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What’s The Limit For Permian Oil Production?

What’s The Limit For Permian Oil Production?

Permian

The ‘hottest shale play’ has been the media’s favorite cliché for the Permian Basin over the past year. And while cliché, the basin straddling West Texas and New Mexico has lived up to this description—its oil production, unlike that in other basins, did not fall off a cliff during the downturn, it recently beat its own record from the 1970s, and is expected to continue to increase production more than any other U.S. shale play and account for most of the American oil production growth.

The Permian has been pumping oil since the 1920s. Conventional oil production started to decline in the late 1970s, but the fracking boom revitalized the oil-producing region in the early 2010s, and as oil prices rose last year, the Permian beat its previous record for annual oil production dating back to 1973.

The Permian surge in oil production is also revitalizing other industries in small Texas towns, from frac sand trucking and oilfield services to overbooked hotels and full restaurants, as Robert Rapier wrote in Forbes about his recent visit to the Permian.

This shale basin will continue to drive the U.S. oil production growth in the short to medium term, forecasts suggest. But analysts have started to question just how long the Permian can keep pumping at this relentless pace before hitting geological or financial constraints.

The Permian is now nearing 2.8 million bpd of oil production, EIA data shows. To compare, in October 2013, before the oil price crash, Permian production was 1.29 million bpd. In January and February 2016, when oil prices dipped to below $30 a barrel, the Permian production was still ticking up and exceeded 2 million bpd, compared to drops in all other main producing shale regions, including the Eagle Ford and the Bakken.

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Norway Desperately Needs Large Oil Discoveries

Norway Desperately Needs Large Oil Discoveries

Norway Rig

Thanks to costs cuts and large oil discoveries made before the oil price crash, Norway will be able to sustain its oil and gas production over the next five years. But reduced exploration drilling and lack of big discoveries in the past two years spell trouble for Western Europe’s biggest oil and gas producer after 2023, authorities fear.

Nearly two-thirds of the undiscovered resources are thought to be located in the Barents Sea, the Norwegian Petroleum Directorate (NPD) directorate said last week in its review of the Norwegian Continental Shelf in 2017.

However, last year’s exploration campaign in Norway’s Arctic was a flop. Oil companies are not giving up on Barents Sea exploration, but firms and authorities alike have now lowered expectations about the possibility of a huge discovery in those areas.

“In the part of the Barents Sea that’s currently open, you’ve sort of tried the elephants — the big opportunities,” Bente Nyland, Director General of the Norwegian Petroleum Directorate, told Bloomberg in a recent interview. “You’re now down to the next generation in size,” Nyland noted.

The authority would be happy with any discovery of around 500 million barrels of oil, Nyland told Bloomberg.

Last year, the most promising exploration well Korpfjell—the first well drilled in the Norwegian section of a formerly disputed area between Norway and Russia, and the northernmost wildcat well drilled on the Norwegian shelf—was a disappointmentcompared to expectations that it could contain more than 250 million barrels of oil equivalent, or even 1 billion boe.

The disappointing Barents Sea campaign led to just 11 companies applying for production licenses in Norway’s 24th licensing round that offered 93 blocks in the Barents Sea and 9 blocks in the Norwegian Sea. Statoil, Aker BP, and Lundin were all applying, but the NPD said that “The applicant landscape could indicate that some parties are prioritizing exploration in mature areas this time around,” commenting on the applications.

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Coastal States Protest Trump’s Offshore Drilling Plan

Coastal States Protest Trump’s Offshore Drilling Plan

Offshore

Less than a week after the Trump Administration proposed to open almost the entire U.S. coast to oil and gas drilling, Secretary of the Interior Ryan Zinke backtracked and took Florida off the table for offshore oil and gas exploration. Now many are wondering why just Florida was given a pass.

Opposition by coastal states, both East and West, had already been strong, even before Secretary Zinke said on Tuesday that he supports Florida Republican Governor Rick Scott’s position that “Florida is unique and its coasts are heavily reliant on tourism as an economic driver.”

