Oil Prices Stable Despite Geopolitical Concerns

Brent crude opened at US$71.37 per barrel on Thursday (April 11) after dipping slightly to US$71 the day before.

West Texas crude also rebounded from an early week drop that saw its price hit US$63.98 per barrel before climbing back to US$64.17.

It has been a volatile first quarter for the oil market, with Brent crude sinking to US$53.80 on January 1, which remains its lowest price year-to-date. West Texas crude saw its lowest point this calendar year in early January as well, when its price slumped to US$45.41.

Some of the precariousness weighing on the sector is a result of geopolitical tensions in Venezuela, a member of the Organization of the Petroleum Exporting Countries (OPEC).

Ongoing power outages paired with US sanctions against Venezuela have reduced crude output to a long-term low of 870,000 barrels per day (bpd).

According to OPEC, Venezuelan output dropped from its February total of 1.46 million barrels per day (mb/d) to 960,000 bpd in March — a 500,000 bpd decrease.

The decrease in production in the country also speaks to the macro dynamics in the sector as a whole. An April oil market report from the International Energy Agency shows that compared to November 2018, March output by OPEC countries was down 2.2 mb/d; however, the difference between Q4 2018 and Q1 2019 production seen in non-OPEC countries was much lower at 0.7 mb/d.

This widespread output cut has resulted in dramatic price growth for both West Texas crude and Brent crude, which has risen by US$17.57 from its 2019 low.

The report cites increased demand, which was about 1.3 mb/d in 2018, as a driving factor behind the double-digit price growth for Brent and Texas crude.

The regulatory body believes that the need for the energy fuel will experience an uptick over 2019 as well, with a continued demand growth forecast of 1.4 mb/d even though the health of the global economy is uncertain.

Modesty on the part of OPEC has kept crude prices from fluctuating wildly in the first quarter of 2019. The organization curbed more than 1.2 million bpd from the market in an effort to calm volatility.

Despite the move by OPEC affiliates and non-OPEC members, US crude production has hit record levels and inventories have ballooned. Current production numbers in the country are 12.2 million bpd, while swollen crude inventories are at a 17 month high of 456.6 million barrels.

The massive growth in output and reserves has moved America into the lead as the top oil-producing nation, surpassing Russia and Saudi Arabia. Although the US has ramped up production, OPEC remains certain its cuts will keep the price in positive territory.

“Regardless of what unexpected ‘black swans’ appear on the horizon — whether disruptive weather patterns and storms, or geopolitical occurrences — OPEC shall always be ready, able and willing to take decisions and implement actions, along with other producers,” notes OPEC’s March bulletin. “’Relax and take it easy’ should be heeded by all who feel a weight on their shoulders.”

The group will meet in June to further review the market and production tallies.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.