MARKET WATCH: Oil markets escalate following death of Chavez

Oil prices rebounded Mar. 5 following the death of Venezuelan President Hugo Chavez, under whom the country’s production and export of crude sharply declined. Chavez was being treated for cancer.

In the New York futures market, the front-month crude contract jumped to a 2-week high, ending a three-session losing streak. North Sea Brent got even a bigger boost after declining for five consecutive sessions.

Chavez’s death “brings to an end a turbulent 14-year era of strident economic nationalism, most sharply felt by the nation's petroleum industry,” said analysts in the Houston office of Raymond James & Associates Inc. “Venezuelan oil production has fallen approximately 20% during Chavez’s presidency, having been overtaken by Brazil as South America’s top oil producer. This was the end result of repeated nationalizations and outright confiscations—some of them still being litigated in international tribunals—which had the effect of virtually cutting off Venezuela from foreign energy investment,” they said.

Although Chavez relied heavily on the country’s oil income to fund social programs, the Associated Press reported Venezuela’s crude exports fell to 1.7 million b/d in 2011 from 3 million b/d in 2000 because little was reinvested in exploration and development. But even under the best conditions, it will take a long time to revive Venezuela’s oil industry, said industry experts.

Meanwhile, Vice-President Nicolas Maduro, Chavez’s handpicked successor, is interim president and will be the socialist candidate in the election that is required within 30 days under Venezuelan law. “The ruling left-wing party will try to capitalize on the public's grief, while the opposition may also be energized,” Raymond James analysts reported. “As the election campaign progresses, the read-through for the oil industry will become more apparent.”

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “Chavez’s death feeds into concerns about supply, already heightened due to the ongoing North Sea pipeline shutdown. While there appears to be no immediate threat of a disruption in Venezuelan supply, as ever oil markets are keen to price in a raising of the geopolitical risk premium. We will, however, concede that a power transition in a country like Venezuela is not completely without risk.”

Venezuela is the fourth-largest producer among members of the Organization of Petroleum Exporting Countries. It produced 2.86 million b/d in February. But even if Venezuelan production is disrupted, Ground noted Saudi Arabia’s spare capacity is around 3.5 million b/d and could be a mitigating factor in overall supply.

Improvement of Venezuela’s economy and oil industry likely will take 5-10 years, said Michael C. Lynch, director of Strategic Energy and Economic Research Inc. in Winchester, Mass. “Because [Chavez] has left the country seriously indebted, it will be necessary [for the winner of the election] to be less confrontational with the remaining foreign oil companies operating in, or considering investment in, the country,” he predicted. “If the run-up to elections finds a conflict between Vice-President Maduro and Diosdado Cabello (the National Assembly chief), with competing demonstrations and probably violence, this will increase the perception of potential instability in the oil sector and increase world oil prices by $5/bbl and perhaps as much as $10/bbl. If the oil union becomes actively involved in supporting one side or the other, this could make things worse, particularly if competition for the union’s support makes them more militant.”

Moreover, Lynch said, if leftists are “dissatisfied” with election results, they “may attempt to mobilize the oil workers’ union against the government, potentially shutting in production for a period.” He said, “If the Saudis (and others, to a lesser extent) increase production rapidly, the price impact will be minimal. If they hesitate, prices could rise by $10-20/bbl, although this could create perceptions of a likely renewed recession.”

In other news, Petroleo Brasileiro SA (Petrobras), Brazil’s national oil company, hiked its wholesale price of diesel 5% Mar. 6, “consistent with the government's decision from January,” Raymond James officials said. “For Petrobras investors, this has been a key theme to track because the company has long been losing vast amounts of money in its downstream segment. Brazilian policy has been to keep a lid on fuel prices in order to keep inflation under control, with Petrobras effectively forced to ‘eat’ the difference.”

Brazil kept wholesale fuel prices steady for 6 years before increasing prices this past summer and raising both gasoline and diesel prices in January by 6.6% and 5.4%, respectively. “Though the increase in diesel prices helps, it is too small to truly move the needle for downstream profitability; Petrobras had been requesting a 15% price hike,” Raymond James reported.

US inventories

The Energy Information Administration said Mar. 6 US commercial crude inventories jumped by 3.8 million bbl to 381.4 million bbl in the week ended Mar. 1, far exceeding Wall Street’s consensus for a mild increase of 800,000 bbl. Gasoline stocks decreased 600,000 bbl to 227.9 million bbl in the same period, less than the 1 million bbl draw analysts expected. Finished gasoline inventories decreased while blending components increased last week. Distillate fuel stocks fell 3.8 million bbl to 120.4 million bbl. The market also was expecting a 1 million bbl draw in that category.

Imports of crude into the US declined 650,000 b/d to 7.3 million b/d last week. In the 4 weeks through Mar. 1, crude imports averaged 7.6 million b/d, down 1.3 million b/d from the comparable period in 2012. Gasoline imports averaged 605,000 b/d, and distillate fuel imports averaged 112,000 b/d last week.

The input of crude into US refineries decreased 480,000 b/d to 14 million b/d last week with units operating at 82.2% of capacity. Gasoline production decreased to 8.6 million b/d, while distillate fuel production declined to 4.3 million b/d.

Energy prices

The April and May contracts for benchmark US light, sweet crudes escalated 70¢ each to $90.82/bbl and $91.28/bbl, respectively, Mar. 5 on the New York Mercantile Exchange. While identical movement in daily prices for the two front-month crude contracts has become less rare in the last year or so, the June and July contracts for US light, sweet crude also rose 70¢/bbl in yesterday’s session.

Heating oil for April delivery regained 5.39¢ to $2.97/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 4.99¢ to $3.15/gal.

The April natural gas contract was unchanged at $3.53/MMbtu on NYMEX, although colder weather seemed to support a price rally earlier in the session. On the US spot market, however, gas at Henry Hub, La., climbed 9.4¢ to $3.63/MMbtu.

In London, the April IPE contract for Brent took back $1.52 to $111.61/bbl. Gas oil for March was up $5.75 to $924.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 87¢ to $106.99/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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