Oil started the new year on the front foot, albeit only just. Brent and WTI eked out respective gains of 25 cts/bbl and 12 cts/bbl on the first day trading of 2020. Nevertheless, underlying sentiment remains well supported by trade optimism and deeper OPEC-led cuts which took effect at the start of this month. There is, however, a fly in the ointment, namely Russia’s lax attitude to production restraint. Latest output figures showed supply from the non-OPEC heavyweight averaged a post-Soviet record high of 11.25 mbpd in 2019. This is in spite of the OPEC+ agreement to which it is bound by. Needless to say, doubts are rife that it will comply with even more stringent quotas in the first quarter of this year.

Aside from Russia’s intransigence, the latest upswing in Middle East tensions is also garnering attention. Yesterday’s subdued session is giving way to a price explosion this morning following a flare-up in the geopolitical risk premium. In the early hours of this morning, Iran’s top military commander Qasem Soleimani was killed at Baghdad airport in a drone strike ordered by President Trump. Soleimani was the mastermind behind Iran’s military operations in the Middle East and the killing comes days after protesters attacked the US embassy in Baghdad. Iran’s Supreme Leader has vowed “severe revenge”. Tensions are running high and the stage is set for harsh retaliation by Iran and its proxies in the region. Put simply, this may prove to be a turning point that could further destabilise the Middle East.

New year, new groove?

Cast your mind to this time last year. Venezuela was thrown into a Presidential crisis after the results of the 2018 elections were deemed illegitimate. Protests were widespread and international condemnation was strong. And so began a policy of “maximum pressure” on the Maduro regime by the Trump administration. Tough sanctions were imposed on the country to put pressure on President Maduro to step down. Many were quick to predict his imminent downfall, yet the incumbent held onto power. Such resilience was also on display across Venezuela’s oil patch.

Output from the embattled OPEC nation has been in long-term decline. Production averaged 1.9 mbpd and 1.3 mbpd in 2017 and 2018, respectively, according to OPEC secondary sources. Last year, however, saw supply stabilising at around 700,000 bpd. Faced with this lull in downward pressures, the US tightened the sanctions screw last August on the state-run oil company PDVSA. The new measures threatened secondary sanctions on any buyer or carrier of Venezuelan oil. Crucially, US refiners were now effectively barred from importing Venezuelan crude. This was a big blow for Venezuela’s oil industry given that it was now locked out of its biggest market. Moreover, other major buyers began giving the Latin American producer the cold shoulder. Most notably was China’s CNPC which had up until then been a key buyer of Venezuelan crude.

Even so, in spite of these significant setbacks, Venezuela’s output continued to show signs of recovery. Indeed, production rose for a second consecutive month in November, according to OPEC secondary sources. Underpinning this mini-revival was a boost in Venezuela’s portfolio of non-American customers. The OPEC member changed its output slate to heavier crudes favoured by Asian customers and limited production of lighter crude typically purchased by US refiners. Singapore and Malaysia subsequently increased their intake of Venezuelan crude. India also remerged as an important destination for Venezuelan oil following a multi-month hiatus. Simultaneously, Russia’s state-run energy company Rosneft increased its intake of Venezuela’s oil shipments, though partly as repayment for PDVSA debts. All the while, acting as a further boon for Venezuela’s oil exports is the use of “invisible” tankers. Faced with shipping sanctions, vessels would switch off their transponders when approaching Venezuelan waters. This practice of going dark allowed tankers to avoid penalties and, more importantly, enabled Venezuela to keep the oil taps open.

Alongside the stabilisation of Venezuela’s flagship industry is a mildly improving economic backdrop. The country’s economy remains in the doldrums but there are signs that the worse may be over. For instance, rampant hyperinflation appears to be easing. Annual inflation has dropped from nearly 3 million percent at the beginning of 2019 to 13,475% in November, according to the opposition-controlled National Assembly. Furthermore, the IMF expects Venezuela’s economy to shrink by 10% this year compared to 35% in 2019. That said, there is clearly no economic miracle on the horizon. Moreover, the prospect of a political transition and therefore sanction relief remains a distant reality. This, in turn, should keep Venezuela’s economy under the cosh.

As for the country’s oil outlook, you could be tempted to say that the long-running decline has bottomed out. Yet this will depend on two key upcoming events. The first is this weekend’s parliamentary vote. Should the outcome cement Nicolas Maduro’s grip on power, it will give the White House a perfect excuse to ratchet up pressure on PDVSA and its international partners. The second is a decision later this month by the Trump administration on whether to renew Chevron’s waiver to continue operating in Venezuela. The rumour mill is in full swing that the country’s output could plunge by half if the waiver is allowed to expire. Venezuela has thus far done well to weather the sanction storm but turbulent waters still lie ahead.