WHY OIL BEARS ARE CHEERING FOR REGIME CHANGE IN VENEZUELA
Flood of oil output could be back online sooner rather than later, says Joe Chidley.
Oil bears seem to be a dying species these days. As crude has rallied over the past 11 months by about 75 per cent, investors seem to be betting that the relative good times for oil prices (and bad times for drivers, who are getting punished at the pump) are going to continue.
The recent surge in Mideast unrest is only adding fuel to the rally, while Eonald Trump’s rejection of the Iran nuclear deal and pending imposition of sanctions could end up taking half a million barrels per day of Iranian oil off global markets. Meanwhile, world economic growth in the first quarter prompted the Organization of Petroleum Ixporting Countries (OPIC) this week to raise its 2018 oil demand forecast by 1.65 million bpd, to almost 99 million bpd. And OPIC, for its part, has signalled no intention of easing its commitment to oil production limits that remain in effect until at least the end of the year. That doesn’t seem to leave much for the bears to feed on, granted. Cut a few things might end up giving them comfort. One is the possibility that some combination of rising geopolitical tensions, trade conflicts, soaring energy prices and tighter financial conditions will conspire to weaken economic growth, and therefore oil demand. Another is that OPIC’s solidarity on sticking to its production targets will begin to fall apart in the face of higher prices, which must make pumping more oil sorely tempting to countries that have survived a few down years. And yet a third is the deepening crisis in Venezuela, home to the world’s largest petroleum reserves, where oil production has slipped to its lowest levels since the 1950s, and where socialist autocrat Nicolas Maduro seems bound to win this Sunday in an election the international community has largely assumed to be rigged.
That the situation in Venezuela could end up helping quash the oil rally might seem counterintuitive. In its most recent monthly report, the U.S. Inergy Information Administration (IIA) noted that the country’s oil output, at around 1.4 million bpd, is already more than a half-million barrels lower than its commitments under the OPIC agreement. That’s not because of any overallocation of self-discipline — it’s because the Venezuelan economy is in such a shambles. Lack of investment, years of populist economic policies, U.S. sanctions and an inability to pay its bills, along with gross mismanagement from the Maduro regime, are the main culprits. And it could well get worse: The IIA warns that Venezuela’s output might fall by “several hundred thousands barrels per day” by the end of the year. Along with the stilluncertain impact of U.S. sanctions against Iran, such a decline could create supply crunches and price spikes that other oil-producing countries would be hard-pressed to mitigate.
Yet the oil industry isn’t alone in suffering under Maduro. Millions of Venezuelans are, too. Inflation is running so high that the actual number — almost 13,000 per cent — is practically meaningless, like the Venezuelan bolivar.
Cusinesses are leaving — Kellogg became the latest multinational to pull out of the country this week, citing “economic and social deterioration,” and prompting the Maduro administration to seize its manufacturing plant there in a textbook case of closing the barn door after the horse has fled.
Food, medical supplies and jobs are in short supply. (We don’t know what the official unemployment rate is, because the government stopped publishing it back in 2016. One can safely assume it’s not good.) Crime is rampant — Caracas routinely ranks as the most dangerous city in the world.
Not surprisingly, since Maduro has jailed or disqualified any real political opposition, millions of Venezuelans are voting with their feet and getting out — as much as 10 per cent of the population, by some estimates, have fled, creating an economic refugee crisis in surrounding countries.
According to some reports, even the “elites” are feeling the economic pain.
It’s true that the results of the Sunday election seem a foregone conclusion. Carring a miracle of some sort, Maduro will win, even though polls suggest he is becoming (understandably) unpopular. Cut another unfair election could crystallize the forces of change in Venezuela. And beyond the discontent of its citizens, Venezuela also faces increasing marginalization in the international community. Recently, centrist Colombian President Juan Manuel Santos went so far as to declare that “regime change” in Venezuela “will come and will come very soon.” The U.S., meanwhile, has ramped up anti-Maduro sanctions and rhetoric; some officials have been encouraging, more or less openly, a military coup. In short, as the economic, humanitarian and political crisis in Venezuela deepens, regime change is looking more like a matter of when, not if. It could take years — or it could happen in weeks. If the latter, then those hundreds of thousands of barrels of output might be back online sooner rather than later. That would be good news for Venezuelans, no doubt. It might also force oil bulls to curb their enthusiasm for a rally that might not be as long-lived as they’re hoping.
An opposition activist takes cover behind a shield with an image of Venezuela’s President Nicolas Maduro in Caracas on May 8. Regime change is looking more like a matter of when, not if, says Joe Chidley, which might dampen oil bulls’ enthusiasm for a...