Oil falls more than US$1 a barrel on Venezuela deal hopes

OIL futures fell more than US$1 a barrel on Monday (Oct 16) as expectations rose the US and Venezuela could soon reach a deal easing sanctions on Venezuelan crude exports, while traders said the Israel-Hamas conflict did not appear to threaten oil supplies in the short term.

Brent crude futures settled at US$89.65 a barrel, down US$1.24, or 1.4 per cent. US West Texas Intermediate crude fell US$1.03, or 1.2 per cent, to finish at US$86.66 a barrel.

Venezuela’s government and opposition will return to political negotiations this week after nearly a year, the two sides said, while sources said the US has reached a preliminary deal to ease sanctions on Venezuela’s oil industry in return for a competitive, monitored presidential election in Venezuela next year.

“The reported deal ... would help to raise the country’s oil output from very depressed levels,” said William Jackson, chief emerging markets economist for Capital Economics.

“But the sector requires enormous investment to return output to the levels seen only a decade ago,” Jackson added. “And this wouldn’t materially affect the deficit in the global oil market in the near term.”

Both oil benchmarks had surged last week on fears the conflict in the Middle East could widen, with global benchmark Brent gaining 7.5 per cent in its highest weekly gain since February.

Monday’s falling prices appeared to be “a breather to take in events in the Middle East” as opposed to expected production increases in Venezuela, said Andrew Lipow, president of Lipow Oil Associates.

“Negotiations with Venezuela could lead to a surge in exports of crude oil that is already in inventory,” Lipow said. “But a surge in production is a ways off given the decrepit state of the Venezuelan energy infrastructure.”

Traders said the war between Israel and the Palestinian Islamist militant group Hamas so far remained focused in the Gaza Strip.

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“It’s more of the same on Monday in terms of the conflict in the Middle East being contained from affecting crude oil supplies,” said John Kilduff, partner with Again Capital.

Israeli air strikes on Gaza intensified on Monday after diplomatic efforts by the US to arrange a ceasefire in southern Gaza failed.

Russia has also entered the diplomatic fray, with President Vladimir Putin set to hold talks with Iran, Israel, Palestinians, Syria and Egypt.

Heightened tensions in the Middle East may have compounded other risk factors to push prices higher last week, market sources said.

The US last week imposed the first sanctions on owners of tankers carrying Russian oil priced above the Group of Seven’s price cap of US$60 a barrel, an effort to close loopholes in the mechanism designed to deprive Moscow of revenue for its energy sales.

“The sudden decision on tightening up of sanctions on ship owners carrying Russian crude over the US$60/barrel limit by the US started to niggle and so did the Russian/Saudi meeting concluded by President Putin stating that Opec+ were achieving ‘stability’,” said PVM analyst John Evans, referring to the price rises at the end of last week. REUTERS