Why oil is chill despite rising heat on Venezuela
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Oil prices are generally sinking this week despite the U.S. seizure of a tanker off Venezuela's coast, saber rattling about doing it again, and Ukraine hitting a Russian tanker in the Black Sea.
Why it matters: Geopolitical strife historically shoves prices upward, especially when oil and oil producers are involved. So what's going on? A few overlapping things...
1. The soft macro picture: The big story in oil markets right now is the global supply surplus as production growth outpaces demand increases.
- In a tight market, the latest action and prospect of more seizures would be a bigger deal.
- Plus, the confiscated oil looks slated to eventually reenter the market.
2. Venezuela's reduced stature: It's now a fairly minor exporter following years of sanctions and decline of its oil sector.
- The country's shipments are in the 700,000 to 900,000 barrels per day range.
- For context, the Saudis export over 6 million bpd and the U.S. supplies several million, too.
3. A psychological shift: Big geopolitical risk premium — that is, market willingness to preemptively price in risk — is a little passé.
- One feature of last summer's Israel-Iran conflict was the absence of huge spikes despite Iranian threats to disrupt maritime supply and the wider prospect of damage to Mideast oil sites.
- Yes, part of that response was about the soft market I noted above, but there's more to it.
- The trader hive-mind increasingly needs to see evidence of actual and continued disruption — not just vague potential — to send prices soaring.
What they're saying: Eurasia Group analyst Gregory Brew points out that Venezuela competes with also-sanctioned barrels from Russia and Iran.
- "Should Venezuelan crude vanish from the market, the impact would be to the sanctioned oil trade ... the impact to the non-sanctioned, legal oil market could be fairly small, as it would be sanctioned cargoes that would fill the gap," he said via email.
The intrigue: Brew has coined a term called the "Houthi paradox," a reference to Houthi attacks on ships in the Red Sea in recent years.
- He notes the market absorbed the disruption over time.
"This resilience has, in turn, made it more likely for actors (such as the U.S.) to take actions against oil flows, since there is now a presumption that such actions are less likely to affect prices," he said.
- "That helps explain why the U.S. is seizing tankers, why the U.S. has given a green light to Ukraine to attack Russian tankers, and could be why the U.S. decided to sanction Russian oil companies in October after resisting that move for ten months," he said.
The bottom line: As RBC Capital Markets analysts said in a note today, "There aren't a lot of market participants, us included, that would have predicted oil in the $50s if we saw a year with 4 sanctioned Russian oil producers, a direct U.S. strike on Iran, and more geopolitical risk building in Latin America."
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