It’s official. The United Kingdom of Great Britain and Northern Ireland has voted to leave the European Union after 43 years, triggering a tsunami of uncertainty and driving financial and commodity markets down, deep in the red. The race was always expected to be tight, but the world generally expected cooler heads to prevail. But the strength of the ‘Leave’ vote was unexpected; voters choosing to abandon the EU by 52%.
Predictably, this has cause crude oil prices to slump, down by 6% in the immediate wake of the vote. More pain is ahead, as the gravity of the situation drags almost everything tradable down, with the exception of safe havens like gold. A short-term downward spike towards US$40/b is not unlikely, but over the longer term the market will adjust. Traders have commented that a “yes” move in the U.K. should not a big direct impact on prices, but sentiment will take a drip due to the region’s financial markets. Besides todays Brexit decision, the market is also closely reviewing developments in the US oil-rig count for future price directions. The US has been actively adding on active rigs for the last 3 weeks!
But the Brexit also leaves the world in uncharted territory – will Brexit spark more anti-EU sentiment and cause more countries to leave? What about the UK itself? The majority of the ‘Leave’ vote came from England; Scotland and Northern Ireland both voted to remain. Will this trigger another independence movement in Scotland? What about the oil industry and giants such as Shell and BP?
The world will adjust, certainly, but there will be short-term pain, particularly for the British. Is it all worth it in the long run? That still remains to be seen.
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Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production:
Headline crude prices for the week beginning 31 December 2018 – Brent: US$54/b; WTI: US$46/b
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