“As a result of discussion with Governor Scott’s and his leadership, I am removing Florida from consideration for any new oil and gas platforms,” Secretary Zinke said in a statement posted on Twitter.

But taking Florida off the table sparked even more backlash from nearly all other coastal states along the Pacific and the Atlantic, with governors and representatives demanding the states they represent be exempt, too.

Analysts see the administration’s move as opening a wider legal crack in the offshore drilling plan, with states and environmentalists waiting in the wings to start suing.

Potential lawsuits could further derail the timeline of the process that would turn this initial draft plan into a proposed final program. Mounting uncertainties over the timeline and legislation could deter oil companies from planning to spend big on exploration, while drilling along the coastal areas could be challenged by states and could increase risks for oil firms’ budget planning and possible legal expenses. Then there is the price of oil in a few years’ time to consider, as well as the fact that companies in the U.S. are increasingly earmarking investments into onshore shale at the expense of conventional offshore.

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U.S. Shale Can’t Offset Record-Low Oil Discoveries

U.S. Shale Can’t Offset Record-Low Oil Discoveries

Rig

The U.S. shale resurgence has been one of the main themes in oil markets this year, while OPEC’s production cut deal to deplete the oil overhang and boost oil prices has been the other key development in 2017.

U.S. shale production is expected to grow over the next few years as the companies that survived the worst of the downturn showed resilience in the face of the lower-for-longer oil prices. But three years of low oil prices also led to the global oil industry slashing investments in conventional oil exploration, and deferring or revisiting development plans.

This has led to the lowest ever volumes of oil discoveries in 2017, Rystad Energy said last week. While the low level of discoveries is not an immediate threat to global oil supply, it could become such ten years down the road, according to Rystad Energy.

In ten years’ time, U.S. shale production may have peaked, at least according to OPEC that sees shale peaking after 2025, although the cartel has conceded that U.S. tight oil has defied previous forecasts and has increased production more than initially expected and will continue to do so in the short term.

This year has seen less than 7 billion barrels of oil equivalent discovered globally, a volume as low as last seen in the 1940s, Rystad Energy has estimated. What worries analysts the most is the fact that this year the reserve replacement ratio—the amount of discovered resources relative to the amount of production—was a mere 11 percent, compared to 50 percent in 2012, Sonia Mladá Passos, Senior Analyst at Rystad Energy, said.

The Biggest Factors In Future Oil Production

Another point of concern is that the resources discovered per field also dropped, and this could affect the commercial viability of new discoveries.

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What Will Drive The Next Oil Price Crash?

What Will Drive The Next Oil Price Crash?

Oil tanker

As we roll into 2018, analysts and investors are more optimistic that the oil market will further tighten next year and support higher oil prices, but rising U.S. shale production will likely cap any significant price gains.

On the demand side, expectations are that global economic growth will support solid oil demand growth. On the supply side, Venezuela’s dire situation, possible new sanctions on Iran, and increased tension in the Middle East mostly with the Saudi-Iran issues and the Iraq-Kurdistan standoff may take more barrels off the market than OPEC and friends plan, and send geopolitical jitters through the oil market.

However, according to energy policy expert Michael Lynch, there remain three potential events in the markets that could send oil prices tumbling. These include a large correction in the U.S. stock market that could spread to a sell-off in commodities; one of the OPEC members or Russia breaking away from the unusually strong compliance to the cuts we have seen so far; and U.S. oil production rising so much as to make OPEC see it as a threat to its long-term oil market share.

In markets, there are already some signs that we may be seeing some bubbles, Bitcoin being the most likely candidate, according to Lynch. In addition, the price to earnings ratio of the S&P 500 index is now over 25, well above the mean historical average of just over 15.

