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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

The US just laid down the hammer on Venezuelan strong man Nicolas Maduro.  In a statement  by Treasury Secretary Steve Mnuchin  it was said that  “The United States is holding accountable those responsible for Venezuela’s tragic decline and will continue to use the full suite of its diplomatic and economic tools to support Interim President Juan Guaidó, the National Assembly, and the Venezuelan people’s efforts to restore their democracy. All property and interests in property of PdVSA subject to U.S. jurisdiction are “blocked and U.S. persons are generally prohibited from engaging in transactions with them.” 

Now that the US has moved to sanction Venezuelan oil, the Nicolas Maduro regime is running out of options. In a move that was anticipated after the US recognized the self-declared interim President Juan Guaido as rightful leader of Venezuela. has ratcheted up pressure on Maduro, who has refused to yield power. By cutting off the regime’s personal oil piggy bank the hope is that Maduro will soon be forced to step down. National Security Advisor Bolton And US Treasury Secretary Steve Mnuchin laid out the well thought out sanctions.  John Bolton said that the sanctions will block $7 billion in Venezuelan Assets, and $11 Billion  in oil  payments to Maduro  and that Petróleos de Venezuela must transfer control to Interim President Guaido before sanctions will be lifted. 

The Trump Administration reached out to Gulf Coast refiners to get a handle on how sanctions on Venezuelan oil might impact them. The Trump administration gave them heads up that the sanctions were coming allowing the refiners to buy extra supply and look for alternative sources of oil. To that point Secretary Mnuchin told reporters that a significant amount of Venezuela oil was already in transit and can be accepted by U.S. refineries. He suggested that the sanctions should have a minimum effect on U.S. refineries . He said that the refiners that rely on Venezuelan oil is only about 10% of US refining capacity,(only 10%) and he felt that other refiners could make up the difference. While that may be true in the short run if this goes on for an extended period it will get harder and harder to replace Venezuelan heavy crude oil.  The Trump Administration is always sensitive to rising oil and gas prices wanted to make sure ahead of time this action would not cause a price spike. And while they did avoid a price spike in the short term they still put in a bottom in the longer term until sanctions are at some point lifted.  He also suggested that our  “many of our friends in the Middle East will be happy to make up the supply as we push down Venezuela’s supply.” 

Of course maybe our friends in Saudi Arabia might not be one of them. Saudi Arabia’s Oil Minister  Khalid Al-Falih is promising go beyond compliance over with their agreed upon cuts until oil supply fell back below the five-year average.  “Saudi Arabia will be well below the voluntary cap that we agreed to” and will pump beneath its ceiling “for the full six months, he said in a Bloomberg Television interview in Riyadh. Right now the Saudis quota is 10.2 ans are looking to produce just 10.1 million barrels in February. The Saudi Oil minister also said that he got a promise From Russia that they would be picking up the pace on oil cuts. Bloomberg reported that  Al-Falih thinks the U.S. is currently “way oversupplied” with its own output and with oil from other Western hemisphere producers. “So, as we look at the oil market, and we see it in the price differentials, it’s really not rewarding us to export a lot of oil to the U.S. And as a result, as we adjust, it makes commercial sense that that’s the market that gets the majority of our cuts.” Saudi Arabia and like-minded countries are determined to drive inventories below the five-year historical average, he said. “We’re going to do it by ensuring that supply is below demand for 2019.” It’s still unclear what effect political turmoil in Venezuela will have on crude markets, Al-Falih said. Output from the South American OPEC member has languished amid escalating tensions between forces loyal to President Nicolas Maduro and those supporting opposition National Assembly leader Juan Guaido. 

Other reports show that the Saudis fully expect that Russia will pick up the pace and increase the cuts. CNBC reported that Russia has initially let the Saudis shoulder the bulk of output cuts. The top OPEC ally, which in late 2016 began a cooperation agreement with Riyadh to stabilize oil prices, has often said that $60 per barrel is enough to meet its economic needs. Moscow in December said it would cut production by 50,000 to 60,000 barrels per day in January, whereas Saudi Arabia reportedly pledged to cut by 900,000 barrels a day compared with November levels. Russia pumped a record 11.45 million bpd in December, an increase of 80,000 bpd on the previous month, its Energy Ministry reported in early January. Saudi Arabia’s crude output, by contrast, fell by more than 450,000 bpd from November to December.  If the Russians are still working to cut output along with the Venezuelan oil sanctions should speed overall oil supply tightening. 

China slowdown fears should be yesterday’s news as the market looks ahead to US China trade talks.  The Wall Street Journal reports that “Cabinet-level delegations from the U.S. and China will resume trade negotiations here Wednesday, but early indications are that the two sides remain sharply divided, suggesting a hard slog ahead for a deal to be cut before a March 1 deadline. The Chinese delegation, dozens strong and led by Vice Premier Liu He, plans to offer a big increase in purchases of U.S. farm products and energy, along with modest reforms in industrial policies, said people in China who are closely following the talks. But Beijing will fight U.S. demands for deep structural changes in the Chinese economy, these people said. Those demands have included eliminating subsidies to favored industries, as well as regulatory help and other aid to Chinese companies, especially state-owned enterprises. U.S. officials said a draft negotiating document laying out terms has yet to be assembled. Treasury Secretary Steven Mnuchin said on Monday he expects “significant progress” in this week’s talks, although U.S. Commerce Secretary Wilbur Ross said  last week that the two sides remain “miles and miles” apart.” Any reported progress on a deal will give oil a big boost. China slowdown fears have weighed on oil not so much about their record demand today but fears of a slowdown in the near future. A trade deal will erase those fears. 

The Fed should also provide support as we should get a dovish statement.  

Winter time blues are being balanced with hopes of a warm up leading to whipsaw action in natural gas. Enjoy the volatility and be prepared to play both sides. So with record cold hitting the US just stay in and watch the Fox Business Network where you can learn how to prosper. Get signed up for trade tips updates and more at 888-264-5665 or email me at pflynn@pricegroup.com.

Thanks,

Phil Flynn

 

 

 

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