Market Report & Analysis for 1/29/2019 Morning Edition
Morning Market Overview
New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange settled higher in capping last week’s trading although declined against prior Friday, with traders following a plethora of competing news effecting oil supply and demand fundamentals.
The market’s reaction to this week’s developments in Venezuela was mild but did offset a sharp weekly build in U.S. commercial crude stocks, as the regime of Venezuelan President Nicolas Maduro is facing its stiffest opposition to date. Venezuela, one of the five founding members of the Organization of the Petroleum Exporting Countries, has seen its oil production freefall since Maduro assumed power in 2013.
Wednesday will likely be marked in the history books after Juan Guaido, the recently elected head of the National Assembly cited Venezuelan’s constitution in claiming he is the “president in charge,” following what is widely considered the illegitimate election of Maduro to a second six-year term as president in May 2018. Maduro was sworn into his second term last week. The United States quickly recognized Guaido as Venezuela’s legitimate leader, as did Canada and several other South American countries.
The United States is considering sanctioning Venezuela’s oil industry to pressure Maduro, who continues to control the country’s military. It’s unclear what action the United States will take, but concern the Trump administration could ban crude sales to the United States is seen further tightening the heavy crude market, lending upside support for West Texas Intermediate futures. U.S. Gulf Coast refiners operate complex refineries reengineered more than a decade ago to support processing a heavier crude slate. That was before the shale revolution that has led the United States to become the largest crude producer in the world, although output is a light grade that needs to be blended with heavier blends so refiners can operate efficiently, and produce middle of the barrel products including diesel fuel.
Canada has abundant heavy crude reserves, although years of political opposition to building the TransCanada Pipeline leaves much of that supply stuck north of the border. The inability to bring Canadian crude to market without a substantial discount to world prices prompted the Alberta government to mandate a 325,000 bpd production reduction during the first quarter in an effort to work down elevated inventory. Mexico, another producer of heavy crude, has seen output steadily decline for years, which prompted the country five years ago to change its constitution and open business to private companies.
Meanwhile, OPEC+ is nearly one-month into a six-month production agreement reducing output 1.2 million bpd, with Saudi Arabia eager to tighten the world’s supply-demand balance, making deeper cuts to its output than obliged under the pact to ensure success. The Saudis have also focused on reducing exports to the United States, partly because U.S. oil statistics are transparent and provide a clearer view of supply-demand dynamics. Venezuela is currently the third largest exporter of crude to the United States, with Energy Information Administration data showing U.S. imports at 574,000 bpd in December.
The complicated backdrop helps to explain why WTI futures advanced Thursday and Friday following the EIA’s supply report Thursday showing an unexpected 8.0 million build in commercial crude stocks for last week that lifted inventory to an eight-week high of 445.0 million bbl, up 8.1% against a year ago.
