Venezuela has the largest known oil reserves in the world, totalling 20% of global reserves and beating Saudi Arabia to pole position. But the recent political turmoil after the death of Hugo Chavez has plunged the country into an economic and political crisis, suffering hyperinflation following Nicolas Maduro’s rise to power.
How Are Oil Prices Impacted?
Oil prices are prone to volatility when major world oil producers become politically unstable. The potential for oil output to drop results in rising oil prices as demand continues to grow while accessible supplies dwindle. And according to Forbes, oil output from Venezuela fell by almost half.
In fact, the Centre for Strategic and International Studies paints a bleak picture, showing Venezuelan oil production at its lowest level in more than 50 years, falling to below 1.3 million barrels per day.
Although it could be anticipated that crude oil prices would skyrocket, this is not actually the case.
In the aftermath of the global financial crisis, oil prices fell from $160 a barrel in 2008 to $36 per barrel in February 2016 as global inventories were found to be in excess, primarily due to weak economic growth and increases in reliance on renewable energy and electric cars.
However, oil prices have rebounded in recent years climbing to $59 a barrel in 2019, primarily due to a reduction in global oil inventories, through production cuts imposed by the Organization of the Petroleum Exporting Countries.
Much of the reduction in oil production, though, has been down to Venezuela’s misfortune, leading to marginally higher international oil prices in recent months, helping Arab oil states, such as Saudi Arabia, to prop up their economies and reducing government budget deficits.
However, you could argue oil prices have not risen as much as one would have imagined since the Venezuelan crisis. Why? The return of American oil dominance, not seen since the days of J.D Rockefeller, thanks to shale oil and fracking activities, which is boosting American oil exports to Western Europe and helping reduce inflation in Europe.
If you’re a day trader, the swing in oil prices is anyone’s guess. With only marginal production cuts from OPEC, American shale oil prominence and remaining excess in global crude oil inventories are likely to see oil prices suppressed for some time.