Venezuelan volatility sways oil price

19 April 2002

The oil price moved sharply up and down in response to the coup and counter-coup in Venezuela between 12 and 14 April. The crisis occurred about 10 days after Iraq suspended all oil exports and while the conflict between Israel and the Palestinians raged on, amidst ultimately fruitless efforts by the US to broker a peace agreement. However, the political volatility was not matched by unstable market fundamentals, as oil demand figures showed an improvement accompanied by a slight increase in oil production.

Over recent months, internal opposition to the government of Venezuelan President Hugo Chavez has been steadily growing. The focal points of public dissatisfaction include labour and union laws and, critically, energy policy. Chavez's reversal of the country's traditional laxity regarding OPEC quotas, and his decision to pursue a high oil price at the expense of some market share, ran against the views of many at state oil producer Petroleos de Venezuela (PDV). When Chavez responded to PDV opposition to his energy reforms by replacing key senior company executives in early April, the company went on strike, endangering oil exports.

On 11 April the army stepped in, forcing Chavez to resign. Speculation that Caracas would reverse the Chavez oil policies and increase output led to a fall of $3 a barrel in the oil price overnight. But within 48 hours, Chavez was swept back into office as the coup leaders capitulated amid popular expressions of outrage. Following days saw the oil price recover by several dollars a barrel.

The effect of political volatility on the market has been compounded by growing oil demand, driven by the recovery of the US economy. The American Petroleum Institute on 16 April reported a fall of 7.3 million barrels in crude stocks in the week ending 12 April. A revised oil demand forecast issued by Sempra Energy Trading in April showed similar demand growth for 2002 as for 2001, reflecting an upward revision of the forecast by 100,000 barrels a day (b/d) for the year as a whole. Demand growth is expected to accelerate throughout the year as the economic recovery picks up pace.

The result will be a tight market in the second half of the year unless OPEC decides to increase production at its 26 June meeting. The organisation co-ordinated a cut of 2 million b/d in concert with non-OPEC producers when it met in late December. The continuing Israeli military occupation of many towns in the West Bank has brought pressure on Arab and Muslim governments to ignore Western calls to raise production in June.

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