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Confluence of factors sends oil prices 2% up, but outlook is choppy

Venezuelan crisis, new hope over trade talks, Opec's supply cuts cited as factors for rise

Oil prices finally rose on Wednesday after having at first shrugged off the risk of supply disruptions on the back of Washington's sanctions on Venezuela's oil industry amid the escalating political strife there.


CALL it a delayed reaction.

Oil prices finally rose on Wednesday after having at first shrugged off the risk of supply disruptions on the back of Washington's sanctions on Venezuela's oil industry amid the escalating political strife there.

Prices were pulled in opposing directions for much of the past week, no thanks to the mixed messages on the US-China trade-feud front and the slowdown in China's economy. On Wednesday, prices headed up by as much as 2 per cent, though they came off a tad during the Asian session.

Vandana Hari, founder of Vanda Insights, a Singapore-based provider of oil markets macro-analysis said: "The situation in Venezuela could evolve into a bull case for oil.

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"But a market overwhelmed by concerns over demand growth and chances of global oversupply appears reluctant to price that in ahead of time," she added, citing also renewed optimism over the US-China trade talks as an added boon for oil prices.

Other factors, chiefly the pledge by the Organization of the Petroleum Exporting Countries (Opec) to slash output to ease concerns over a supply glut and the weaker greenback ahead of the US Federal Reserve meeting, also lent support to crude prices.

On Monday, Washington announced export sanctions against Venezuela's oil firm PDVSA to choke off oil revenue and oust the incumbent president Nicolas Maduro.

The US has thrown its weight behind opposition leader Juan Guaidó, who has declared himself as Venezuela's new president. The political crisis has pushed the country - already with a broken economy and hyperinflation - deeper into chaos.

It was feared that the US sanctions would wreak more damage to the South American country - but for oil prices, which had ended 2018 on a sour note; they had peaked in October, but gained some ground in the first two weeks of this year, so some support looms.

Margaret Yang, market analyst at CMC Markets, said: "Venezuela sits on the world's largest discovered oil reserve and produces an output of about 1.5 million barrels a day. A sharp decline in Venezuela's oil supply due to its deteriorating political situation, alongside the expiry of waivers of US sanctions on Iranian oil exports, will likely catalyse some positive move in energy prices in the months to come."

Not many believe the Venezuelan factor will be a big deal for oil prices.

OCBC Bank's economist Howie Lee does not expect the crisis there to stoke a huge rally in prices because, he said, the country's output has already been much reduced in the last three years.

Venezuela accounts for 3.7 per cent of total Opec production, and about 1 per cent of total global supply. The US, which buys more than 40 per cent of Venezuela's crude, is the South American country's single biggest oil customer. Mr Lee said that, with the sanctions, Venezuela can export its oil to Asia.

The bigger worry is geopolitics. Russia, Opec's biggest non-member ally, and China have both publicly denounced the US sanctions on Venezuela.

OCBC's Mr Lee said: "Oil prices could fall if US-Russia or US-China relations head further south, with both relationships already looking strained in recent times."

Looking ahead, oil prices are expected to remain choppy.

Ms Vandana said: "The oil market remains beholden to the alternating fears and hopes over the global economic momentum in 2019, and developments in the US-China trade talks have become the proxy for that calibration."

Nomura Research has cut its 2019 forecast for Brent oil to US$55 per barrel (now at around US$62/barrel) from US$70 previously; for West Texas Intermediate (WTI) crude, the forecast is US$49/barrel (now at US$53), against an earlier projection of US$65.

Citing lower demand growth, the research house said it expects oil prices to fall further if refining margins weaken, if the US-China trade dispute is prolonged, if the output cuts by Opec/non-Opec members are not fully met or if US shale output stays resilient despite falling prices.

Upside risks include a slowdown in US output growth and Saudi Arabia's intention to balance oil supply and support the oil price.

Nomura warned: "We think the street has yet to factor in a deteriorating economic condition in the first half of 2019, oil inventory build-up due to supply rising in the fourth quarter of 2018, and worsening refinery utilisation due to depressed gross refining margin."

READ MORE: Oil industry braces for turmoil from US sanctions on Venezuela

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