Oil Markets Are Ignoring Geopolitical Risk

The markets are ignoring rising geopolitical tensions on multiple fronts right now-from Israel and the Red Sea to Venezuela and Guyana. Some 8.8 million barrels of oil per day are shipped through a vital Red Sea choke point, and for Guyana (not to mention Exxon, Hess, and Chinese CNOOC), 1.2 million bpd of new discoveries (by 2027) are at stake. 

The reality that is dictating the markets right now, instead, is OPEC's failure to control prices, rising U.S. oil production, and concerns over Chinese oil demand. As the market focuses on U.S. output numbers, observers might rightly wonder if there would even be a significant price reaction to a Venezuelan invasion of oil-rich Guyana's territory. 

Venezuela …

Just as it was hard to believe that Russia would not invade Ukraine, many observers feel that Venezuela will not invade Guyana and attempt to take Essequibo by force. It is a brave call to make at a time when Nicolas Maduro is unpopular and desperate and the idea of Venezuela as the rightful owner of Essequibo is much more popular than he is. Even with its devastated military, Venezuela could easily overcome Guyana's meager defense forces to annex oil-rich Essequibo. 

On Wednesday, Maduro raised a fervor, pledging to hand out oil exploration permits for the offshore bounty housing Exxon's string of huge discoveries. Later that same day, he unveiled a new map of Venezuela that included Essequibo, appointed a provisional authority for Essequibo, and mobilized the military on Venezuela's maritime Atlantic border. He has instructed state-run oil company PDVSA to create an exploration map and a map of discoveries in Essequibo and has given the likes of Exxon three months to comply. On Thursday, he started rounding up opposition politicians, including staffers of presidential candidate Maria Corina Machado, accused of treason and conspiring to rig the referendum on annexing Essequibo. 

Backing down now would quite possibly be an even bigger blow to his popularity at a time when he is being challenged by an official opposition candidate for presidential elections in 2024. 

Brazil is scrambling to ensure Maduro doesn't take Essequibo by force, and it's deployed defense forces to its border. Colombia, with its newish leftist government, will likely support Maduro in his endeavors. The U.S., which had only recently eased oil sanctions on Venezuela on the condition of free and fair elections is ominously silent on the developments. So far, Blinken has vowed support for Guyana's territorial sovereignty, and on Thursday, the U.S. launched military exercises in the area. There's been no word on reversing the easing of sanctions, and Maduro is clearly testing the will of Washington. He is desperate enough to test it all the way, while Exxon and Chevron keep their lips sealed and hope that millions of barrels of oil per day will not be lost to war. 

The Red Sea …

In the Red Sea, Yemen's Houthis continue to target vessels loosely linked, or not linked at all, to Israel, forcing defensive actions from the U.S. Navy in the region, and rendering this area a dangerous, high-risk route for insurers. The Saudis are pleading with Washington for restraint in their response to the Houthis. Why? Because they just recently restored diplomatic relations with Iran, which backs the Houthis, and with whom they have been fighting an endlessly tiring and expensive proxy war in Yemen. A major response to the Houthis could put Saudi oil facilities at risk again, reminiscent of the 2019 attacks that took out half the Kingdom's oil supply. 

In the meantime, Putin in Riyadh for OPEC+ Damage Control …

OPEC+'s most recent production cut gambit has flopped, as we noted above. This flop sparked an urgent visit by Putin to Riyadh for a show of unity with respect to output cuts. While the Saudi Energy Minister was quick to hit the airwaves with criticism of "commentators" whom he blames for the continued decline in oil prices despite the November 30 OPEC+ voluntary output cut deal, his words have fallen flat on the market. OPEC is now scrambling to convince everyone it still has the power to manipulate oil prices amid significantly rising U.S. production. 

On Thursday, OPEC+ found itself urging (begging) all of the expanded cartel's members to make good on "voluntary" output cut pledges from November 30 for the good of the global economy. This plea underscored the crucial flaw in the Saudi Energy Minister's statements from earlier this week, that no one understood the output cut deal and they would soon see the reality. It's a reality that they are now begging the rest of the cartel to make happen. 

The market clearly disagrees with the Minister, with oil prices this week falling to a six-month low. If OPEC wants higher prices, it may have to rely on disastrous geopolitical events instead.