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Energy- Oil Market Update

Authors: Jerusan Jegatheeswaran Co-VP Research, Dragos Cada Co-VP Research, Alice Li Research Analyst, Amy Li Research Analyst, Helen Feng Research Analyst

Oil Prices Rise Following Latest U.S. Sanctions on Venezuela

U.S. oil prices hit a two-month high on Wednesday, January 30th following Trump Administration’s newly imposed sanction on Venezuela’s Petróleos de Venezuela SA and a bullish weekly report from the Energy Information Administration showing falling U.S. gasoline inventories for the first time in nine weeks.

On Wednesday, U.S. oil standard West Texas Intermediate (WTI) futures closed 1.7% higher at $54.23 a barrel, its highest closing price since Nov. 21, 2018 on the New York Mercantile Exchange. Global benchmark Brent crude closed 0.5% higher at $61.65 a barrel on London’s Intercontinental Exchange.

December 2018 Oil Price Low

At the beginning of October 2018, oil prices peaked at multi-year highs. However, on Friday Dec. 21st, 2018, West Texas Intermediate crude oil closed at $45.59, lowest closing price since January 2016. Brent crude also fell to $52.79 midday, its lowest level since September 2017. Both benchmarks steeply lost over a third of their value in two months, due to sustained oversupply in the U.S. The United States pumped 11.6 million barrels per day of crude oil, and became the world’s largest crude producer ahead of Saudi Arabia and Russia. Global inventories were filling up while demand was falling. The biggest oil producers in OPEC agreed to reduce production by 1.2 million barrels per day to raise prices back up. The cuts have just begun this January.

US Sanctions on Venezuela State-Owned Oil Giant

On Wednesday, U.S. imposed sanctions on Petróleos de Venezuela SA (PdVSA), prohibiting U.S. firms from importing Venezuelan crude beyond what is already in transit. This is a culmination of a two year campaign to empower the opposition leader Juan Guaidó and debilitate the government of President Nicolás Maduro. This powerful action is meant to force Mr. Maduro to give up control and allow for new elections. Just last week, President Trump’s recognized Mr. Guaidó as the legitimate head of state. The Treasury Department stated that after “the expeditious transfer of control to the Interim President or a subsequent, democratically elected government”, PdVSA and its subsidiaries could be released from the rules.

Impact of Sanctions on Venezuela Government and Oil Prices

The United States is the biggest client of Venezuela’s heavy crude oil, accounting for about half the country’s oil exports. Trump’s national security adviser, said that if the sanctions are maintained throughout the year, it would block $7 billion in assets and remove $11 billion of export revenue from the government of Mr. Maduro. Under the sanctions, assets of PdVSA are frozen, and U.S. firms are required to deposit their pay for oil in accounts controlled by the opposition leader Juan Guaidó. John Bolton. Furthermore, investors and banks stopped trading bonds issued by PdVSA to comply with the sanctions. The sanctions are likely to lower U.S. supplies of crude oil by 500,000 barrels a day, which is the current import level. This relieved some worries of global oil oversupply and led oil price to rise after Wednesday’s announcement.

Crude Oil Prices Over The Past Two Months

Bullish Weekly Report

The Energy Information Administration published a weekly report with surprisingly positive news. Last week, crude stockpiles rose by less than 1 million barrels, compared to expectations of 3.1 million barrels. Gasoline inventories fell unexpectedly for the first time since mid-November by 2.2 million barrels. Signs for an increase in fuel demand came as well from a 2.8% slowdown in refining activity, dropping to a 90.1% capacity utilization rate. However, amidst the positive news, there are still worries that the crude oil demand could be weak if the U.S.-China trade war slows economic growth. Nonetheless, this weekly report coupled with the new sanctions on Venezuela pushed oil prices to a two-month high.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.