Crude Firms on Geopolitical Tension, but Saudis See a "Stable" Market Ahead

The price discrepancy between WTI and Brent will reportedly cause headaches for OPEC. File Image / Pixabay

Venezuela was added to the list of reasons why crude on Tuesday rose to a three week high, along with the more familiar support of tension between Saudi Arabia and Iran, as well as a surprise decline in U.S. inventories.

Specifically, traders were said to be motivated by falling production in Venezuela, whose output has been halved since 2005 to below 2 million barrels per day (bpd) - a situation that caused the International Energy Agency to declare the Bolivian republic "vulnerable to an accelerated decline" and having the potential to tip global markets into deficit.

West Texas Intermediate settled up $1.34, or 2.2 percent, to $63.40 per barrel, the highest level in three weeks, while Brent was up $1.36 to $67.41 per barrel, a 2.1 percent rise.

Although Venezuela has been on the analytical community's warning radar for several years now, the more immediate impact on crude seems to be from the Middle East, due to the Saudis on Monday calling the 2015 nuclear deal between Iran and world powers a "flawed agreement" in advance of a meeting between Mohammed bin Salman, crown prince of Saudi Arabia, and the similarly-minded U.S. president Donald Trump.

For the record, during that meeting on Tuesday, Salman told the brash billionaire he sees a "stable" oil market ahead and added that his kingdom has an 84-year supply of crude.

Tuesday also saw the American Petroleum Institute reporting a 2.74 million barrel draw of U.S. crude inventory last week, which would be the largest decline since early January if confirmed by the Energy Information Administration on Wednesday - and if the EIA does indeed confirm the quantity, "we could get another $1 increase [in prices] tomorrow," according to James Williams, president of WTRG Economics.

This is in stark contrast to a Bloomberg survey in advance of the government report showing a 3.25 million barrel rise in stockpiles.

But even though Tuesday's market performance was more in line with trading activity in 2018 as a whole, the price discrepancy between WTI and Brent worries Matt Stanley, a fuel broker at Freight Investor Services International.

He pointed out in a note that "Spot Brent crude oil prices averaged $3.36 per barrel more than WTI prices in 2017 compared with just $0.40 per barrel more in 2016, providing a price incentive to export U.S. crude oil into the international market" - a scenario he says will cause headaches for the Organization of the Petroleum Exporting Countries (OPEC), Russia, and their allies as they struggle to make headway in year two of their production cutback deal.

Earlier this week Stanley disputed the popular theory among analysts that global inventories continue to be tight by succinctly stating, "Let's face it, there's still too much oil."