The Five "Hot Spots" Fueling Oil's Rally in 2018

The Five “Hot Spots” Fueling Oil’s Rally in 2018

by | published August 15th, 2018
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Despite some volatility in recent weeks, 2018 has overall been an incredible year for oil prices.

As I write this, West Texas Intermediate (WTI) is touching $66 a barrel while Brent crude is above $71 a barrel, levels that would’ve been unheard of back in the doldrums of early 2016.

Now, I’ve written about the narrowing of the global crude oil balance for some time.

But it’s looking more and more like that balance is arriving quicker than anticipated.

One thing that’s really becoming clear as 2018 plays out is that geopolitics are driving most of the price gains we’re seeing.

And all of this largely boils down to five highly volatile regions at the center of the global oil industry…

Hot Spot #1 – Venezuela

I’ve been talking about Venezuela for a while now because, quite frankly, it’s a terrible situation that grows more terrible by the day.

It started in 2014, when the nation entered a deep recession on the back of an unprecedented oil price crash. The economy went from bad to worse as prices plunged to 13-year lows in early 2016.

All of this has left the country’s production nearly non-existent. My estimates are now putting the collapse below at least 60% of levels experienced during the highest production period some two decades ago. I project a loss of at least 1.2 million barrels a day by the end of the third quarter.

Given the vital position crude oil export revenues hold for the central budget, and the inability of state company PDVSA to administer fields and assets, such a precipitous decline will tear the country apart.

A double whammy ensues: a financial insolvency cycle combined with a failed state. The resulting power vacuum and eradicated domestic oil market will not only rapidly turn the country into one of the most unstable regions in the world, but also send prices soaring as the lack of supply boosts demand.

Hot Spots #2 and #3 – Libya and Nigeria

These are the last two major providers of light sweet crude that are currently experiencing contraction.

Both are the result of domestic insurrection – an ongoing civil war in Libya’s case, and renewed insurgency in Nigeria’s primary oil-producing region.

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Libya’s National Oil Corp. has been in the midst of nonstop military clashes and political power struggles that have halted exports since the start of summer. Reports last month indicated that as much as 850,000 barrels a day could be kept offline as a result of the ongoing conflicts.

Nigeria is in a similar political and military situation that’s halted production. On top of that are underinvestment and generally poor infrastructure, both of which have kept the domestic oil industry from operating at full capacity.

In both countries, the government’s heavy control over domestic oil markets compromises production and export flow. This uncertainty of available volumes should continue to influence market expectations.

Hot Spot #4 – Russia

Russia has long been one of the biggest oil players outside of OPEC. This has naturally enticed OPEC to play ball with Moscow when it comes to coordinating production efforts.

Last month, Russian output reached as high as 11.2 million barrels a day. Meanwhile, total production across all OPEC members hit 32.2 million barrels a day, with Saudi Arabia leading with 10.4 million.

While Moscow has increased its production in league with Saudi Arabia, Russia’s ability to sustain higher production rates is debatable.

Most volume comes from mature Western Siberia fields. Absent added production from north of the Arctic Circle, out on the continental shelf, and/or from undeveloped Eastern Siberia, Russia will experience a rolling decline in available extraction reaching 8.5% annually by 2025.

All of these new sources require extensive working capital and advanced technology Russia does not have.

Hot Spot #5 – South China Sea

Chinese moves to control wide portions of the South China Sea have created two major problems.

First, expected production offshore Vietnam, Indonesia, and Malaysia has been delayed. This has also led to disagreements with the Philippines on access.

Second, concerns exist on free access to essential tanker routes as China intensifies its militarization of constructed islands.

China has been intensifying its presence in the region for years now, even quietly installing anti-ship cruise missiles – a move that allows Beijing to further flaunt its power.

The placement of these weapons also comes on the heels of China’s installation of military jamming equipment, which disrupts communications and radar systems.

The White House has warned China of “consequences” for its ongoing militarization of the intensely disputed waters of the South China Sea…

But we believe only the Pentagon’s “best-kept secret” has a chance at stopping this deadly threat.

Right now, China has enough carrier missiles to wipe out every U.S. carrier strike group on the planet – and this shocking satellite footage shows they’re more hostile than ever.

In fact, China has already set this battle plan into motion…

So this isn’t a “future” scenario…

It’s a “right now” emergency.

Luckily, we have a few tricks of our own up our sleeve.

$1.743 trillion worth, to be exact.

I highly recommend you arm yourself with this urgent information now… before it’s too late.



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