Last week, Fed Chair Janet Yellen said, referring to the high valuation in some asset classes, “the fact that those valuations are high doesn’t mean that they are necessarily overvalued.” According to VTB Capital’s Global Macro Strategist Neil MacKinnon, the ultra-low volatility in U.S. equities this year is “very vulnerable” to shocks, and current stability could actually bring future instability.

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Yuan-Priced Crude Futures Could Arrive Before Christmas

Yuan-Priced Crude Futures Could Arrive Before Christmas

Yuan

After years of setbacks and delays, China may be days away from launching a yuan-priced crude oil futures contract to make its currency more international and challenge the dominance of the petrodollar.

Many Chinese investors eagerly anticipate the start of yuan oil futures trading on the Shanghai International Energy Exchange, with hope it will come just in time for Christmas, when western markets will be either closed or calmer than usual.

Although local investors can’t wait to pour yuan into another commodity contract, international investors may not be as eager because it is not clear yet how much freedom China would allow in that trade. International traders may have to swallow Chinese intervention on the markets or rigid capital controls, Bloomberg reported last week.

In July, the Shanghai International Energy Exchange, INE, completed a four-step trial in crude oil futures denominated in yuan and said that it would carry preparatory works for the listing of crude oil futures, and would try to launch the contract by the end of this year.

The launch of the yuan oil futures contract will be a wake-up call for traders and investors who haven’t been paying attention to Chinese plans to create the so-called petroyuan and shift oil trade out of petrodollars, Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), said in October.

Although the petroyuan is not expected to immediately supplant the petrodollar, the world’s top oil importer launching a crude oil futures contract in its domestic currency is a sign that the Chinese want their yuan to play an increasingly important role in global trade, starting with the oil trade.

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The ‘Unknown Unknowns’ That Threaten U.S. Shale

The ‘Unknown Unknowns’ That Threaten U.S. Shale

Bakken

Three years after the oil price crash, the U.S. shale patch is on its second growth phase and is expected to continue to increase its production, at least through the next five years.

The global oil markets have become increasingly dependent on U.S. tight oil supply—and the oil industry is still coming to grips with this new reality, Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, wrote in a recent article.

Current projections put the Permian on the forefront of the United States’ ability to deliver increased tight oil supply to the global markets. However, forecasts for the shale patch are as dynamic as production and drilling rates are. And some ‘known unknowns’ have been surfacing such as higher gas-to-oil ratios in some wells, and the parent/child wells issue, Flowers says.

Wood Mackenzie said last month that signs had started to show that intensified drilling in the Permian doesn’t deliver commensurate volumes of oil. Although WoodMac thinks that such setbacks could just be growing pains and Permian drillers could indeed ‘change the laws of physics’, it had warned three months ago that drillers might soon start to test the region’s geological limits. If exploration and production companies can’t overcome the geological constraints with tech breakthroughs, Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question and potentially significantly influencing oil prices, WoodMac said in September.

In his December article, WoodMac’s Flowers included this observation in the Permian’s ‘known unknowns’:

“Growth might also be constrained by shareholders demanding that independents rein back from volume-driven targets.”

Those ‘known unknowns’ serve as a warning: the oil market can’t be complacent and just assume that the Permian boom will deliver as expected, according to Flowers.

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U.S. Oil Has One Fatal Weakness

U.S. Oil Has One Fatal Weakness

Midland

U.S. crude oil production is again on the rise, and exports of American crude are smashing records.

But most of the U.S. oil production is light tight oil, and American exports—especially those of very light sweet crude—may hit a demand constraint next year, Bill Barnes, director of energy consultancy Pisgah Partners, writes in Petroleum Economist.

Oil production in the U.S. is currently expected to reach an all-time high at an average 9.9 million bpd next year. In recent weeks, U.S. crude oil exports beat records, and surpassed the 2-million-bpd mark for the first time ever in the week to October 27.

