Venezuela crisis one of worst for oil market

The political crisis in Venezuela has created one of the biggest shocks in the history of the oil market and has exceeded any disruption likely from a war with Iraq, according to research from investment bank Goldman Sachs.

The combined effects of the Venezuelan strike and a war in Iraq could cost the oil market as much as 600 million barrels by the end of the third quarter 2003, which would be the biggest loss ever, Goldman adds. The combined output of Iraq and Venezuela is about 7 million barrels a day, about 10% of the world total, according to the US government’s Energy Information Administration.

Goldman says in its January 21 Energy Watch research report that the Venezuelan crisis has cost the world oil market nearly 110 million barrels in lost production, with 20 million barrels being lost each week. Even if the situation is resolved in February, logistical issues and technical complications over resuming oil supplies are likely to cost an additional 230 million barrels over the next six months, the report adds.

New York Mercantile Exchange (Nymex) oil prices closed at a two-year high of $34.61 a barrel (bbl) on January 21, as the strike by oil workers protesting against the policies of Venezuelan president Hugo Chavez combined with concerns over a possible attack on Iraq took their toll.

Goldman predicts an average price of $36/bbl for benchmark West Texas Intermediate (WTI) crude over the next few months. This price is based on the assumption that the US dips into its strategic petroleum reserve, a stockpile aimed at mitigating the effect of war or other disruptions on oil prices. WTI crude closed at $33.28/bbl on January 24.

The impact of the Venezuela crisis on the US market is aggravated by low US inventories, limited excess production capacity and a lack of shipping capacity that could replace the lost crude, the report says. Because of the proximity of the two nations, ships that deliver oil from Venezuela are too small to make the longer journey from the Middle East, where there is excess production capacity.

US crude inventories fell to 272 million barrels in January, a level Goldman describes as “critically low”. US crude oil stocks have not fallen below 270 million barrels since 1975.