CRUDE markets are faced with contrasting push and pull.

In the short term, markets are keeping a close eye on the possible debt default by Venezuelan oil giant Petroleos de Venezuela SA (PDSVA). This could help prop up the oil market prices.

“They have $3.5 billion in national oil company debt coming due in October-November. If they default, that could be significant for Venezuela’s production outlook,” analyst Helima Croft told CNBC’s ‘Squawk on the Street’. Hence the markets could spike.

However, John Kilduff, founding partner at energy hedge fund Again Capital asserts that Venezuela is indebted to Russia and China. Russian oil giant Rosneft has amassed a large stake in PDVSA’s US-based refiner Citgo by bankrolling Venezuela. China has traditionally been lending money to Venezuela in exchange for oil. And they may not let PDVSA slip by. Yet, the possibility exists.

Markets are also keeping a wary watch on the next move of President Donald Trump on Iran. Would the United States abandon the international deal that lifted sanctions on Tehran? This could lead to the renewal of sanctions, impacting Iran’s production and hence market prices. Kilduff, however, is of the view that the five other nations that negotiated the Iran nuclear deal would probably break with the US and refuse to snap sanctions back on Iran.

While these factors may prop up the prices at least in the shorter run, China is emerging as the ‘X factor’ of the global crude dynamics.

China has been building a strategic crude oil reserve for many years now, but the size of that reserve remains undisclosed. Last year, tech company Orbital Insight, suggested that China may have stored as much as 600 million barrels of crude by May. Since then, the reserve must have grown, possibly exceeding the US SPR, which stood at 678.9m barrels as of August 18.

This year, Chinese crude imports have run at record-breaking rates, with the average daily on par with the US imports, at about 8m barrels, the Financial Times noted. A lot of these, however, are going into storage tanks. Once the tanks fill up, it would wreak havoc on crude markets.

Analysts remain concerned. If the Chinese imports slow down from the current 1m bpd, prices are bound to take a hit. As per FT, analysts from FGE Energy have estimated that the growth rate of crude oil imports in China will slow down to 700,000 bpd in the second half of this year. For next year, the forecast is even gloomier: increasing by 100,000 bpd only.

And in the meantime, many are also doubtful, if post-March 2018 Russia and its Organisation of the Petroleum Exporting Companies (Opec) partners would agree to continue with their output cuts. If they fail, the prospects of a real price drop would be imminent, most agree.

In the longer too, interesting variables appear haunting the crude markets. As per Oilprice.com, the Caribbean is fast emerging as the new crude frontier.

In 2015, ExxonMobil discovered major reservoirs in Guyana. Last month, ExxonMobil also announced the discovery of more oil in the Payara reservoir off the coast of Guyana, increasing the total discovery to approximately 500m barrels.

ExxonMobil (partnered with Hess Corp and Statoil) has also recently purchased a new deepwater block for exploration off the coast of neighboring Suriname, another potentially oil-filled nation. Some in the industry are already referring to the Guyana-Suriname Basin as the next big oil region.

Trinidad and Tobago have long been the Caribbean’s largest oil and gas producer. Just this month BP Trinidad and Tobago announced two major discoveries totaling approximately two trillion cubic feet (tcf) of gas.

Encouraged by the massive discoveries in the region, Tullow is also planning to return to offshore locations off the southern coast of Jamaica to explore a field of “live oil” hoping to strike vast oil fields, the likes of their neighbors to the south and the nearby Gulf of Mexico.

The Bahamas has also recently publicised their plans to invite international companies to drill in deep waters off its coast, pointing not only to Guyana and the Gulf but also to neighboring Cuba’s oil reserves as an indication of what treasures may be lying under the surface of the sparkling Caribbean Sea.

Opec output cuts have helped in easing off some reserve bulge. Despite the depleting glut levels and some positive market sentiments, the crude future is not out of woods yet.

Published in Dawn, August 27th, 2017

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