Political crisis in Venezuela and US pressure makes up two pillars in bull oil market
Shedding some light on the influence of the US-Venezuela spat towards oil
Apart from currency pairs, retail traders exploit the opportunity to speculate other assets. Crude oil is one of the most popular assets.
Petroleum is traded through CFDs or a contract for difference. One CFD means buying or selling 100 barrels of crude oil without actual delivery of a commodity.
Trading crude oil is available at particular hours. For instance, North Sea Brent Crude is traded from 01:00 am on Sunday GMT+00 until 10:00 pm. The oil market is closed overnight from 11:00 pm until 01:00 am. Oil deals cannot be executed at this interval. Oil CFDs are valid over a particular term. When contracts expire, deals are closed at current market quotes.
To profit from trading oil with CFDs, you should grasp the principles of how and why oil prices fluctuate. To begin with, crude oil is the basic commodity for the energy industry. Thus, it is bought by virtually all countries. The bulk of oil production comes from the US.
So, oil invoices are settled in US dollars worldwide. Therefore, crude oil and the US dollar are closely linked. If you want to predict a dynamic of oil prices, it would be a good idea to monitor fluctuations of the US currency. Make sure you take notice of all factors which matter a lot to the greenback such as policy meetings of the Federal Reserve, employment data, GDP rates etc.
On the contrary, if oil prices develop a rally or lose ground for reasons other than macroeconomic data, this is also mirrored in the dollar's value, thus changing trajectory of many currency pairs.
Besides, petroleum is highly sensitive to social and political causes in the world, especially in oil exporting countries. For example, when the US imposed sanctions on Iran due to its nuclear program, the global oil market responded with a rally because of a tighter supply. Regular military clashes in the Middle East also trigger price fluctuations and even sharp price swings.
In 2019, political jitters in Venezuela have been a major catalyst for twists in global oil prices. Indeed, this OPEC member holds the largest developed oilfields on Earth. In January 2019, the opposition declared their leader Juan Guaido interim Venezuela's president despite the fact that incumbent president Nicolas Maduro had not stepped down yet.Some countries, in particular the US, have already welcomed the new self-proclaimed president. By contrast, Russia and China are backing the legitimate Venezuelan president. The thing in this saga that arouses keen interest among energy investors is how crude oil responds to developments in the upper echelons of power in the Latin American country.
The US has already slapped various sanctions on Nicolas Maduro and his hardliners, meanwhile avoiding restrictions on the whole oil sector of Venezuela. The situation could change anytime soon. US President Donald Trump warned that he is ready to impose new sanctions on the back of growing clashes over Maduro's autocratic rule.
Oil output in Venezuela used to be 3.4 mln barrels per day during the economic boom but it was slashed to less than 1.2 mln barrels in 2018. Venezuela is the third major supplier to the US in terms of oil shipments volumes. Bigger oil exports come from Canada and Saudi Arabia. Nearly half of the current oil output in Venezuela is exported to US oil refineries. One of them, Citgo, is owned by PdVSA, the Venezuelan state-run oil and gas company.
Venezuelan heavy acid crude oil has to be mixed with other grades for further processing. If the whole Venezuelan energy sector is subject to sanctions, prices of heavy crude grades will surge instantly. Prices of similar crude grades have already soared by 6.25%.
Canada extracts equivalent crude grades from oil sands in the province of Alberta. However, US oil refineries which are mainly located along the coast of the Mexican Gulf will encounter troubles with such oil supplies due to the frail logistics infrastructure throughout Canada. Channeling oil from the Persian Gulf region is also a tricky solution as it takes too much time.
In essence, in case the Venezuelan oil sector is targeted by sanctions, US refineries at the Mexican Gulf coast which process the Venezuelan petroleum will have to deal with higher production costs. If they have to reduce their production capacity, this could inflate petrol prices in some regions.
If the US announces fresh sanctions on Venezuelan oil companies, there is a likelihood that the LatAm country will also halt purchases of American petroleum products even if this decision causes more damage to Venezuela than the US. According to the US Energy Information Administration, Venezuela imported over 3 million barrels of refined oil from the US in October 2018.
At present, domestic refineries are not able to produce enough petrol and other petroleum products to satisfy local demand. Since 2016, Venezuela has been importing petrochemicals which are blended with heavy domestic grades for further exports. If the trade with the US is terminated completely, Venezuela's oil exports could decline to a large degree until the LatAm country discovers a different source of lowering oil viscosity.
As a rule, Venezuela's public budget is mainly replenished by revenue from its crude exports to the US. Revenue from other oil exports is allocated for repaying loans borrowed from lenders, including Russia and China.
If Venezuela fails to fulfill its commitments to Russia's Rosneft, this oil company will be able to claim the right to PdVSA's stake in the US. In fact, PdVSA's debt to Rosneft is secured by a 49.9% stake in the Citgo oil refinery.The US government is likely to ban a Citgo acquisition deal by Rosneft, citing national security. This scenario could spark a standoff among Venezuela, Russia, and the US. If PdVSA defaults on its debt and the US Department of Justice freezes the Citgo's stake for Rosneft, the logical development is that the equities will be sold at a discount to a company agreed by the parties.
Obviously, the sanctions will deal a serious blow to Venezuela. Besides, the sanctions will also exert an immediate adverse effect on the US. Nowadays, US storage facilities have been filled up with petroleum products. US refineries are running at full capacity, thus amassing huge stockpiles.
Meanwhile, Mexico has halted oil imports from the US as the government launched a crackdown on fuel theft from pipelines. In case Venezuela retaliates against the American sanctions by halting US oil imports, we will see US oil inventories swelling.
Most analysts reckon that oil output in Venezuela could contract to 1 mln barrels per day in 2019. The worst-case scenario suggests even bigger production cuts. Experts foresee a surge in oil prices in May.
A variety of factors could dwarf supply in the global oil market this spring: sanctions against Venezuela, the beginning of vacation car journeys in the US, expiry of waivers granted to major buyers of Iranian oil, and the ongoing pact on oil production cuts by OPEC and its allies.
To sum it up, with any developments in Venezuela, including the scenario of Nicolas Maduro asserting his power, the US will step up its pressure on the Latin American country which will have to curb its drilling activity and petroleum exports to the global market. There are weighty reasons to expect a rapid rally of oil prices in the first half of 2019.
Therefore, crude oil is likely to be a lucrative and above all liquid
investment asset that will make an impact on Forex. Importantly, a steady oil
rally will be certainly bullish for commodity currencies that will support
domestic economies of the countries assigned to emerging markets.