The Market Was Expecting an Increase in Oil Output but OPEC Says Otherwise

01/04/2021 11:00 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The crude oil market is breaking out and commodities are hot, and the place to be in 2021, says Phil Flynn of the PRICE Futures Group.

Oil prices are the highest since March on reports that OPEC+ will show restraint and not increase oil output like the market was expecting. We are also getting strong overall commodity sentiment as funds look to get long and rebalance. Yet it appears that OPEC+ is recognizing the fact of more Covid lockdowns and that perhaps it is not the time to be raising production just yet. The OPEC Secretary-General Mohammad Barkindo on Sunday warned about the downside risk for the oil outlook in the first half of 2021, and it appears the members might heed that warning. In recent weeks Russia has suggested that they wanted to raise production by 500.000 barrels a day in February, but now the market is pricing in the fact, that that may not happen. 

Oil is also getting support from geopolitical threats. Bloomberg News reported that, “The USS Nimitz will remain in the waters in and around the Arabian Sea, US Acting Secretary of Defense Chris Miller says in a statement, following what he said were recent threats from Iranian leaders against President Donald Trump and other US officials.”

How is that socialist thing going for you? Reuters reported that Venezuela’s oil exports hit the lowest level since the 1940s falling by 376,500 barrels per day (bpd) in 2020, according to Refinitiv Eikon data and internal documents from state-run PDVSA, financially squeezing socialist President Nicolas Maduro. US sanctions, along with Venezuelan corruption, are killing the once-great oil company.

Venezuela is now going to go all out on cryptocurrency. Bloomberg reports that Venezuela’s government is planning to move to a fully digital economy as hyperinflation has made worthless bolivar notes practically disappear, and dollarization expands through the local financial system. The US dollar has operated as an escape valve for Venezuela amid US sanctions and collapsing oil revenues, President Nicolas Maduro said in a televised interview with Telesur on Friday. He said 18.6% of all commercial transactions are in dollars, while 77.3% are carried out in bolivars with debit cards. Only 3.4% are paid with bolivar notes. “They have a war against our physical currency. We are moving this year to a more profound digital economy, in expansion. I’ve set the goal of an economy that’s 100% digital,” Maduro said, adding that physical money will eventually disappear.

It’s the latest ambitious currency plan from Venezuela’s president, with no guarantee of success. In 2017, with the bolivar in freefall, Maduro vowed that the nation would create a cryptocurrency called the Petro, backed by reserves of oil, gas, gold, and diamonds. The Petro launched in 2018; the US called it a scam. Venezuela’s currency has lost 99% of its value during three years of hyperinflation, forcing the country to issue higher-denomination notes that in turn becomes useless in record time. Inflation soared 5,790% in the last 12 months, according to Bloomberg News’s Cafe con Leche Index. The largest note now in circulation, 50,000 bolivars, is worth about $0.04. The government has delayed plans to issue a 100,000-bolivar bill, which currently would be worth less than $0.10.

Natural gas is making a comeback as forecasts for spring in January are now becoming a little less spring-like. Andrew Weisman of EBW Analytics says that, "NYMEX natural gas went through wild swings over the holidays and could continue to do so this week. The period just before Christmas saw a major weather forecast bust, with model runs abruptly turning much warmer—sending gas prices down sharply.

Since the New Year’s break began, however, weather models have repeatedly added gHDDs, reversing much of the pre-Christmas loss. There are increasing signs that temperatures could turn even cooler later this month, driving natural gas prices up by 20 cents or more.

Learn more about Phil Flynn by visiting Price Futures Group.

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