I was reading in the Financial Times that “For trading markets every tragedy is a business opportunity”. The writer was referring to the tragic situation in Venezuela and whether it will affect the oil market.

But Venezuela now shares the tragic situation with the devastation brought on by Hurricane Harvey and the loss of half Libya’s production due to continued violence. Add to bits and pieces here and there and the possibilities of further destabilising events in producing countries, and you would expect a great impact on the oil market.

On the consumer side, falling rig counts in the US and declining global and OECD oil inventories did not affect the market as they did at other times. However, all these were not sufficient to move the market appreciably, at least where prices are concerned.

Venezuelan production has fallen from about 2.2 million barrels a day (mbd) in 2016 to 1.93-mbd in July, below its Opec allocation of 1.97-mbd. There are just too much economic and political problems that have adversely affected the oil industry.

But the Financial Times article concludes that even a drastic change of government is unlikely to generate a rise in oil prices “that bulls in the market have long been hoping for”. However, we have to wait and see if the newly announced US sanctions on Venezuela and its national oil company PDVSA will fuel the fire and whether China and Russia will step in with further financial assistance.

Hurricane Harvey has wreaked havoc on the US oil industry in Texas, Louisiana and the Gulf of Mexico. In short, 4.4-mbd of refining capacity is shut due to flooding, about 1.4-mbd of Gulf of Mexico and onshore oil production was shut and major pipelines in the area affected.

Surprisingly, these events hardly moved crude oil prices, and the trend downward was more noticeable. As I write, WTI and Brent prices are $47.24 (Dh173.37) and $52.74 a barrel, which are in the range of prices in the last couple of months.

Long term impact

The loss of refining capacity has reduced demand for crude oil, and naturally gasoline prices in the US hit two-year highs at $1.7799 a gallon in NYMEX and about $2.2 a gallon at the pump, which prompted the US government to release from its strategic reserves one million barrels of crude to a refinery in Louisiana.

The long term impact of Harvey is yet to be assessed and Goldman Sachs says the US industry could take months to heal. It would depend on how long the refineries will stay down and whether any of them have sustained severe damage.

It will also depend on the port’s resumption of operations, where crude oil is imported and exported and petroleum products to the tune of 2.7-mbd is exported. This may result in greater US crude oil availability and higher inventory while increasing the need for additional supplies of gasoline and diesel.

Baker Hughes announced a fall of five rig counts last week only to raise them by three later. Such modest changes are “a further sign that drillers are responding to the lower price environment by pulling back” according to “Market Watch”.

At the same time, Opec reports that “Total OECD commercial oil stocks fell in June to stand at 3,033 mb. At this level, OECD commercial oil stocks are 252 mb above the latest five-year average. In terms of days of forward cover, OECD commercial stocks stood at 63.8 days in June, some 4.1 days higher than the five-year average.”

Compliance

While stocks are falling, the market rebalancing is slower than some expected and at this rate the five years’ average stocks may not be reached even at the end of the first quarter of 2018, when the current producers’ agreement would end.

Given that oil prices did not appreciate much, the producer’s compliance is said to be slipping. The Joint Ministerial Monitoring Committee (JMMC) said that in July “producing countries achieved an impressive conformity level of 94 per cent”.

This is disputed by IEA where it says that Opec compliance is only 75 per cent and participating non-Opec producers at 67 per cent. The JMMC is aware of slipping compliance and said that “All options, including the possible extension of the Declaration of Cooperation beyond the first quarter of 2018, are left open to ensure that all efforts are made to rebalance the market for the benefit of all.”

The producers’ efforts are also undermined by surging Nigerian and Libyan production. Nigeria is approaching its target of 1.8-mbd while Libyan production have gone above 1-mbd though it suffered a reduction recently.

In all my experience, I have not seen prices move up or down the slightly even with so much happening.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.