Oil price rally boosted by unrest in Venezuela, fund interest

Rising political unrest in Venezuela is fuelling the recent oil price rally. AP photo by Fernando Llano.

Oil price rally could mean $80/barrel crude

The oil price rally that boosted prices over $70/barrel this month may not be running out of steam, which some analysts have feared, as falling Venezuelan output and funds’ rising interest in commodities may underpin oil prices.

Majid Jafar, chief executive at Crescent Petroleum says he believes prices could hit $80/barrel if the economic crisis in Venezuela continues to impact the country’s oil production, which has already fallen to a three-decade low.

“My concern is that events in Venezuela could lead to a shock and prices could go to $80 per barrel this year,” he told Reuters Television at the World Economic Forum in Davos.

Jafar added that low investment in exploration and production since oil prices tanked in 2014 has led to a shortage of new projects, which could lead to a supply crunch in the short term.

Marco Dunand, chief executive and co-owner of trading house Mercuria, said rising global oil demand has surprised analysts and is supporting oil prices.

“People talk about peak demand but then demand all of a sudden accelerates further. And you have global GDP growth rates above average, which is creating inflation fears,” he told Reuters.

“In that environment, many macro funds want to be long commodities and use them as a hedge against inflation,” he said.

According to Reuters, open interest in Brent and WTI benchmark contracts has reached new highs.

“People say it will collapse soon. Not necessarily. It happens as equity markets have gone up like crazy. So to keep percentage allocation unchanged, the macro funds have to buy commodities. It helps explain why open interest in oil is so big,” Dunand said.

But, a number of oil majors, including BP, are cautious about betting on further price gains.

“We are certainly not planning for such prices,” Bob Dudley, the head of BP told Reuters.  He added that he did not expect oil prices to rise above $70.

As the OPEC supply cut agreement tackled the global crude glut, oil prices rose, along with US shale production.  The increase in US production has stunted the oil price rally.

Most oil majors are now approving new projects that work at prices below $40 to $50/barrel, in the hope they will avoid being stuck in high production cost operations should the price of oil drop again.