The price of oil still favors Chavez

The next 12-24 months will be very difficult for Venezuela’s economy, and very challenging politically for President Hugo Chavez. However, if Chavez can hang on for the next couple of years, the price of oil should be recovering robustly by the end of 2011.

But what if oil prices start to recover more quickly than is now forecast by many energy experts? For example, what if Opec tightens its belt, makes deeper production cuts and, most importantly, all of its members comply strictly with their individual quotas?

Recently there have been some hints this could happen. For example, Saudi Arabia decided unilaterally to produce under its 8 million b/d quota during February, and go lower still in March.

If Opec finds some discipline and everyone stays within their output quotas, the price of oil will start to recover more rapidly, perhaps as soon as mid-2009 – if all the group’s members cooperate.

Meanwhile, Nicholas Sarkis, Director General of the Paris-based Arab Petroleum Research Centre (APRC), blames Opec for the collapse in crude prices, saying the oil cartel has failed to fully comply with output cuts and keeps sending contradicting messages to the already sceptic market. APRC acts as an adviser to the Organization of Arab Petroleum Exporting Countries (Oapec).

In an article published in the APRC’s monthly magazine, Arab Oil and Gas, Sarkis describes Opec’s behaviour in dealing with faltering crude demand over the past few months as “suicidal,” and urges Opec to announce a target for its oil price and to abide by output reductions to attain it. Full article here.

And here’s another good analysis explaining why The “Cheap Oil Era” is Ending Soon…

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years. The Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel. More here.

Meanwhile, today Bloomberg reports Crude Trades Little Changed After OPEC Cuts January Production

“Crude oil traded little changed on speculation OPEC cut its output in January to drain surplus global inventories and bolster prices.
OPEC production averaged 28.565 million barrels a day last month, down 3.5 percent from December, according to a Bloomberg News survey of oil companies, producers and analysts. “Compliance to the cuts has been very high,” said Thina Saltvedt, an oil analyst at Nordea Bank AB in Oslo. Crude oil for March delivery traded up 1 cent at $40.09 a barrel on the New York Mercantile Exchange at 1:44 p.m. London time. It earlier rose as much as 2 percent to $40.87 a barrel. Producers with output quotas, all members of Opec except Iraq, pumped 26.2 million barrels a day in January, 1.355 million more than their target of 24.845 million barrels a day. Prices are down 9.9 percent this year and are 55 percent lower than a year earlier.”

The Chavez government’s strategy in the current situation is to push for deeper Opec production cuts, starting with 2.2 million b/d before the group’s next meeting in March. In Venezuela’s case, pushing for deeper cuts will not inflict undue financial pain on the Chavez regime, since Pdvsa’s real crude oil production capacity is, at best, about 2.3 million b/d and not the 3.4 million b/d claimed by Chavez. However, it’s not clear that more Opec production cuts will benefit the Chavez regime, at least not immediately.

President Chavez also may be hoping (praying?) for a Black Swan event that could trigger a very substantial spike in oil prices. For example, a move by Iran to blockade Hormuz Strait, the world’s premier oil transportation choke point through which over 16 million b/d of crude oil are shipped. However, if Iran tries to block Hormuz it would be considered globally an act of war. The US undoubtedly would launch a combined sea and air counter-offensive immediately to reopen Hormuz, but oil prices would still surge in the resulting armed clashes between US and Iranian forces. For a look at the world’s major oil chokepoints, go here.

Chavez has a strategic security and energy pact with Iran which calls for each country to rally to the othr’s defense if attacked by external aggressors (ie. the US). In complying with its Opec-mandated production cuts, the Chavez government already has imposed ovefr 60% of its Opec cut on Pdvsa joint ventures which account for only 25% of Venezuela’s total production. And close to 180,000 b/d of the crude production affected by this move was being shipped to US clients. In a clash between the US and Iran over Hormuz, President Chavez could be tempted to completely suspend Venezuela’s crude exports to the US, although ultimately this would be a self-defeating move that probably would hurt the Bolivarian regime more severely than the US.

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About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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