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Venezuela’s chaos Can Spark Oil Price Increase

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  • Venezuela’s chaos Can Spark Oil Price Increase

Deepening turmoil in Venezuela could fuel a rise in oil prices, a feat the Organisation of the Petroleum Exporting Countries (OPEC) has been striving to achieve through oil production cuts.

According to MarketWatch report, the South American nation, home to the world’s largest oil reserves, voted to give President Nicolás Maduro’s government powers to redraft the constitution, sparking clashes between protesters and state security forces. The opposition charges the vote could mark the end of democracy in Venezuela.

What the chaos portends for the oil industry, the report said: “The “possibility of chaos” in the country is the “only true element that would change the dynamic for crude,” Tom Kloza, global head of energy analysis at Oil Price Information Service, said.

“If “Vendemonium,” as he dubbed it, comes to pass, it could lift West Texas Intermediate crude-oil prices up from their current trading range of roughly $42 to $53 a barrel, said Kloza.

WTI crude, the U.S. benchmark, traded just below $50 a barrel last week, contributing to a 8.7 per cent weekly gain fueled in part by data showing a fourth-straight weekly decline in U.S. crude inventories, as well as pledges by some OPEC members to curb exports.

But WTI crude and Brent, the global benchmark, still trade about eight per cent lower year to date, even as a production-cut agreement by OPEC members and other major non-cartel nations such as Russia, that began at the start of the year, has seen historically high compliance and has been extended through March of next year.

“For oil, there is “ongoing concern about stability as the opposition gains strength and the chance that the U.S. will ratchet up pressure by halting imports,” James Williams, energy economist at WTRG Economics told MarketWatch. Venezuela is among the top suppliers of crude to the U.S., though its production has declined since last year on the heels of civil unrest.

“Venezuela’s oil output has dropped over the last year. A long strike by Venezuelan national oil firm’s workers was to blame for the huge drop in 2003. The chaos intensified last week with the U.S. State Department ordering family members of U.S. embassy employees in Caracas to leave the country.

“If we are removing diplomats, it is certainly an indicator of the intent to embargo oil from Venezuela,” said Williams. The U.S. had placed sanctions last week on 13 high-ranking Venezuelan officials for alleged corruption, among other offences, according to The Wall Street Journal.

“If Maduro installs puppeteers who more or less make up new constitutional rules, it really puts an already beleaguered (U.S. President Donald Trump) administration in a tough spot,” said Kloza.

Still, if the Trump administration “tries to put financial handcuffs” on Venezuela’s state-owned Petróleos de Venezuela, SA, (PdVSA), “it might provide the catalyst for the oil market and for consumer gasoline prices to rise appreciably,” Kloza said.

And the impact could be far reaching, with “financial handcuffs or penalties” potentially signaling “incredible turbulence for Citgo,” he said.

Citgo Petroleum Corporation, the Venezuela-owned American refiner, employs thousands of U.S. citizens and is “instrumental in ensuring adequate supply of gasoline, diesel fuel and jet fuel,” said Kloza.

In Russia, integrated oil firm Rosneft, which is majority owned by the country’s government,” might ultimately gain a large ownership stake in Citgo should its parent company and country default,” he said.

Rosneft received 49.9 per cent of the equity in PdVSA unit Citgo late last year as collateral for a $1.5 billion loan to PdVSA. Reuters recently reported that Rosneft is in talks with PdVSA for a fuel-supply deal and stakes in Venezuela-based oil and natural-gas fields.

For now, traders can just “hope that Trump only target individuals, not oil” when it comes to sanctions, said Williams.He also warned that the market could see a reaction from the U.S. that is “more complex than a simple halt in imports.

Meanwhile, Kloza said that if Venezuelan crude continues to flow, there is “limited upside” for the oil market “despite the large inventory draws that have happened and will continue to happen for some time.”

“Without ‘Vendemonium,’ we’re destined to remain in a low-price oil environment into 2018 or later,” said Kloza.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Energy

Egbin Decries N388B NBET Debt, Idle Capacity

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Egbin-Power-Plant - Investors King

Egbin Power Plc, the biggest power station in Nigeria, has said it is owed N388bn by the Nigerian Bulk Electricity Trading Plc for electricity generated and fed into the national grid.

The company disclosed this on Tuesday during an oversight visit by the Senate Committee on Privatisation, led by its Chairman, Senator Theodore Orji, to the power station, located in Ikorodu, Lagos.

The government-owned NBET buys electricity in bulk from generation companies through Power Purchase Agreements and sells it to the distribution companies, which then supply it to the consumers.

The Group Managing Director, Sahara Power Group, Mr. Kola Adesina, told the lawmakers that the total amount owed to Egbin by NBET included money for actual energy wheeled out, interest for late payments and available capacity payments.

Egbin is one of the operating entities of Sahara Power Group, which is an affiliate of Sahara Group. The plant has an installed capacity of 1,320MW consisting of six turbines of 220 megawatts each.

