Tug of war over global oil

Supply, demand and price

Tug of war over global oil

The world’s crude-oil supply continues to grow, despite OPEC’s moves to control it; Venezuela’s “hunger bonds” problem; U.S. employers hang on to their most important non-renewing resource

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Global crude oil: Tug of war One key measure of the tension between supply and demand last week was the price differential between Brent and West Texas Intermediate (WTI) crude-oil -- $3.381 on Friday ($51.60 – $48.22), wider than in March, when OPEC’s December 2016 production discipline broke down. The differential reflects increased production by the U.S. and a recovery of Canadian output, which held WTI prices back vs. Brent, a measure of European pricing.

Another measure can be seen in industry announcements. The International Energy Agency reported oil supply rose by 520,000 barrels (bbl) a day in July, to 98.16 million bbl/day, which was also 500,000 bbl above last July’s figure. The IEA also reported OPEC’s output rose by 230k bbl/day to a new high of 32.84 million bbl/day—in line with OPEC’s own announcement. The IEA confirmed OPEC’s compliance with its own agreement fell to 75%, the lowest level this year, due to higher output from Iran, Equatorial Guinea, Gabon, Algeria and the United Arab Emirates.

But despite the increase in supply, Brent crude has remained above the psychologically important $50 level since mid-July, causing the IEA to renew its plea for a market more evenly balanced between demand and supply.

Venezuelan bonds: Not at any price? Credit Suisse took the unusual step of banning its traders from dealing in a particular batch of Venezuelan bonds, not wanting to be seen as supporting that country’s increasingly embattled government. Venezuela’s state-owned oil company, PDVSA, issued bonds earlier this year to help it invest in its own badly neglected production infrastructure. The issuance was greeted by protests both within and outside the country, and became widely known as “hunger bonds” because of the country’s widespread food shortages, which the bonds would in no way alleviate. Goldman Sachs and Nomura, two purchasers of these bonds, were viewed unfavorably by the press and pro-democracy forces.

Adding to the geopolitical issues facing the country, it appears that PDVSA has been the beneficiary of billions of dollars from Russia and Russia’s oil company, Rosneft, in exchange for future deliveries of oil.  The Venezuelan company has also been negotiating selling ownership interests in a number of productive petroleum projects to Rosneft, thereby raising cash that would be available to pay the interest on the newly issued bonds, as well as on other outstanding obligations. This is over and above the agreements with China to buy some of Venezuela’s flagging oil exports.

U.S employment: Demand vs. supply The most recent monthly employment report showed Americans are less likely to be laid off than at any point in at least 50 years. For every 10,000 people in the workforce, 66 claimed new unemployment benefits in July. The previous low point, 83 per 10,000, was reached in April 2000, near the height of the tech boom. According to one employment benefits consulting firm, the reasons are clear: ”If you have a big segment of the workforce winding down due to retirement, why would you let anyone go?”



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