Charles Peabody, the analyst who predicted 6% bond yields when they were 5% a few months now now says the stock market will crash within 60 days. Hopefully OSX will be much higher before market tanks.
Good news from Venezuala
Global Intelligence Update
Red Alert
March 4, 1999
Venezuela Concedes Defeat in Battle for U.S. Oil Market Share
Summary:
Venezuela has announced that it will not attempt to regain its
number one position in the battle with Saudi Arabia and Mexico
for U.S. crude oil market share. As the struggle for market
share has hindered crude oil producers' collective attempts to
raise oil prices through production cuts, Venezuela's decision
may present an opportunity for such efforts to achieve greater
success. In a reflection of its potential new strategy, an
increasing emphasis on downstream operations, Venezuela has
announced that it intends to purchase refineries sold to meet the
regulatory requirements of oil company mega-mergers. Considering
Venezuela's current economic difficulties, it will no doubt be in
the market for financing as it seeks to increase its downstream
holdings.
Analysis:
Speaking Monday at Johns Hopkins University's School of Advanced
International Studies on March 1, new Venezuelan Oil Minister Ali
Rodriguez announced that Venezuela would not attempt to regain
the U.S. market share it lost to Saudi Arabia in 1998. "We're
not going to be in competition with Saudi Arabia," said
Rodriguez. Exporting 1.386 million barrels per day (bpd) of
crude oil to the U.S. in 1998, Saudi Arabia advanced from third
place to lead Venezuela, at 1.357 million bpd, and Mexico, at
1.305 million bpd. "Putting more oil in the U.S. market would
not be in the best interests of Venezuela at this time, given
continued low oil prices," said Rodriguez. Rodriguez claimed
that Venezuela wants to work with Saudi Arabia, other OPEC
members, and non-OPEC member Mexico, to establish crude oil
production levels that will help stabilize oil prices.
The price of oil has been relatively unaffected by the
collaborative efforts last year of OPEC and non-OPEC producers to
manipulate production quotas. Worldwide crude oil prices have
been stuck between $11 and $12 a barrel, the price to which they
fell last year after ten years of averaging between $17 and $21 a
barrel. Besides questions about OPEC's capacity, under the best
of circumstances, to control prices through manipulating supply,
two specific factors have been blamed for 1998's failure. Some
countries are continuing to overproduce, and Iraqi oil exports
are not regulated by the production agreement. Figures released
by OPEC substantiate the claim that Iran continues to overproduce
and that Iraqi oil continues to flow at increasing rates.
Nevertheless, even after U.S. air-strikes on March 1 and 2 cut
Iraqi crude exports by an estimated 56 percent, the price of oil
actual fell slightly. Other factors than Iranian non-compliance
and Iraqi production may be at work here.
One major factor that has helped keep oil prices at historic lows
is the struggle for U.S. market share among Saudi Arabia,
Venezuela and Mexico. The three countries were instrumental in
forging the original production cut scheme, leadership some argue
was specifically intended to guarantee their positions in the
U.S. market. But while producers' efforts to gain control of
production and prices has been hampered by the Saudi-Venezuelan-
Mexican dispute, Venezuela's apparent capitulation on the issue
may present an opportunity for such schemes to work. The next
OPEC meeting is scheduled to take place on March 23 in Vienna,
and OPEC members have already begun calling for further
production cuts, or at least faithful compliance with existing
cutback agreements. Rodriguez' comments suggest that Venezuela
is ready to remove one major hindrance to the effectiveness of
those efforts.
While production cuts may still be mathematically and politically
doomed, regardless of Caracas' capitulation, the question for
Venezuela is, "What's next." Venezuela's new president, Hugo
Chavez, has claimed that a "new energy model" is at the core the
core of his "new macro-project for economic development." This
new model would reportedly involve promotion of investment in
Venezuelan downstream operations in petrochemical and natural gas
refining. Speaking to reporters following a speech at the Energy
Council in Washington DC on February 28, Rodriguez carried the
Chavez agenda one step further. Rodriguez said that Venezuela's
state run oil company, Petroleos de Venezuela (PDVSA), may be
interested in acquiring U.S. refineries expected to be put on the
market by oil companies in the process of completing mergers.
Rodriguez added that Venezuela's existing refining capacity would
be increased under a $3 billion refinery investment plan.
Venezuela already has six domestic refineries, with a combined
capacity of 1.3 million bpd, as well as refineries in the U.S.
and Europe with an additional combined capacity of 1.6 million
bpd. Among PDVSA's U.S. holdings is CITGO.
Venezuela's apparent shift in focus to downstream operations is
quite understandable. Venezuela is hoping to leverage itself
against any further declines in the price of oil. Whereas the
average price of crude oil has dropped by 40 percent, the price
of refined petroleum products has declined only around 10
percent. Even if oil prices were to recover, other oil exporting
countries would be dependent on Venezuelan refineries not to
preference Venezuelan crude over their own in the production
cycle. Acquiring additional refineries would place Venezuela in
a much better position relative to Saudi Arabia and other
countries that rely heavily on upstream operations, the
production and export of crude oil, as their primary means of
cash flow. This policy already has promise. Though Venezuela
was beaten out by Saudi Arabia in crude oil exports to the U.S.
in 1998, Venezuela still exported more petroleum products, such
as gasoline and jet fuel, to the U.S.
The only caveat to this plan is the fact that Chavez based his
presidential campaign on a platform that privileges the social
welfare of the Venezuelan population over other goals. Venezuela
must somehow integrate Chavez's welfare programs with its new
hydrocarbon strategy of increased investment in U.S. and
Venezuelan refineries. Chavez has already encouraged foreign
investment in Venezuela's downstream operations. As Venezuela
shifts the balance of its hydrocarbon industry from crude oil
exports to refining, both at home and abroad, it will
increasingly be in the market for foreign financing.
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