Recent events have shown that we continue to live in interesting times. Geopolitical disruption around the world has thrown further impetus behind oil prices with Brent rising over US$77/bbl and even WTI rising over US$70/bbl for the first time in more than three years.
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Venezuela’s embattled national oil company, PDVSA continues to struggle under what has been described as a “lack of knowledge and experience”, “political infighting” and “a lack of investment”1 as the country undergoes continued political upheaval.
According to Bloomburg, Rafael Ramirez (former Oil Minister and President of PDVSA for 10 years) has claimed that the company is now on the edge of collapse. Ramirez argues that President Nicolas Maduro’s politically motivated purges of senior PDVSA staff have left the company with inexperienced and ineffective leadership. One key example cited is the appointment of Major General Manuel Quevedo as the President of the company and the recent legislation giving him “exorbitant, unprecedented powers”.2 The situation is reportedly so bad that Ramirez expects the company to see output fall by 600 000 bpd a year from current levels of 1.5 million bpd – a figure that is roughly half of what it was 20 years ago.
And then there is Iran. It had long been expected that President Trump would seek to end US participation in the Joint Comprehensive Plan of Action (a.k.a. the ‘Iran Deal’), which he once referred to as “one of the worst and most one-sided transactions the United States has ever entered into.”3 When US withdrawal was confirmed, it prompted an immediate surge in oil markets, which rallied around the news that the White House would immediately begin working to bring back sanctions on Iran. Aside from generally pushing up the price of oil, it’s difficult to predict how far things will go. Hussein Sayed, Chief Market Strategist at FXTM, was quoted by the Financial Times as saying “it’s challenging to know the magnitude of re-imposing sanctions on oil exports from Iran. That’s why analysts’ expectations varied widely on this front. But prices may remain elevated and even reach US$80 a barrel in the short run.”4
Regardless of what happens in Iran or Venezuela, one thing appears certain: US production will continue to surge and will likely be the main factor preventing prices soaring back up to 2014 levels. With breakevens as low as US$25/bbl,5 the US rig count continues to rise. Driven by a booming shale industry, the Permian basin alone is expected to account for roughly half of all new US production over the next few years, with total US output expected to rise to more than 12 million bpd by 2020.6
Whether these political disruptions equate to long-term support for oil prices remains to be seen, but for now at least, the news looks good for the upstream industry.
1. ‘Man Who Ran Venezuelan Oil Giant for Decade Predicts Fast Demise’ – https://www.bloomberg.com/news/articles/2018-05-04/man-who-ran-venezuelan-oil-giant-for-decade-predicts-fast-demise
3. ‘President Donald J. Trump is Ending United States Participation in an Unacceptable Iran Deal’ – https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-ending-united-states-participation-unacceptable-iran-deal/
4. ‘Iran nuclear worries push crude oil to 4-year high’ – https://www.ft.com/content/1e0d86f6-51a8-11e8-b3ee-41e0209208ec
5. ‘Boom in West Texas oil patch lifts wages, prices’ – https://www.reuters.com/article/us-usa-oil-record-economy-analysis/boom-time-comes-early-to-west-texas-oil-patch-idUSKBN1I22TF
6. ‘The U.S. Oil Market Is Surging’ – https://www.forbes.com/sites/judeclemente/2018/05/02/u-s-oil-market-update-early-may-2018/#62b4e01c7995