World Crude Oil Supplies & Price Uncertain in the Face of Multiple Variables

Three key suppliers of crude oil to the United States sent conflicting signals last week, driving speculation as to what might happen if Middle East and Venezuelan crude oil supplies were cut off. For its part, the United States says that it will ensure that oil will flow unimpeded through the Strait of Hormuz if the passage was threatened. Meanwhile, Venezuelan President Hugo Chavez has declared that a Venezuelan oil embargo to the United States would send crude oil prices higher by as much as $30 per barrel. Recently, Venezuela has cemented several deals with another voracious consumer of crude oil, China. The deals include the building of oil tankers and discussions surrounding the increase of petroleum exports to China.

Simmering differences between the Bush Administration and the leftist government in Venezuela and Iran’s supreme leader, Ayatolla Ali Khamenei, are driving tensions in both regions. Venezuela is the world’s fifth largest oil exporter and a key trading partner to the United States. Almost 40% of the world’s crude oil passes through the Strait of Hormuz where Iran commands a strategic geographic position. Most industry observers, however, believe that any attempt by Iran to block the strait would be both political and economic suicide. Venezuela represents more than 10% of U.S. petroleum imports and even the U.S. Government itself says that any politically motivated interruption in usual supplies could send crude oil prices higher by at least $10. At midweek, crude oil prices were hovering in the $75 range.

In a separate development, Saudi officials are claiming to be experiencing difficulties in finding buyers for their crude oil output. In response to this situation, the Saudis have reduced their output by about 400,000 barrels per day. Additionally, the Kingdom is said to be storing its excess crude oil on tankers in the region. The situation in Saudi Arabia, combined with the saber rattling in Iran and Venezuela is presenting a puzzling picture for the global energy markets. A shortage of global refining capacity, especially in the U.S. domestic markets is also playing into the equation. Despite these trends, crude oil prices continue to show strength.