Last year, 51 percent of the 8.4 million bpd of crude oil produced in the Lower 48 States was light oil, or less dense oil with an API gravity of 40.1 or above, EIA data shows. The higher the API gravity, the lighter the oil. So far this year, much of the lower 48 states’ crude oil production had 30.1 or higher API gravity.

Due to the wide discount of the U.S. benchmark WTI to Brent in recent months, American exports have seen record-high levels.

Yet, according to Pisgah Partners’ Barnes, there are several demand and supply factors that may limit the buyers’ willingness to import extra light U.S. oil.

One is that Libya and Nigeria—the two members exempt from OPEC’s production cuts—have started to gradually recover their production that had been plagued by militant and civil strife last year. And they are exporting light sweet crude oil varieties to refiners.

Also, consumption of various oil products outside the U.S. “argue for processing middle-gravity crudes such as Arab Light, Iranian Light and Russian Urals, rather than extra-light barrels such as 48°API gravity Eagle Ford,” Barnes said.

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Norway’s Oil Sector Faces Existential Crisis

Norway’s Oil Sector Faces Existential Crisis

Norway

Oil companies have recently focused on frontier exploration drilling in the Barents Sea offshore in Norway, neglecting the powerhouse of the Norwegian oil industry, the North Sea.

Exploration activity in the North Sea—the most mature area of Western Europe’s biggest oil producer—is at an 11-year low this year, which is a concern for the industry’s regulator, the Norwegian Petroleum Directorate (NPD).

“That worries me,” NPD Director General Bente Nyland told Bloomberg in a recent interview, voicing the industry concern that without new oil discoveries, especially in mature areas with well-connected infrastructure, the decline in Norway’s oil production would be even bigger than expected.

Following a continual decline between 2001 and 2013, Norway’s crude oil production rose last year for the third year running, but according to the Norwegian Petroleum Directorate (NPD), oil production this year would be nearly half the volume from the peak in 2000-2001.

Two huge fields discovered in 2010 and 2011, Johan Sverdrup in the North Sea, and Johan Castberg in the Barents Sea, are expected to start operations in 2019 and 2022, respectively, and will lift Norway’s oil production in the early 2020s compared to expected declines in 2018 and 2019.

But after 2025, production and activity are expected to significantly drop off unless there are new discoveries, according to oil major Statoil.

Related: Trump’s China Trip To Reap Billions In Energy Deals

Norway’s Ministry of Petroleum and Energy, and NPD say:

“Production from new fields that come on stream will compensate for the decline in production from ageing fields. However, in the longer term, the level of production will depend on new discoveries being made, the development of discoveries, and the implementation of improved recovery projects on existing fields.”

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Canada Aims To Solve U.S. Nuclear Woes

Canada Aims To Solve U.S. Nuclear Woes

Hydro

Canada believes it may have the answer to replacing some U.S. nuclear capacity with other forms of carbon-free energy.

When New York state and Massachusetts retire three nuclear reactors between 2019 and 2021, the two states will lose a combined 2.7 gigawatts of carbon-free power. Both states want to replace that capacity with other forms of clean energy, in line with their ambitious goals to reduce greenhouse gas emissions and increase the share of renewables in their energy mix.

Some thousand miles north, Hydro-Quebec, owned by the Quebec government, is struggling with stagnate demand at home, and as it expands its hydropower generation capacity, the company seeks to sell power to New York and Massachusetts.

Hydro-Quebec faces strong competition from wind and solar proposals in the two U.S. states. In addition, hydropower is a reliable baseload option, but environmentalists say it is destructive to rivers and to river and nearby forest habitats.

The Pilgrim Nuclear Power Station in Plymouth, Mass., is planned to cease operations on May 31, 2019, while the two operating units at the Indian Point Energy Center will close in 2020-2021, with the decision driven by sustained low wholesale energy prices.

The closing of the three reactors would mean that NY and Massachusetts will lose a total of 2.7 gigawatts of carbon-free power.

