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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Oil markets weigh chances of Venezuelan regime change
Ole Hansen
Head of Commodity Strategy
Summary: The oil market's attention has shifted from crude stocks to the dramatic political situation unfolding in Venezuela where opposition leader Juan Guaido has declared himself acting president with several countries including the US and Brazil recognising him as head of state.
WTI Crude oil remains stuck in a $50 to $55/barrel range with ongoing production cuts from the Opec+ group of nations being offset by global growth worries. Earlier in the week, the International Monetary Fund lowered its global economic forecasts for 2019 and 2020 in response to risks including trade tensions and rising interest rates. However the reduction in global growth from 3.7% to 3.5% was viewed as optimistic given the impact of a prolonged US government shutdown together with a weaker outlook for Europe and not least China, which last year experienced the slowest rate of expansion in almost 30 years.
The Energy Information Administration, the International Energy Agency and Opec all kept their 2019 outlooks for global demand growth stable in January's oil market reports. Downward revisions, however, are now likely to surface following the mentioned downgrade from the IMF and the OECD’s composite leading indicator, which in November dropped to 99.3 points, a six-year low and a level that has previously signaled recession.
While the weakness during the past 24 hours was driven by forecasts for rising crude and product stocks, the market's attention has since shifted to Venezuela. President Maduro’s dreadful regime, which has driven the population into poverty and misery, is finally seeing a strong challenge from Juan Guaido, the elected leader of the National Assembly. He has declared himself acting president under article 233 of the Constitution, which authorises him to become interim president in the event of “serious misconduct” on the part of the elected president. Shortly after declaring himself as head of state, the US and other nations, including Canada and Brazil, recognised him as the rightful leader.
Maduro responded by cutting diplomatic relations with the US and ordering all personnel to leave within 72 hours. This was rebuffed by the US State Department with Secretary of State Michael Pompeo issuing the following tweet with a link to the official statement:
The Energy Information Administration, the International Energy Agency and Opec all kept their 2019 outlooks for global demand growth stable in January's oil market reports. Downward revisions, however, are now likely to surface following the mentioned downgrade from the IMF and the OECD’s composite leading indicator, which in November dropped to 99.3 points, a six-year low and a level that has previously signaled recession.
While the weakness during the past 24 hours was driven by forecasts for rising crude and product stocks, the market's attention has since shifted to Venezuela. President Maduro’s dreadful regime, which has driven the population into poverty and misery, is finally seeing a strong challenge from Juan Guaido, the elected leader of the National Assembly. He has declared himself acting president under article 233 of the Constitution, which authorises him to become interim president in the event of “serious misconduct” on the part of the elected president. Shortly after declaring himself as head of state, the US and other nations, including Canada and Brazil, recognised him as the rightful leader.
Maduro responded by cutting diplomatic relations with the US and ordering all personnel to leave within 72 hours. This was rebuffed by the US State Department with Secretary of State Michael Pompeo issuing the following tweet with a link to the official statement:
The prospect of regime change has been lurking for a long time as Venezuela continued its descent into the abyss. Maduro, just like his predecessor Hugo Chavez, has been kept in power by support from the country’s poorer areas but yesterday’s mass demonstrations where led by protests over failed public services, food scarcity and rising prices.
The outcome of this uprising could have a major impact on the global oil market. The deteriorating economic outlook and lack of foreign investments in its ageing oil industry have triggered a collapse in production during the past few years. Venezuela’s abundant heavy crude reserves are just what the world needs at a time where the US barrel is getting lighter and lighter due to rising shale production.
A political and potentially a military stand-off with the US could trigger another drop in production while raising geopolitical tensions, not least considering the support Maduro enjoys in Moscow and Beijing. The longer-term outlook, should Maduro be deposed, could see production eventually return to its former level and beyond. In the short-term, the US may respond to an escalated situation by cutting imports of Venezuelan crude, currently around 500,000 barrels/day.
The outcome of this uprising could have a major impact on the global oil market. The deteriorating economic outlook and lack of foreign investments in its ageing oil industry have triggered a collapse in production during the past few years. Venezuela’s abundant heavy crude reserves are just what the world needs at a time where the US barrel is getting lighter and lighter due to rising shale production.
A political and potentially a military stand-off with the US could trigger another drop in production while raising geopolitical tensions, not least considering the support Maduro enjoys in Moscow and Beijing. The longer-term outlook, should Maduro be deposed, could see production eventually return to its former level and beyond. In the short-term, the US may respond to an escalated situation by cutting imports of Venezuelan crude, currently around 500,000 barrels/day.
Later today and one day delayed due to Monday’s Martin Luther King, Jr. holiday, the EIA will publish its Weekly Petroleum Status Report. Last night the American Petroleum Institute published numbers which showed strong rises in both crude and product stocks.
If confirmed by the EIA it would add further pressure on refinery margins that are already lower following weeks of rising product stocks. Last week, total inventories of motor gasoline reached 256 million barrels and a record level is likely to be reached before the seasonal peak in mid-February.
The first month WTI to gasoline spread trades at $6.25/bbl, the lowest since October 2013 and well below the five-year seasonal average above $14/bbl.
Rising gasoline stocks and falling refinery margins at a time of seasonal slowdown in refinery demand could cause a price negative rise in crude stocks.
The first month WTI to gasoline spread trades at $6.25/bbl, the lowest since October 2013 and well below the five-year seasonal average above $14/bbl.
Rising gasoline stocks and falling refinery margins at a time of seasonal slowdown in refinery demand could cause a price negative rise in crude stocks.
With Venezuelan uncertainty in mind, the outlook for oil remains one of rangebound trading, predominantly within the shown area below. Any geopolitical spike may prove short-lived given the current risks to growth.
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