Oil prices fall on rising US rig count, economic slowdown

Virginia Carson
January 28, 2019

Political risks have been sharply in focus for oil markets although much-discussed USA sanctions on Iran, imposed last November, failed to have that much of an effect on global supply as a handful of waivers were granted to oil importing countries, like Japan and India, allowing them to continue to buy oil from Iran.

At 445 million barrels, these were about 9 percent above seasonal limits, the authority said, a day after the American Petroleum Institute estimated inventories had risen by 6.55 million barrels, which apparently surprised market players, as do most API weekly inventory releases these days.

However, the market gains were capped as the U.S. Energy Information Administration (EIA) reported Thursday that the nation's crude oil inventories jumped 8 million barrels in the week ending January 18. Venezuela's crude is so heavy it must be blended with naphtha, a liquid hydrocarbon mixture used to dilute oil so that it can be transported.

Meanwhile, markets digest the latest reports of potential U.S. sanctions on Venezuela's crude oil exports, which could make the oil markets tighter, with the OPEC output cuts already underway.

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Declining Venezuelan shipments have been underpinning demand for heavy Canadian crude for more than a year, even at the South American nation's own USA refineries.

Output has fallen from more than three million barrels per day in the 1990s to 1.339 mbd a year ago, according to OPEC data. If the Trump administration pulls the trigger on energy sanctions, those declines could balloon to several hundred thousand more barrels, says Helima Croft, global head of commodity strategy at RBC.

That could mean designating the Guaido government as the legitimate steward of Venezuela's assets, including USA refineries owned by Citgo, the refining subsidiary of state-owned energy company Petróleos de Venezuela. It is also considering sanctions on oil deliveries, a move it has until now resisted, energy company sources told Reuters on Wednesday.

USA crude inventories sharply rose by 8 million barrels last week.

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There's no shortage of oil in the world right now, with global supplies hitting a record last summer.

The OPEC member has already seen its output drop 50 percent in five years as a spiraling economic crisis takes its toll on the oil industry.

Potential U.S. sanctions against Maduro's government or serious unrest in the country could cut the country's crude exports. Production of heavy crude in Mexico has been declining, and although there is a strong supply in Canada, there are challenges to getting that crude to the Gulf Coast refineries.

The supply of global oil is also being closely watched by oil market analysts with the growth in production of US shale oil also a pressure on prices. Gulf Coast refiners can't operate on USA shale oil alone. If the United States stops importing oil from Venezuela, it would devastate the nation that is already economically disadvantaged, according to Risa Grais-Targow, director for Latin America at risk consultancy Eurasia Group. That's because light oil yields more gasoline than diesel, so as fuel producers seek to ramp up diesel production, they are piling up on excess gasoline.

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Mr Varadkar said the border at present was "totally open" but that if things went "very wrong" it would "look like 20 years ago". Mixed messages this week surrounded the Irish border and what would happen to it if the United Kingdom leaves without a deal.

And Venezuela relies on United States products to keep its oil industry afloat.

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