OPEC: Showdown In Caracas

Chavez In The Spotlight

One day before the official OPEC meeting in Caracas, due to take place on June 1, OPEC and Venezuela's president Hugo Chavez are vying for control of the political angles in the oil market. The cartel wants to do business, while Chavez is interested in expanding his political influence. Somewhere in the midst of all of this jockeying is the future of the price of oil.

The battle pits Saudi Arabia, the traditional controlling power in OPEC against Venezuela, the champion of production cuts aimed at keeping prices as high as possible.

A Fully Squeezed Turnip

According to Reuters: "Venezuelan President Hugo Chavez is set to seize on this week's OPEC meeting in Caracas to promote his campaign for oil producers to grab their full share of record crude prices." At the same time, though, "Already pumping flat out, officials from the Organization of the Petroleum Exporting Countries (OPEC) say it has no option but to leave output quotas unchanged at Thursday's meeting."

What is left unsaid, though, is that OPEC is already pumping at full tilt, and that the so called 2 million barrel reserve, mostly from Saudi Arabia, is a difficult stretch given the logistics of the global refinery and production capacity.

With the U.S. Gulf of Mexico oil and gas supply still largely off line, and hurricane season due to kick off, any spat within the cartel could lead to yet another ratcheting up of prices.

Potential Power Shift

What is increasingly evident is that OPEC is an institution in the midst of a power struggle, based on who has the most oil and the most political persuasion power.

The Saudis have the largest amount of proven reserves, usually pegged at above 200 billion barrels, therefore they usually hold sway over the politics in the cartel, often overruling consensus by adding that they are willing to increase production even if other members of the cartel are not.

But Saudi influence is not infallible, given the flurry of reports over the last several years, including the book by Matthew Simmons "Twilight In The Desert," that questions whether the Saudi oil reserves are indeed what they are reported to be.

Venezuela, on the other hand, is in the midst of lobbying for an accounting shift of its own reserves, pegged by most in the business at 80 billion barrels. According to Venezuela's state owned oil company, the country has an additional 230-270 billion barrels of thick, sulfur laden, tarry oil deposits in the Orinoco River basin, that it wants to include in its proven reserve volume.

This is currently controversial, given the logistics of actually accounting for, harvesting, transporting, and refining the heavy crude in the Orinoco basin.

Not the least troublesome is the fact that over the last twelve months, the Chavez government has changed its financial arrangements with international oil companies, has raised taxes, and has essentially performed a de facto quasi-Nationalization of the Venezuelan oil industry.

Cost estimates of what is needed to fully explore, catalog, and start significant production from the Orinoco basin area range as high as $4 billion. And there are currently four joint venture projects in the area, while some reports have recently appeared that suggest that Venezuela is becoming increasingly aggressive in its seismic operations in the area in order to prove that indeed it has the massive reserves that it claims.

To make matters even more complex, some ratings agencies have recently downgraded the credit quality and outlook for the existing Orinoco projects due to the Venezuelan government's recent tightening of operating conditions.


June 1 will be a pivotal day for OPEC, both for what is said, and for what is unspoken.

Expectations are high for some kind of major, and possibly over the top, announcement from Venezuela's president Chavez, while the Saudis have been keeping a relatively low profile and sticking to their talking points, especially reassuring the markets that production will remain at current levels.

The key to the power struggle is who has the most oil, and who can act as a swing producer when conditions call for such maneuvers. According to Marketwatch.com: "Chavez's ability to influence OPEC's policy on production quotas is limited because Venezuela currently isn't meeting its own allotment, and so can't act as a swing producer, analysts say. That could change, however, if the country is able to tap into its huge potential reserves of heavy oil," in essence, the Orinoco basin.

Chavez has a tall order to fill. Sean Brodrick, an editor at Weiss Research, told Marketwatch the following: ["Venezuela's inability to meet even its current OPEC quota "weakens its standing in the cartel. It doesn't have any extra production, so of course it's always on the side of cutting production."]

In other words, if Chavez can deliver a stunning announcement about the Orinoco reserves, the game may change decisively.

Mr. Chavez is unpredictable, has a flare for the dramatic, and should never be underestimated, but has suffered some setbacks lately, as his relationship with Peru and Brazil, both Latin American neighbors has soured. His relationship with Mexico has been heading south for months now, following a spat with Mexico's president Vicente Fox.

His standing in recent polls in Peru, has faltered, while some are suggesting that the opposition is actually making some progress in Venezuela.

Only one thing is certain. The stakes are high in Caracas, for Chavez, for OPEC, and for the oil markets.

Oil And Commodity Summary:

Supply Expectations Remain Positive

Analysts are expecting a continued buildup of gasoline supplies when the U.S. Energy Information Agency releases supply data, on a holiday delayed basis, on June 1. That the supply is out on the same day that OPEC meets in Caracas might have a double whammy effect on the markets, depending on how things shake out.

Some are expecting as much as a one million barrel buildup in gasoline supplies, which will be the key component to watch, as the summer driving season has started.

Also important will be refinery activity, which has remained below 90% for several weeks, meaning that the U.S. is now relying on imports for a significant amount of its gasoline supply.

Crude oil prices look poised to test the $75 area, and may do so as early as this week, once supply data is available and the OPEC meeting hits full speed on Thursday.

Although there has been some short term volatility, longer term, little has changed in the energy markets, as there is hurricane season to worry about, and the continuing presence of tension with Iran, the war in Iraq, and now the rising tide of nationalization of foreign company energy assets in Latin America.

According to the U.S. government data, at www.mms.gov, some 20% of the yearly production of natural gas and crude oil from the Gulf was lost, while some 12% of the daily production of natural gas is still off line and some 20% of the U.S. oil production is gone.

Dr. Joe Duarte's Market IQ appears daily at Joe Duarte. Dr. Duarte is author of the book "Futures And Options For Dummies," which is available at the Rigzone Book Store.