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...

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