Op-Ed: Big Trouble in North Korea, Venezuela Threaten Oil Prices
Instability unnerves commodity markets, and as tension between the United States and North Korea heightens and the death toll in Venezuela rises, oil prices struggle to regain equilibrium.
The U.S.-N. Korea stand-off is essentially two countries revisiting old wounds. The United States wants the Asian country to disarm and abandon its nuclear dreams; North Korea wants the United States to stop telling it what to do. This has been going on since 2002, when North Korea admitted it had dismissed the 1994 nuclear proliferation agreement.
But truly, the bad blood between the two nations goes all the way back to the Korean War, when North Korea attacked South Korea. The United States supported independent nation to the south.
And the “American imperialists” have been North Korea’s sworn enemies ever since.
Today, North Korea’s leader Kim Jong Un, gets a kick out of taunting the United States with its nuclear weapons program. U.S. President Donald Trump takes the bait and pulls no punches in response to the impertinence. Pre-emptive strikes, sanctions and an oil embargo are among his tools for punishment.
And so there is concern that escalation with North Korea could pull down oil prices. Geopolitical stress can shock the markets, said Mark Watkins, regional investment manager with U.S. Bank Private Client Group.
“The number one influence besides the supply and demand factor ends up being the global political tensions, and those are specifically focused right now on North Korea,” he said.
What’s more, should the United States engage militarily with North Korea, Russia and OPEC may be less willing to keep their production artificially low as the United States benefits from unflagging drilling, he said.
Ethan Bellamy, senior analyst with R.W. Baird & Co., said it’s plausible that North Korea is bringing out the oil bears, but the Venezuelan crisis is more significant to crude prices.
With the world’s largest proved oil reserves, Venezuela is sitting on a veritable gold mine. But whatever you think of socialism or national oil companies, Petroleos de Venezuela SA (PDVSA) takes mismanagement to another level. Or, as Raymond James (RayJa) analysts say, PDVSA is “quite possibly, the worst-managed national oil company in the world.”
Corruption? PDVSA’s got it. Venezuela – which is 95 percent funded by oil money – scores a whopping 166, tied with Iraq, out of 176 countries on Transparency International’s corruption index.
Ill-advised workforce reductions? Most definitely. Back in 2002, striking technical workers were sidelined for taking on then-president Hugo Chavez. That was more than 18,000 people without a job. Fast-forward to now, and the economy is so destitute now that the best of the oil workforce has fled Venezuela in a mass exodus.
Countries such as Colombia are reaping the rewards of PDVSA’s discontent. That country, home to Ecopetrol – a national oil company (NOC) that’s doing it right, according to top RayJa analyst Pavel Molchanov – is accepting an inflow of smart, talented and well-educated oil industry types fleeing poverty in Venezuela.
Not paying the bills? Yup. Foreign investors, such as drilling contractors Schlumberger and Halliburton, are increasingly reluctant to work with PDVSA because the company routinely skips out on its invoices, Molchanov said.
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