The company said from 2020 till date, the plant had been unable to utilize 175MW of its available capacity due to gas and transmission constraints.

Adesina said, “At the time when we took over this asset, we were generating averagely 400MW of electricity; today, we are averaging about 800MW. At a point in time, we went as high as 1,100MW. Invariably, this is an asset of strategic importance to Nigeria.

“The plant needs to be nurtured and maintained. If you don’t give this plant gas, there won’t be electricity. Gas is not within our control.

“Our availability is limited to the regularity of gas that we receive. The more irregular the gas supply, the less likely there will be electricity.”

He noted that if the power generated at the station was not evacuated by the Transmission Company of Nigeria, it would be useless.

Adesina said, “Unfortunately, as of today, technology has not allowed the power of this size to be stored; so, we can’t keep it anywhere.

“So, invariably, we will have to switch off the plant, and when we switch off the plant, we have to pay our workers irrespective of whether there is gas or transmission.

“Sadly, the plant is aging. So, this plant requires more nurturing and maintenance for it to remain readily available for Nigerians.

“Now, where you have exchange rate move from N157/$1 during acquisition in 2013 to N502-N505/$1 in 2021, and the revenue profile is not in any way commensurate to that significant change, then we have a very serious problem.”

He said at the meeting of the Association of Power Generation Companies on Monday, members raised concern about the debts owed to them.

He added, “All the owners were there, and the concern that was expressed was that this money that is being owed, when are we going to get paid?

“The longer it takes us to be paid, the more detrimental to the health and wellbeing our machines and more importantly, to our staff.”

Adesina lamented that the country’s power generation had been hovering around 4,000MW in recent years.

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Crude Oil

Oil Rises on U.S. Fuel Drawdowns Despite Surging Coronavirus Cases

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U.S. Crude Oil - Investors King

Oil prices climbed on Wednesday after industry data showed U.S. crude and product inventories fell more sharply than expected last week, reinforcing expectations that demand will outstrip supply growth even amid a surge in Covid-19 cases.

U.S. West Texas Intermediate (WTI) crude futures rose 48 cents, or 0.7%, to $72.13 a barrel, reversing Tuesday’s 0.4% decline.

Brent crude futures rose 34 cents, or 0.5%, to $74.82 a barrel, after shedding 2 cents on Tuesday in the first decline in six days.

Data from the American Petroleum Institute industry group showed U.S. crude stocks fell by 4.7 million barrels for the week ended July 23, gasoline inventories dropped by 6.2 million barrels and distillate stocks were down 1.9 million barrels, according to two market sources, who spoke on condition of anonymity.

That compared with analysts’ expectations for a 2.9 million fall in crude stocks, following a surprise rise in crude inventories the previous week in what was the first increase since May.

Traders are awaiting data from the U.S. Energy Information Administration (EIA) on Wednesday to confirm the drop in stocks.

“Most energy traders were unfazed by last week’s build, so expectations should be high for the EIA crude oil inventory data to confirm inventories resumed their declining trend,” OANDA analyst Edward Moya said in a research note.

On gasoline stocks, analysts had expected a 900,000 barrel decline drop in the week to July 23.

“The U.S. is still in peak driving season and everyone is trying to make the most of this summer,” Moya said.

Fuel demand expectations are undented by soaring cases of the highly infectious delta variant of the coronavirus in the United States, where the seven-day average for new cases has risen to 57,126. That is about a quarter of the pandemic peak.

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Crude Oil

Oil Price Rises To $74.70 Despite Delta Variant

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Oil prices - Investors King

Oil price inched higher on Tuesday despite the fast spreading COVID-19 Delta variant. Brent crude oil, against which Nigerian oil is priced gained, $0.20 or 0.27 percent to $74.70 per barrel on Tuesday at 12:05 am Nigerian time.

Delta variant is spreading in China, the world’s largest importer of crude oil, forcing crude oil investors to start cutting down on their oil demand projections.

The Delta variant is still spreading and China has started to clamp down on teapots, so their import growth would not be that much,” said Avtar Sandu, a senior commodities manager at Singapore’s Phillips Futures, referring to independent refiners.

Strong U.S. demand and expectations of tight supplies have helped crude oil to recover from a 7 percent slump recorded last Monday to mark their first gains in two to three weeks last week.

Global oil markets are expected to remain in deficit despite a decision by the Organization of the Petroleum Exporting Countries (OPEC) and allies, collectively known as OPEC+, to raise production through the rest of the year.

There is seemingly a battle within the energy complex between the prevailing supply deficit engineered by OPEC+ and the threat of the COVID-19 Delta variant in regions with low vaccination rates,” said StoneX analyst Kevin Solomon.

The slow take-up of vaccinations will continue to limit some upside in oil demand in those regions, and there will be intermittent spells in the recovery in the coming months.

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