Oil Back On The Move

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.

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