5 near-term risks to oil prices

5 near-term risks to oil prices

US crude oil inventories have finally started to decline. The Energy Information Administration reported Wednesday that domestic-crude supplies fell 3.6 million barrels for the week ended April 21—the largest drop so far this year. The oil supply/demand equilibrium might tip into a deficit soon. That will definitely lift the oil prices.

But as you probably know we always manage to find a fly in the ointment. So, we did it this time. Here is the lilt of the countries that won’t allow OPEC to bolster oil prices by curbing supplies.

Venezuela

The outlook for Venezuela’s economy was downgraded after oil prices collapsed in 2014. Since then the situation has deteriorated; as a result of Chavez’s and his predecessor Maduro’s policies, Venezuela’s socioeconomic status declined, with inflation, bribery, poverty and hunger increasing. The present situation in Venezuela’s capital Carcas has the feel of some sort of a final stage for Maduro’s rule. Oil production dropped 10% last year, and it seems like it is going to fall this year too. In case of a government shutdown, political protests and total collapse of Venezuela society, the oil market will lose a substantial share of oil supply. If the political risks recede, and Venezuela’s oil industry pick up, it will a substantial drag for oil prices.

Libya

This North African oil producing country is struggling to recover from years of conflict between government and militias. Its oil field used to produce 1.6 mln barrels before the outburst of political crisis in 2011. The country was allowed to be exempted from OPEC output cut deal. It was producing 490,000 barrels a day with Sharara pumping about 213,000 barrels. Sharara isn’t operating at the present moment because of a valve closure on April 9. So, if outages in Lybia persist, and the largest oil industry doesn’t reopen, it will be a significant boost for oil prices. In case of revival of the Libya’s national oil industry (currently targeting 1.2 mb per day by the end of 2017) will have a truly depressive impact on oil prices.

Nigeria

This African country is also exempted from the OPEC cuts, and like Libya it also represents both downside and upside risks to the oil market. In 2016, Nigeria made lots of headlines beacuse of the streak of attack on pipelines from the Niger Delta avengers demanding that all international oil companies leave the region. The attacks inflicted a great damage on Nigeria’s oil infrastructure (the 300,000 bpd Forcados export terminal is still offline). The oil production slumped to a three-deacde low following the incidents. The upside potential in Nigeria is more limited than in Lybia, but the downside risk for oil prices is still in place, as the Avengers backed off.

US drillers

The imminent comeback of the US shale industry might put additional pressure on oil prices. The Energy Information Administration registered an increase in US oil production by almost 300,000 barrels per day in 2017. The output could grow by additional 400, 000 barrels per day by the end of December.

Russia

Russia’s drilling activity is believed to be the largest short-term catalyst to global supplies and oil prices. The extension of OPEC cuts depends on the agreement of this country – one of the largest oil producers in the world.  

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