Monday, June 11, 2018

Venezuela's OPEC Problem

OPEC meets on June 22. The Venezuelan government is asking that it denounce sanctions:

“I kindly request solidarity and support from our fellow members,” Venezuelan Oil Minister Manuel Quevedo wrote in a copy of the letter seen by Bloomberg News. OPEC should discuss “the constraining effects of unilateral sanctions imposed by the United States of America, which represent an extraordinary aggression, financially and economically, for our national oil industry’s operations and the stability of the market.”
In particular, Venezuela naturally does not want prices to decrease. Meanwhile, the United States is asking Saudi Arabia to increase production precisely to keep prices down while it sanctions Iran.

But, Saudi Arabia and Russia probably can’t simply allot themselves more production allowances without risking a full-blown revolt from the rest of the group. So, they will likely need to allocate more production to everyone, but even the act of deciding on a formula will also be highly contentious. Still, it will be somewhat of a formality for most members since they can’t increase production anyway.
Nonetheless, Russian output is already increasing. In part, Russia just wants lower prices but it also does not want OPEC's share of output to decrease, which would happen if OPEC went down just as U.S. production continued to increase.

This is pressing for Nicolás Maduro for existential reasons. It is pressing for Donald Trump for political reasons, particularly the midterm elections. This is not new--two years Barack Obama pushed OPEC in the same way, and it ticked Maduro off.

Oil markets think production will indeed increase. This would be bad news for the Venezuelan government, which needs prices to stay as high as possible since output is declining due to incompetence (oh sorry, I meant because of the empire).


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