Oct 20 / Victor Arduin

Energy Weekly Report - 2023 10 20

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"Factors such as underinvestment, poor maintenance, economic crises, and Western sanctions have significantly reduced Venezuela's oil production capacity. Now, with an agreement with Washington, Venezuela has the opportunity to invest in its energy sector and increase its production, but it will take time."

More Venezuelan oil helps, but it is not enough to solve the market deficit

  • The US removed trade restrictions on Venezuela on October 18, which could ease the tight crude oil market supply.
  • However, the impact is likely to be limited in the short term, as the country's production is still a fraction of what it was in the past.
  • The recent conflict between Israel and Hamas has added another factor of upward volatility to the backwardation curve for crude oil, which has strengthened over the past few months.


Venezuela is the country with the largest oil reserves in the world, with about 300 billion barrels according to OPEC data, equivalent to 17% of global reserves. However, the country's oil production has been declining since 2014 due to the political and economic turmoil the country is facing.

In addition, it is important to emphasize the role played by PDVSA (Petróleos de Venezuela, S.A.), the national oil and gas company, which is responsible for 90% of hydrocarbon production in the country. This giant oil company covers activities that include exploration, production, refining, in addition to expanding its operations to logistics and infrastructure.

In 2015, the United States imposed economic sanctions on Venezuela with the aim of pressuring the country's government to implement democratic reforms. These sanctions resulted in a significant reduction in oil production and exports.

Therefore, in recent years, PDVSA has faced significant challenges due to a number of factors, such as mismanagement and the economic and social crisis in the country. As a consequence, Venezuela's oil production has fallen drastically, and PDVSA has lost much of its capacity.

Image 1: Venezuela Crude Oil Production and WTI

Source: OPEC, Bloomberg

Venezuela can help reduce the crude oil deficit, but it will take time

Recently, on October 18, the United States announced the removal of trade restrictions on the country, which could lead to an increase in oil supply in a market facing shortages. However, it is important to note that the impacts may be limited, as Venezuela's current production, which was at 733,000 barrels per day in September, represents only a fraction of the 2.4 million barrels per day that the country produced in 2016.

Factors such as underinvestment, poor maintenance, economic crises, and Western sanctions have significantly reduced Venezuela's oil production capacity. Now, with an agreement with Washington, Venezuela has the opportunity to invest in its energy sector and increase its production, but it will take time.

Image 2: Venezuela Crude Oil Seaborn Exports (Millions bpd)

Source: These numbers are from Refinitiv Ship Tracking App. These indicative figures may not match the official data published later

The possibility of more oil from Venezuela reaching the market is unlikely to change OPEC+'s price stabilization policy, which has caused a growing energy deficit. The group, which controls more than 40% of the world's oil supply, does not expect a significant change in prices in the short term, given that Venezuela's production recovery is expected to be gradual.

The recent conflict between Israel and Hamas in the Middle East, a region that encompasses major oil producers, is fueling concerns of an escalation in the war, potentially disrupting global oil trade. The market's biggest risk priced in is direct involvement of Iran in the conflict, which could, on the margins, lead to heavier Western sanctions or the country's retaliation, potentially disrupting the passage of the Strait of Hormuz, both of which would have a strong bullish impact on oil.

Image 3: OPEC-13 Crude Oil Production (Millions bpd)

Source: OPEC, Refinitiv

Oil prices continue to trend higher

The beginning of 2023 was a bearish start for oil, due to high interest rates in major economies fighting inflation. However, the situation changed substantially with actions by OPEC+, particularly Russia and Saudi Arabia, which reduced production and seaborn exports.

Since then, the backwardation structure has risen sharply, and the recent conflict in the Middle East is likely to strengthen the curve further by adding more upward volatility to the commodity. Even as Washington seeks to ease the rise in global oil prices by bringing Venezuelan oil back to the market, prices are likely to remain high through the end of the year.

Image 4: Higher Premium for Nearer WTI Contracts (USD Spread)

Source: hEDGEpoint, EIA

In Summary

The oil market is expected to remain bullish for the remainder of 2023, due to low global stockpiles, resilient demand, and conflicts that create upward volatility, such as the war between Israel and Hamas.

Some initiatives could help reduce the gap between oil supply and demand, such as the removal of US sanctions on Venezuelan oil. This would allow the country to increase investments and increase its production. However, this result will take time, and the increasing availability of more crude oil in the market will be a gradual process.

Although the upside risks are greater than the downside risks for the energy complex, it is worth mentioning that we are still in a high-interest rate environment, with inverted US 2-year and 10-year treasury yields, which could lead the country to a recession in the medium term.

Therefore, it is important to keep in mind that there are risks on both sides, even though the outlook is bullish for oil, there are still risks that can affect commodity prices in the bearish sentiment.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Alef Dias


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