After 14 years at the helm of Venezuela, Hugo Chávez passed away on Tuesday night from complications related to cancer. However, the consensus appears to feel that the news event provides a long-term bearish case for oil.
Chávez did all but close off foreign investment in Venezuela's oil industry while production dropped around 30% during his reign as president. According to analysts that track OPEC production levels, Venezuela pumped just 2.34m barrels per day (b/d) last month.
The immediate market reaction to the announcement was a 30-cent jump in crude futures which may be credited to the initial worries of political uncertainty in the country. However, Chávez's health had been deteriorating for some time and Web Financial Group technical analysts have pointed out that, since the December 8th announcement of Chávez's relapse, "absolutely nothing has happened in crude prices".
After having some time to digest the news, oil prices
have turned around with West Texas falling 15 cents and Brent trading down 23 at the time of writing on Wednesday morning.
The general opinion coming out from analysts is that any political instability will be short-term and that the odds are up for Venezuela's new government to increase oil production, keeping in mind that it represents 95% of the country's export revenue.
Analysts across the board note that Chávez was a charismatic president and most find it hard to envision how any incoming government will be able to maintain the current oil system that the deceased leader himself clamped down on, even if there is a smooth transition to Chávez's designated successor. If the opposition gains power, the chances increase that oil production will be ramped up. In any case, the political uncertainty is defined as short-term, primarily because elections should be taking place within 30 days.
MarketWatch columnist Jim Jelter noted that rumours on Venezuela supply disruptions actually moving the market are a thing of the past, because "refiners rely far more on output from deepwater rigs in the US Gulf and barrels from newly-opened shale oil fields in Texas and North Dakota."
Jelter's conclusion is that "the oil market's long-term view is unlikely to be shaped by short-term political turmoil in Caracas."
Along similar lines, Financial Times blogger Nick Butler ended his piece on the event stating the following: "For the last decade the policies of Hugo Chávez have kept Venezuelan production and exports down and oil prices up. With his death, there is no guarantee that such policies or such an outcome will be maintained for long."
In the markets, maintaining the status quo shouldn't affect prices and the only other viable option for any incoming government, at least long-term, is an increase in production with its corresponding bearish effect on prices. In fact, Reuters quotes UC Davis energy and geopolitics expert Amy Myers Jaffe as saying: "Venezuela needs money. Whatever comes next, it won't have the kind of charismatic leader that Chávez was. It will have to get serious about rebuilding its oil industry."