By: Andria Pichidi
The WTI crude futures have tipped lower by over 3% in Asia session today, posting a 6-day low at $31.55, extending the correction from the 11-week high that was seen on Tuesday at $34.81. The easing the past 2 days came from a Bloomberg report citing unnamed sources, that Russia intends to begin easing agreed production cuts starting in June. Interestingly, Reuters reported unnamed sources on Tuesday, that Russia seeks to extend the current output limits through July. It remains to be seen who is right. The July contract has since moved above its lows, and remains inside its one-week trading band.
However, correction look to be back as the USOIL rebounded from today to $32.70, reversing nearly 50% of week’s losses. This come as the overall outlook for oil is still bullish as oversupply deducted and demand rises slowly.
OPEC+ adherence to planned production cuts is reportedly high, though Russia is desiring to increase output in July. US output continues to fall amid the forced closure of hundreds of shale wells, with current pricing making such operations unviable. On the demand side, China and India are said to be increasing imports, while fuel use in general has been on the rise as economies emerge from lock down.
Bigger picture, as long as the nascent recovery isn’t scuttled by a second wave of COVID-19 infections, oil price risk going forward would appear to be to the upside. However from geopolitical perspective the threats from US regarding sanctions in Iran and Venezuela could add pressure to oil outlook.
Venezuela is suffering a shortage of refined fuel, despite having the world’s largest oil reserves. Venezuela sits atop the world’s largest oil reserves, but it must import gasoline because production has crashed in the last two decades, with lot of people blaming corruption and mismanagement by the socialist administration amid an economic crisis that has led to huge migration by Venezuelans seeking to escape poverty, shortages of basic goods. People have had to endure shortages of basic necessities such as food and medicines, which have forced 4.8 million to flee the country last year. Inflation hit 800,000% last year.
Hence Tehran sent to Venezuela 5 oil tankers this month, with the 2 already being delivered, which carry about 1.5m barrels of fuel. According to Iran’s President Hassan Rouhani, there is a big risk that the country would retaliate if the oil tankers are not arrive or blocked by US.
Other than political corruption, the Venezuelan economy has been hurt also by US sanctions , which have mainly targeted Venezuela’s oil industry. Oil production in the country has fallen to nearly a quarter of levels seen in 2008. Venezuela’s plight has worsened with a drastic drop in global crude oil prices amid the coronavirus crisis. The price of Venezuelan crude has fallen to less than $10 a barrel, its lowest level in more than two decades, and well below last year’s average price of $56.70.
Recently according to BBC, the Trump administration launched two rounds of sanctions in against Rosneft affiliates for trading Venezuelan crude in international markets. In late March, Rosneft announced its surprise departure from Venezuela. Since then, petrol has had to be strictly rationed, with people queuing up through the night to fill up no more than 30 litres.
Doctors and nurses are among those forced to queue, at a time when the country’s health system is collapsing and there are concerns over the spread of Covid-19.
Hence the recent rescue move from Iran, represented a deepening of economic relations between Venezuela and Iran, two pariah states run by authoritarian leaders subject to punishing sanctions by the United States government. Representatives of both nations cast the transaction as a sign of strength.
In exchange for the fuel, Iran received gold flown by the airline Mahan Air in late April, in a deal that bypasses US sanctions on both countries. At least nine tons of gold, worth about $500 million, flew off to Iran last month, according to Bloomberg News. That leaves the crisis-plagued nation with a scant $6.2 billion in hard-currency assets, the lowest amount in three decades.
Venezuelan President Nicolás Maduro thanked Iran for its support, describing the two countries as “two revolutionary peoples who will never kneel down before North American imperialism”.”Venezuela and Iran both want peace,” he said in a televised state address. “We have the right to trade freely.” Venezuelan Foreign Minister Jorge Arreaza said that “Iran and Venezuela have always supported each other in times of difficulty” .
Indeed the Iran–Venezuela relations have strengthened substantially in recent years, as the two countries are contemporary strategic allies.
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