Oil Slides as Economic and Supply Fears Offset Venezuela Risk

Oil fell as a darkening outlook for the global economy offset the risk of American sanctions on OPEC member Venezuela’s crude.

March futures in New York dropped 0.9 percent, extending Wednesday’s decline. Germany’s industrial slump worsened at the start of 2019, while an extended shutdown of the U.S. government could wipe out the country’s economic growth in the first quarter. The White House recognized Juan Guaido as the interim president of Venezuela on Wednesday, a move that carries the risk of further disruption to the nation’s oil exports.

The prospect of swelling supplies and weaker economic growth is weighing on prices. The mood has darkened after crude markets got off to their best start to a year since 2001 on optimism output cuts by the Organization of Petroleum Exporting Countries and its allies will balance the market. However, bullish sentiment could return if the U.S. were to impose sanctions on Venezuelan crude, a move that would hit some Gulf Coast refiners hard and force them to seek out alternative supplies.

“With the U.S. now clearly taking sides with the opposition, changes might be in the making,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. “This would deal a further blow to U.S. refiners that rely on whatever Venezuelan oil is still available and as such would be short-term bullish.”

West Texas Intermediate crude for March delivery fell 47 cents to $52.15 a barrel on the New York Mercantile Exchange at 7:38 a.m. The contract fell 39 cents to $52.62 a barrel on Wednesday.

Brent for March settlement slid 69 cents to $60.45 a barrel on the London-based ICE Futures Europe exchange. The contract dropped 36 cents to $61.14 on Wednesday. The global benchmark crude was at an $8.31 premium to WTI.

Zero Expansion

There’s a possibility of zero economic expansion this quarter if an ongoing partial government shutdown in the U.S. extends through March, according to White House Council of Economic Advisers Chairman Kevin Hassett. “Humongous” growth would follow once federal agencies reopen, he said in a CNN interview Wednesday.

Meanwhile, U.S. crude inventories rose 6.55 million barrels last week, the American Petroleum Institute was said to report. Energy Information Administration data due Thursday is forecast to show stockpiles dropped 750,000 barrels last week, according to a Bloomberg survey.

In Venezuela, opposition leader Guaido was recognized as the acting president by several governments in addition to the U.S. on Wednesday. The leftist regime of Nicolas Maduro responded by breaking diplomatic relations with America, giving diplomats 72 hours to leave the country.

Also read: Two Venezuelan Presidents Raises Questions About OPEC Leadership

The Trump administration has drafted a slate of sanctions but hasn’t decided whether to deploy them, according to people familiar with the matter. Earlier this month, White House officials warned U.S. refiners that sanctions were being considered, and advised them to seek alternative sources of heavy crude. Some processors worried about restrictions experimented with alternatives last year before ultimately returning to Venezuelan crude.

Other oil-market news: While the current situation in Venezuela is a  “tad bullish” for oil prices if it generates more disruptions, supply changes may be ahead in the next 18 months with a new regime, Goldman Sachs Group Inc. analyst Jeffrey Currie said. While  Venezuelan oil production is set to drop by 300,000 to 500,000 barrels a day this year, the outage number may rise by several hundred thousand barrels if the U.S. imposes energy sanctions, RBC Capital Markets analysts including Helima Croft wrote in a Jan. 23 report.  Heavy Canadian crude isn’t getting any cheaper — but that hasn’t stopped companies from splurging on costly rail shipments. Executives gathered at Davos see the oil market gradually returning to balance as OPEC reins in output and the American shale boom slows, but warned that the risk of stalling growth in China — which is engaged in a trade war with the U.S. — continues to cloud the outlook.