Oil, near three-month highs, is continuing to move higher on China trade talk hopes and President Trump’s increasingly hardline on Venezuela. Not only did the Trump Administration add sanctions to many of Venezuelan Military leaders, he decried the evils of socialism. “The twilight hour of socialism arrived in our hemisphere. The days of socialism and communism are numbered, not only in Venezuela but in Nicaragua and in Cuba as well.” Trump also touted progress on the U.S. China trade talks.

For oil traders, of course, the harder line on Venezuela is causing traders to fret about the ongoing loss of Venezuelan heavy oil, especially with the reports of the outage at the Saudi Aramco’s Safaniyah oilfield, the world's largest offshore oilfield, last week. OIL Price reporter Tsvetana Paraskova wrote that “refiners around the world are looking for alternatives to Venezuela’s heavy and extra heavy crudes, but Venezuelan grades have few suitable substitutes, Reuters market analyst John Kemp writes. In addition, heavier, higher-sulfur grades are more difficult to process, and refiners must first see if their refineries will be suited to process substitutes of Venezuelan grades. The closest replacement to Venezuela’s Merey grade, for example, would be Brazil’s Marlim, Mexico’s Maya, Canada’s grades Bow River and Cold Lake, or Iraq’s Basra Heavy, according to Kemp. The sanctions on Venezuela—combined with the U.S. sanctions on Iran and with OPEC’s cuts—have been removing medium to heavy crudes from the market. This has led to the point that the benchmark Middle East prices for higher-sulfur sour grades have recently increased to above the price of Brent Crude in a rare occurrence in the oil market, where lower-sulfur, sweet grades from the Atlantic basin and the North Sea are typically more expensive than the sour grades from the Middle East or Latin America.”

The loss of Venezuelan oil is also playing around with the Brent WTI spread. The WTI was doing better against Brent as the market tries to juggle not only the impact of supply and demand but also juggle the impact for the different kinds of crude oil blends. The dynamics surrounding the refining issues changes the narrative as the market had previously bought into the false narrative of dramatically weakening demand. While demand has softened it does not compare to the OPEC Production cuts, which are exceeding expectations.

Market Watch Reports that  “Saudi Arabia’s production cuts by more than the required level also serve to offset the lack of compliance by countries like Iraq,” said analysts at Commerzbank in a daily note. The cartel’s joint ministerial monitoring committee, or JMMC, which monitors OPEC members’ conformity levels to the cut agreement, is due to meet in Azerbaijan on March 18. Crude-oil volumes shipped from major producer Saudi Arabia fell in the first half of February to 6.2 million barrels a day, down 1.3 million barrels a day on the previous month, according to data published by ship tracking firm Kepler on Monday. The data confirmed comments from the Kingdom’s oil minister who said earlier this month that the country would further cut output. Data from ship-tracking firm Kepler showed fewer shipments were destined for the U.S., India, Thailand and South Korea in particular. “There is also evidence that Saudi Arabia has increased refinery throughput so far through February,” said Kepler, adding that departures of oil products have spiked to 1.56 million barrels a day, up 0.19 million barrels in the month.” The oil market is coming to grips with a much better fundamental outlook. The Oil price crash pessimism overtook all the markets at the end of last year. The truth is that the global economy was not crashing and the odds of the U.S. going into a recession are slim to none. We still suggest that users and buyers of oil and products be prepared for possible significant upside moves.