Economic sanctions have essentially shut Venezuelan oil out of the U.S. market and caused fluctuations in global oil prices.

Oil prices rose in mid-February before erasing some of the gains later in the month. Crude prices are holding in a fairly narrow range. Still, prices are below our estimate of fair value. That said, the gap between fair value and prices in the spot market is not very large. A number of developments have influenced prices on the supply side, including U.S. actions against Venezuela, which has the world’s largest oil reserves.

President Trump slapped surprise oil sanctions on Venezuela aimed at toppling President Nicolás Maduro. The sanctions announced by the Treasury Department in late January 2019 banned United States companies and individuals from dealing with Venezuela’s state-run oil company, Petróleos de Venezuela (PDVSA), which provides about 90% of the country’s hard currency.

As a result of the sanctions, the United States has stopped importing crude from Venezuela.

As a result of the sanctions, the United States has stopped importing crude from Venezuela. That has caused some temporary price anomalies on the Gulf Coast as the refiners that are set up to process the very low-quality, mud-like Venezuelan crude are scrambling to find other sour crudes. This has some implications for refinery run rates, for gasoline supplies, and ultimately for crude prices.

The price of political uncertainty

We don’t really know what is happening with Venezuela’s oil output and exports. Russia and China have been supplying the additives that refiners need to process Venezuela crude. Bloomberg, however, reports that there are about 14 million barrels of crude from Venezuela floating in the Gulf of Mexico as PDVSA struggles to find buyers.

There aren’t that many refiners that can process the crude and risk U.S. sanctions. They are probably only prepared to buy it at large discounts. All this will get sorted out when, and if, Maduro leaves office and a new government takes power. For now, however, Maduro’s administration is holding on to power.

Dynamics within OPEC and beyond

In addition to Venezuela, OPEC’s output discipline, Iran’s sanctions, and U.S. shale production have affected the supply of oil. OPEC’s output was 30.5 million barrels per day in February, about 2 million barrels lower compared with October 2018, the reference month for OPEC quotas. Given what we know about output from exempt countries, and the big cut in Saudi Arabia’s production, it seems Russia is the only OPEC+ player that is not living up to its obligations.

Oil’s fair value (US$ per barrel, daily)

In Iran, tanker tracker data suggest oil exports are rising and shipments have increased to Japan and Korea. These importers are two of the eight countries that have exemptions from U.S. sanctions on Iran. The waivers, granted in November, are only valid for six months. The United States will be pressing to reduce the waivers one way or another. We will have to wait and see what kind of waiver extensions are granted by the Trump administration.

In the United States, shale output still doesn’t seem to be doing much. The rig count is a little lower, but output looks broadly constant. U.S. exports of crude have risen, and the infrastructure to move oil from wellheads is now largely in place. This has allowed differentials within the United States to normalize. But current prices are not high enough to encourage a large increase in U.S. output.

On the demand side, it’s clear that China’s oil imports continue to grow steadily. Some of this may be going into storage, but overall, it’s consistent with a Chinese economy that isn’t doing too badly.

And finally, OPEC’s compliance on crude output is impressive. But how long OPEC can keep up this discipline is anyone’s guess. OPEC members are scheduled to meet in April 2019 to discuss oil quotas for the remainder of this year. Saudi Arabia has signaled that it is prepared to make a disproportionate share of the cuts. That said, cartel dynamics are inherently unstable.

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The global economy continues to slow. Higher interest rates, weaker demand from China, political troubles in the eurozone, and protectionist tariffs have kept the lid on economic growth.