With Venezuela’s Marxist Dictator Gone, the Country’s Oil Production Could Soar

Feb.12, 2018
by Bob Adelmann

By every measure, Venezuela’s Marxist dictator Nicolas Maduro isn’t long for this world. His socialist regime is losing altitude and airspeed at a most satisfyingly horrific rate. His people are starving, as are many in his army. Citizens are fleeing into Colombia to buy food missing from shelves at home, and many are staying there. He’s in default on his estimated $150 billion national debt, and his lenders – China, Russia, and Cuba – appear to be increasingly reluctant to throw good money after bad. American refineries, which have been supporting Maduro through their purchases of his country’s sticky crude, have happily cut them by two-thirds, finding more reliable sources in Canada and Mexico, and as a result helping to starve Maduro into oblivion.

Finally, his precious oil company, PdVSA, which is essentially Maduro’s only oxygen hose, is failing as well. Its production is down to a little over a million barrels a day. In 2014 it produced more than three. 

So it’s reasonable to assume, as economist Herb Stein expressed it, that “if something cannot continue, it will end.” And the end of Maduro won’t be lamented.

In a burst of perhaps unjustified optimism, this writer is willing to suggest that, with Maduro’s departure (perhaps with “extreme prejudice”), a new, more sensible regime will replace him: one that has enough common sense to take advantage of the enormous wealth residing beneath the surface of the country and let the free market develop it.

That would improve the standard of living of those starving in that unhappy country almost immediately while further disrupting OPEC’s plans to raise world crude oil prices to levels needed to fund their welfare and warfare states.

OPEC’s strategy has vacillated between flooding the market with crude oil, hoping to bankrupt American producers who couldn’t make profits when oil was cheap. When that didn’t work, the cartel strong-armed its members into restricting their production, hoping to raise prices without awakening the sleeping giant: American oil.

Neither strategy worked. The price of crude as priced in London (Brent crude) briefly touched $70 a barrel last week before declining precipitously. Traders who were long in options and futures contracts – at one moment in time, according to one source, those traders owned a billion barrels of crude oil! – decided to head for the exits. By the close on Friday, NYMEX crude for March delivery fell below $60.

The selloff was triggered by an announcement last week from the Energy Information Agency (EIA) that U.S. crude oil production exceeded 10 million barrels per day (bpd) last month – the first time since 1970 – and would continue to set records into 2018. In addition U.S. oil rig count jumped by 26, the largest jump in a year.

Also adding to the downward pressure was the little-noticed part of the budget bill passed late last week that mandated cutting the U.S.’s Strategic Petroleum Reserve (SPR) by 100 million barrels. That would raise about $6 billion for the U.S. Treasury at today’s prices, and although not scheduled for immediate sale, it provided more pressure to the downside.

Along with that is the restarting of the North Sea crude oil pipeline that was taken offline unexpectedly, affecting more than a third of crude oil production from it.

Analysts at Commerzbank put two and two together, and cogently concluded that crude oil prices had nowhere to go but down:

It is now clear that oil prices in late January were too high to keep the oil market balanced in the long term. This is because U.S. production is now rising so sharply that there is a risk of renewed oversupply if OPEC does not voluntarily renounce market share.

Thanks to U.S. production, crude oil inventories are climbing once again, rising by nearly two million barrels during the week ending February 2.

There are other pieces and parts to the global energy equation as well, including Big Oil’s expansion of efforts in the Bakken Formation in North Dakota and the Permian Basin in Texas. ExxonMobil announced it would be taking some its tax savings under tax reform and pumping (sorry!) it into its Permian Basin properties. Two other of oil’s “big sisters” – Royal Dutch Shell and Conoco – are pouring capital into Canada’s Montney and Durvernay Formations, which hold proven reserves in the billions of barrels.

If Maduro is removed – perhaps “when” is a better word to use here – and if the incoming regime uses some common sense as suggested above, that additional one to two million barrels of fresh daily production (assuming also that the new regime ends its affiliation with OPEC) would add additional downside pressure on the global price of crude.

It may be a fantasy, but wouldn’t it be nice that, come summertime, American drivers heading off on vacations in their automobiles and motor homes would enjoy lower gas prices? Most wouldn’t likely know, or care, that they’re saving money partly because a Marxist dictator in a South American country has been replaced with someone with a modicum of common sense. At least they won’t have to worry about another oil embargo from the increasingly enfeebled cartel that wrought such pain and suffering to Americans during the 1970s.

---------------------------

Sources:

Background on economist Herb Stein

Bloomberg.com: OPEC’s Oil Price Nightmare Is Coming True

Chart of Nymex crude oil futures

MarketWatch.com: U.S. budget deal will trim the nation’s oil reserve by 15%

CNBC.com: US crude sinks another 1%, settling at $61.15 and posting the longest losing streak since April

SeekingAlpha.com: Why The Oil Price Rally Was A Flash In The Pan

1973 US oil crisis

1979 US oil crisis

 

Add new comment

Plain text

CHECK OUT THE ENTIRE MCALVANY NETWORK

McAlvany Weekly Commentary provides investors with valuable monetary, economic, geo-political and financial information that cannot be found on Wall Street. Your host David McAlvany presents a solid strategy of wealth preservation for your financial and retirement assets while living in an unstable economy.

Through its client focused, customized approach, MWM is committed to providing independent, well-researched, objective advice, and investment professionalism. At MWM, our client commitment is to preserve capital, manage risk, and grow your assets in an ever-changing global environment.

At International Collectors Associates (ICA), we specialize in the sale of bullion, semi-rare U.S. and European gold coins and secure offshore storage in Switzerland for your precious metals. Our highly trained and experienced advisors strive to help you in customizing solid strategies of wealth preservation for your financial and retirement assets.

McAlvany Financial Group

The McAlvany Financial Group has a contrarian, in-depth approach to its analysis, allowing the company to avoid decisions based on emotion, and thus combine maximum risk mitigation with consistent real growth for its clients’ investments. Integrity, attentiveness, and longevity have characterized the company’s client relationships since 1972.