Chavez Death to Impact on Oil Prices? No!

Will Venezuelan Dictator Hugo Chavez Death Have Much Impact On World Oil Prices?

The death of Venezuelan dictator Hugo Chavez will likely have very little long term effect on oil prices. His connections to OPEC, not his policy or his country’s production, are what gave him power of oil prices while alive. Chavez did not utilize his resources efficiently or focus much attention on developing Venezuelan oil interests. Venezuelan oil production is under-invested and weak compared to other producers. They just don’t have the capacity to influence prices.  This lack of attention has caused the Venezuelan industry to decline from its peak in the mid 80’s. Chavez could have helped his country by investing in oil, creating jobs and boosting GDP.



Venezuelan Oil Production Decreased

Oil production actually decreased during Chavez reign of Venezuela. His policies favored consumption and exporting to friendly countries like Cuba and others in it’s sphere of influence. In Venezuela alone consumption of oil has nearly doubled since the 80’s when oil production in the country was at it’s peak. It is currently estimated that Venezuela produces about 3.25 million barrels per day and consumes nearly a quarter of that. The IEA estimates that world consumption of oil and liquid fuels tops 89 million barrels. This means Venezuela only accounts for less than 3% of the daily oil market, a mere drop in the bucket.




Global Recovery Leads To Increased Demand

There should be a growing optimism in the world markets for increased demand. This may seem counter to recent demand growth estimates but consider the data. The global recovery has been showing some signs of gaining traction. First, the U.S. is expecting a bounce in GDP beginning as early as this spring, led by the housing sector. Housing has been posting some great numbers recently and the surprise drop in unemployment plus the surprise gain in jobs creation are all confirming that expectation. Moving on to Europe there are still expectations of growth for later this year. Mario Draghi has said it time and time again. Germany is expected to rebound sharply in the first quarter and lead the EU in its recovery. The recent trade balance figures show that German exports are on the rise, a good sign for that rebound and leadership. Asia is also doing OK. China is back on an expansionary trend and Japan is making bold moves to improve its economy.




Hurdles For Oil Demand

One possible economic hurdle I see for oil prices is the next round of central bank meetings. The FOMC may begin active talks of when to end QE. That is not very likely to be soon but the recent strength in jobs could lead to their decision sooner rather than later. The ECB is expected by some to cut its target rate next month. There was some speculation that could have happened at the last meeting but they held firm. Lingering weakness in France, Italy, Spain and Greece may need another shot of stimulus to be cured. There is almost no doubt about what the BOJ is going to do at its next meeting. It is on track with the current administration of Japan in efforts to devalue currency and boost economic growth. Taken together these three meetings could be one of the most important events in market history; they could propel the global rally forward or halt it dead in its tracks.




What This Means For Binary Traders

My point is that the global economy looks like it is going to start growing again. This should lead to increased demand and that will affect oil prices. There is also still downside risk. If the economy doesn’t grow neither will demand for oil. Venezuela is a small drop in the bucket when compared to the other 97% of the oil industry. Venezuela is also isolated and fairly stable when compared to the Middle East and African producer nations. I would look more to those countries for impact on prices.  In a lesser sense the central bankers should also be watched. They don’t have any direct influence on oil but their policies affect the global economy and that affects oil prices.