Venezuelan Concerns, Improving US-China Relations Boost Crude Prices

A near-term correction in il prices is possible. File Image / Pixabay

The announcement that the looming trade war between China and the U.S. is on hold coupled with rising concerns about Venezuelan crude output translated into good news for benchmark prices on Monday, with Brent rising 36 cents to $78.87 per barrel, and West Texas Intermediate up 40 cents to $71.68 per barrel.

However, the argument that there is more than enough supply to meet global demand will likely result in a cap on prices and perhaps even a correction in the near-term, according to one respected analyst.

Steven Mnuchin, treasury secretary for the U.S., said over the weekend that the world's largest economies have agreed to suspend their tariff threats and work on a wider trade agreement - thus averting, at least for the time being, a full out trade war dealing a significant blow to global growth.

But the hawkish American stance that seems to have worked in favour of resolving issues with China are so far exacerbating tensions with regards to Venezuela: on Monday president Donald Trump signed an executive order restricting the Bolivian republic's ability to liquidate state assets, thus possibly further depressing its crude output.

Jamie Webster, senior director of the Center for Energy Impact at the Boston Consulting Group, said, "There's increasingly a view that this could be as bad as Libya was in its worst days – that production could fall to a very small per cent of what it is capable of doing."

The output in question hit a long-term low of 1.505 million barrels per day (bpd) in April.

Not helping matters was international condemnation on Monday directed at Venezuelan's leftist president Nicolas Maduro, after his re-election in a weekend vote was denounced as a farce to cement autocracy.

Venezuela's woes have reached a point where the Organization of the Petroleum Exporting Countries (OPEC) - which has steadfastly downplayed any concern over the output losses of its once-mighty member - is now studying the matter to determine if relaxing its own output restrictions  is warranted, sources familiar with the matter told Reuters.

One OPEC delegate who declined to be identified said, "Maybe, if the market is tight, there will be a need to make some adjustment," and another delegate stated, "It will be discussed at the next meeting [in June], for sure."

As for moving forward, Fatih Birol, executive director of the International Energy Agency, told Bloomberg that "Venezuela is the major risk for the oil markets for the next weeks or months to come."

But Greg McKenna, chief market strategist at AxiTrader, offered a different forecast: echoing the sentiments of many experts that there is enough supply to meet demand despite the OPEC production cuts, he noted that "Without a further escalation in geopolitical risk, oil might be due a pullback."

Indeed, Bob Dudley, chief executive of BP, forecast oil prices falling to between $50 and $65 per barrel due to surging U.S. shale output and OPEC's ability to boost production to replace potential falls in either Venezuelan or Iranian supplies due to sanctions.

Last week, Richard Gorry, managing director at JBC Asia, argued that oil prices should be $6 to $7 cheaper than they currently are, because "if you look at it from a fundamentals perspective, we've got plenty of supply....we have growing shale oil in the United States and plenty of new projects coming in."