Venezuela may do what OPEC can’t
Oil traders rang the cash register this week and pocketed the profits from needlessly running up oil prices based on an OPEC fairy tale about a global cutback in production.
The price of oil has dropped from nearly $50 late last week to just above $44 on Friday. Pardon me while I remind readers that I never thought September’s “agreement to talk about a deal” would ever amount to much.
Traders, though, are always looking for an excuse to trade, which is how they make money. So they were happy to drive up prices. And costing you more at the pump, by the way.
The odds of OPEC actually executing a deal that will slow the flood of oil onto the oversupplied global market remain pretty slim. Oil ministers will try to sell the markets on some vague new deal at month’s end. But actually reducing the supply of oil is something OPEC hasn’t accomplished since 1973.
Prices will spike after news of a fake deal and then collapse on the reality that OPEC members always cheat on their quotas.
Some analysts are predicting oil prices could drop even more if OPEC doesn’t reach a deal at all. That would be a major setback for the industry, which had its heart set on $50 a barrel, which is the break-even price for most U.S. producers.
U.S. oil companies may get their $50 a barrel, but it won’t be OPEC that delivers it. Venezuelan President Nicolas Maduro, by driving his country’s economy into the ground and inspiring a revolt against
him, will deliver the disruption in oil supply that the industry wants.
Venezuela’s socialist government relied on $110 oil to finance a command economy that redistributed wealth to the poor. But now that prices are low, the government no longer has the foreign cash needed to import the food and medicines that Venezuelans need to survive.
Conservatives are seizing the moment and won control over the National Assembly. They are trying to impeach Maduro, but he has blocked every move and used security forces to suppress demonstrations. The Vatican is trying to negotiate a power-sharing deal, but Maduro and his clique appear uninterested in anything but absolute power.
That could lead to more street demonstrations and strikes, which will hurt Venezuela’s oil production. A complete collapse of the government could potentially shut down all production, taking 2.1 million barrels a day off the market.
The global oversupply is only about 1 million barrels. Losing just half of Venezuela’s productions would balance the market and send prices above $50. Losing all of it could send prices to $60.
When it comes to predicting oil markets, believe only some or none of what you hear from OPEC. But believe at least half of what you see in Venezuela. Those are the forces driving oil markets for the rest of the year.
Chris Tomlinson is the Chronicle’s business columnist. His commentary appears on Sundays and Wednesdays. He also posts a daily news analysis at HoustonChronicle.com/ Boardroom. chris.tomlinson@chron.com twitter.com/cltomlinson