This year, both NY state and Massachusetts issued requests for proposals for clean energy projects. Massachusetts seeks renewable energy generation and renewable energy credits (RECs) of 9,450,000 MWh annually and seeks proposals for long-term contracts of 15–20 years to provide the distribution companies with clean energy generation. The state has received more than 40 bids, including proposals from Hydro-Quebec-led developments. Hydro-Quebec says it is proposing six options —either 100-percent hydropower or a hydro-wind supply blend — offered over one of three proposed new transmission lines.

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China Takes Aim At The Petrodollar

China Takes Aim At The Petrodollar

Dollar

China continues to pursue its ambitious plan to make its currency—the yuan—more international.

The world’s top crude oil importer and key oil demand growth driver is now determined to get as many oil exporters as possible on board with accepting yuan payments for their oil.

China is now trying to persuade OPEC’s kingpin and biggest exporter, Saudi Arabia, to start accepting yuan for its crude oil. If the Chinese succeed, other oil exporters could follow suit and abandon the U.S. dollar as the world’s reserve currency. Pulling oil trade out of U.S. dollars would lead to decreased demand for U.S. securities across the board, Carl Weinberg, chief economist and managing director at High Frequency Economics, tells CNBC. Weinberg believes that the Chinese will “compel” the Saudis to accept to trade oil in yuan.

Other analysts warn that the true test of China’s push for a yuan oil trade will be if the Saudis are willing to risk the anger of the U.S. by accepting yuan payments.

The other option isn’t much better for the Saudis—if they continue to resist trading in yuan, they risk losing further market share of the world’s top crude oil importer and possibly the snub of Chinese investors for the much-hyped IPO of Saudi Aramco next year. Chinese sovereign wealth funds and major state companies have deeper pockets than major institutional investors in the West. For China, an Aramco investment could increase Beijing’s bargaining power to convince Aramco to accept yuan payments. Although there’s no indication yet that Aramco would want yuan for its oil, the Saudis say they’re willing to consider issuing yuan-denominated bonds, in what could be a break from the practice to issue debt only in U.S. dollars.

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Russia And China Continue To Boost Oil Ties

Russia And China Continue To Boost Oil Ties

Oil

Even before the OPEC/non-OPEC production cuts took effect in January 2017, Russia had already beaten Saudi Arabia to become China’s single largest oil supplier for 2016. Since then, Saudi Arabia has sacrificed still more of its market share in the prized Chinese market, while Russia has dominated Beijing’s top suppliers’ list for most of this year.

Now Russia’s oil giant, Rosneft—whose chief executive Igor Sechin is a close ally of Vladimir Putin—is reportedly aiming to further increase its crude oil deliveries to China, as Russia looks to boost energy ties with the world’s biggest crude oil importer and top driver of global oil demand growth.

Since the OPEC/Russia oil production deal began, the U.S. has stepped up sanctions on Russia, which made Western banks and companies even more cautious in dealing with Russian firms. Considering this, it’s not a huge surprise that Rosneft and Russia want to boost ties with Chinese firms, refiners, and banks.

Rosneft now aims to almost double its crude oil exports to China through Kazakhstan, Reuters reported last week, citing industry sources.

Although it’s not immediately clear when that increase will take place, this plan is only the latest in a series of projects that boost Russian oil supplies to Chinese refiners. Chinese firms, on the other hand, recently made big investments in Russian energy projects and firms, including in a large stake in Rosneft.

Chinese industrial conglomerate CEFC recently agreed to buy 14.16 percent in Rosneft for approximately $9 billion. The deal didn’t come as a surprise, coming on the heels of a Rosneft announcement regarding the sealing of a strategic partnership deal with CEFC, but it’s clearly indicative of a continuing warming between Moscow and Beijing that gave the former the upper hand in the race for market share with Saudi Arabia.

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Scotland To Permanently Ban Fracking

Scotland To Permanently Ban Fracking

Oil

The Scottish government said on Tuesday that it wants to extend a current moratorium on fracking into a permanent full ban, with a final vote likely taking place at the Scottish Parliament later this year.

