb. 15 to 448.5 million, gasoline inventories dropped 1.55 million barrels last week, while distillate stocks fell 758,000 barrels. Still we saw a 3 million barrel reported build in Cushing! Market is confused so it will just wait on the EIA status data.
Weak manufacturing data from Europe is a counter balance. Pound Sterling Live reported that preliminary February IHS Markit Purchasing Managers Index (PMI) released Thursday show that the Eurozone's service sector continues to expand, however the manufacturing sector continues to shrink. The Services PMI read at 52.3 in February, a beat on the 51.5 forecast by markets, and a beat on the previous month's 51.2. Manufacturing PMI read at 49.2, below the 50.3 forecast by markets and below the 50.3 forecast a month prior. Any reading below 50 suggests contraction. The Composite PMI read at 51.4, above expectations for 51.1.
India will overtake China as the world’s second-largest oil demand growth center according to a new report from Wood Mackenzie. The report said that in 2018, India accounted for 14% of the global demand growth for oil—or 245,000 barrels-per-day. “We forecast oil demand to grow at the same level (as last year) in 2019. This will result in India becoming the second-largest demand growth center globally in 2019, behind the U.S. but ahead of China,” the UK-based researcher said in a Jan. 22 report.
For oil, upside risks abound. While Saudi Arabia hinted they might help a bit in replacing Venezuelan oil, don’t hold your breath. OPEC oil exports fell to 1.41 million barrels a day in January, the lowest in five years, according to data from cargo-tracking and intelligence company Kepler. The Saudis led the decline and are pressuring OPEC cheaters to get in line.
