Why oil prices dipped on Chavez’s death

12:09 6/3/2013 - Πηγή: BankWars

Hugo Chavez is dead. He’s been dying for a long time. So has Venezuela’s oil industry. And that’s the main reason the oil market reacted to the death of Venezuela’s president with little more than a shrug.

Following news of Hugo’s death, April crude-oil futures

drifted lower to $90.72 a barrel on Globex, down 10 cents from the $90.82 settlement price earlier in the day on the New York Mercantile Exchange.

The muted response reflects Venezuela’s waning influence on the global energy market.

That’s not to dismiss its reserves. Chavez’s government has estimated Venezuela’s untapped oil reserves at nearly 300 billion barrels. The United States Geological Survey puts them at closer to 200 billion barrels. Either way, Saudi Arabia is the only country sitting on more oil than Venezuela.

But under Chavez’s 14-year rule, Venezuela’s oil production fell 30%, from 3.5 million barrels per day to 2.5 million. Behind the decline lies a botched effort to nationalize the nation’s oil industry, which left state oil company PDVSA woefully underfunded, drove foreign investment out of the country, and left its aging energy infrastructure with a severe shortage of qualified personnel to maintain it.

Meanwhile, production elsewhere in the world has surged, led by the boom in shale-oil drilling in the United States.

There was a time not many years ago when mere rumors of supply disruptions or output cuts in Venezuela would push oil prices sharply higher as U.S. refiners scrambled to find replacement barrels in the spot market. These days, refiners rely far more on output from deepwater rigs in the U.S. Gulf and barrels from newly-opened shale oil fields in Texas and North Dakota.

That said, the country is entering a potentially turbulent time. Over the next 30 days the country must elect a new leader, which throws the nation’s oil policy into question. A return to power by Chavez’s leftist regime would presumably mean more of the same. Victory by the conservative opposition party would almost certainly push the country to revive its ailing oil industry, which still accounts for about 95% of its export revenue. And reviving the industry means putting more barrels of oil on the global market which, of course, would be bearish for prices.

So the oil market’s long-term view is unlikely to be shaped by short-term political turmoil in Caracas. And that explains the muted reaction in oil prices tonight to the death of Hugo Chavez.

Πηγή: MarketWatch