Commodities Week Ahead: Venezuela, Trade War Paralysis Stifles Oil, Boosts Gold

At Friday’s settlement, U.S. West Texas Intermediate crude still carried a 16 percent gain on the year, after a near 19 percent rise last month, the biggest ever for a January.

But the one-way trade oil bulls had relished through mid-January has disappeared, with modest gains and sharp falls more likely on any given day. Last week’s 5 percent drop was the worst since the year began.

The Venezuelan and Chinese standoffs are key to the quagmire in oil.

In the former case, two weeks after opposition leader Juan Guaido declared himself interim president of the South American country in defiance of sitting leader Nicolas Maduro, the standoff between the two has settled into a kind of stasis. While dozens of countries have recognized Guaido, Maduro continues to control the Venezuelan state apparatus, including the military.

New York-based consultancy Energy Intelligence said in its weekly note:

"For now, the competing presidents appear to be mustering allies and trying to determine their next moves and a prolonged stalemate is likely."

Raul Gallegos, associate director at consultancy Control Risks, added:

“If you’re expecting Maduro to leave on a plane for Cuba in a couple of weeks, you’re wrong. That’s not happening.”

The stalemate also means the sanctions imposed by the Trump administration on the Maduro-controlled PDVSA oil company have had limited impact on crude prices so far. U.S. sanctions against Venezuela entail two additional headaches for Trump: dealing with a Saudi Arabia that’s determined to boost oil prices just as the U.S. economy is recovering, and continuing his one-upmanship over Iran.

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Trump is counting on Saudi Arabia’s help to fill any oil supply gap caused by restrictions against PDVSA, while at the same time trying to prevent the Saudi-controlled OPEC group from formalizing a pact with Russia that would lift crude prices.

U.S. senators from different parts of the political spectrum have put together a bill for the Justice Department to sue OPEC members for antitrust violations if the cartel tries to formalize its cooperation pact with Russia.

At the same time, refiners on the U.S. Gulf Coast squeezed by the absence of Venezuelan oil have been told by White House officials not to expect any crude release from the Strategic Petroleum Reserve because they are "certain" the Saudis will boost crude exports to the U.S. in coming weeks, energy reporting service S&P Global Platts said.

Platts pointed out that Saudi officials have indicated no plans of making up for any shortfall in Venezuelan supply, as the OPEC cartel they closely influence has been cutting output to boost prices.

For oil specifically, here’s what’s at stake from the Venezuela-Iran crises:

U.S. sanctions had earlier taken 1 million bpd of Iranian crude off the market and could hit another tranche if waivers end in May — meaning U.S. action could remove close to 2 million bpd of supply in total. Throw in other outages — around Nigeria’s elections later this month or Libya’s intensifying power struggle — and oil prices could come under serious pressure.

Offsetting all this is some 7 million Venezuelan barrels stranded at sea, with no certainty on who would pay for them.

Phil Flynn, energy analyst at The Price Futures Group brokerage in Chicago, summed it up: “No one really knows how this is going to end.”

Back to the Chinese case, a new round of trade talks begins in Beijing on Monday, led by Deputy U.S. Trade Representative Jeffrey Gerrish, before higher principal-level discussions featuring U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin follow later in the week.

U.S. negotiators are pressing China on longstanding demands, including stealing intellectual property and forcing U.S. companies to share their technology with Chinese firms.

Beijing needs to meet a March 1 deadline for a trade deal before U.S. tariffs on $200 billion worth of Chinese imports rise to 25 percent from 10 percent.

U.S. President Donald Trump said last week he did not plan to meet his Chinese counterpart Xi Jinping before that deadline, dampening hopes for a quick resolution.

The missed U.S-China summit opportunity has helped gold finish on the positive side of $1,300. But overall, the U.S. currency has been a de facto hedge to the trade war, rising a fifth straight time on Friday.

Written By: Investing.com