“I can confirm that the decision of the Scottish Government is that we will not support the development of unconventional oil and gas in Scotland,” Scotland’s Energy Minister Paul Wheelhouse told the Scottish Parliament today.

In January 2015, the Scottish Government put in place a moratorium on granting consents for unconventional oil and gas developments in Scotland. Back then, the government promised to undertake further research on potential impacts before holding a full public consultation. The consultation ran from January 31 to May 31, 2017, and received more than 60,000 responses, the government said.

Today, Minister Wheelhouse told the Parliament that 99 percent of respondents in the consultation were against fracking. The ministers have a “moral responsibility” to tackle climate change, he noted.

“Fracking cannot, and will not take place in Scotland,” Wheelhouse said.

First Minister of Scotland, Nicola Sturgeon, tweeted that “Scottish government backs ban on fracking”.

Just yesterday, The Scotsman reported that ministers of the SNP party of government had been warned by other parties that a failure to ban fracking would be a “betrayal” to climate change commitments Scotland has made.

The Labour Party, Greens, and Liberal Democrats are all opposing fracking and supporting a ban, so they would likely support the Scottish government in a Parliament vote on banning fracking.

Friends of the Earth Scotland welcomed the decision to ban fracking, which they described as a “truly momentous win for the anti-fracking movement.”

A British Geological Survey report from 2014 said that there were “modest” shale reserves in Scotland. The estimate of shale gas in place is 80 trillion cubic feet, and the central estimate for shale oil in place is 6 billion barrels of oil. The volumes of oil and gas that could be commercially extracted are likely to be much lower, according to the 2014 report.

Oil Prices Steady, But $80 Oil Is Coming, Says Analyst

Oil Prices Steady, But $80 Oil Is Coming, Says Analyst

Oil

Oil prices were basically flat early on Wednesday, but $80 oil could be just around the corner, according to analyst Jodie Gunzberg, head of commodity and real asset indices at S&P Dow Jones Indices in a CNBC interview on Wednesday.

While prices are holding just below highs from earlier this week after U.S. crude inventories surprisingly declined amid higher demand, Gunzberg sees a “real rebalancing” taking place in the oil market.

The catalysts, Gunzberg explains, are improved OPEC compliance, strong demand growth in China—not to mention Hurricane Harvey, which disrupted US refineries.

“When we look at the index data, we can see the price could move even as high as $80 to $85 (a barrel),” Gunzberg said, noting that this would not happen immediately. “…with their structural backwardation and shortages in the market, you just can’t replenish it overnight,” she said.

Another catalyst for higher oil prices is the fact that Turkey could cut off the crude oil flow from the northern Iraqi region of Kurdistan, Turkish President Recep Tayyip Erdogan said on Monday. That threat has sparked concern that cutting off Kurdish oil could take around 500,000 bpd off the market.

West Texas Intermediate hit US$52.22 a barrel at the close of trade on Monday, up by 3 percent, as the Kurdistan issue, coupled with evidence that the global overhang is depleting, joined forces to push up international benchmarks. WTI is now back in a bull market, having risen more than 20 percent since the June lows. Brent crude settled at US$59.02 on Monday, its highest since July 2015. On Tuesday, Brent settled 1 percent down, as investors took profits after the price had hit a 26-month high the previous day.

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Oil Analysts Baffled As Venezuela Ditches Petrodollar

Oil Analysts Baffled As Venezuela Ditches Petrodollar

Venezuela

At the end of August, the U.S. stepped up sanctions on Venezuela, prohibiting dealings in new debt or equity issued by state oil firm Petroleos de Venezuela SA (PDVSA) or the government. A couple of weeks later Venezuela responded to what it called an “economic blockade” by suspending trade in U.S. dollars and publishing Venezuelan oil basket prices in Chinese yuan.

Analysts believe that although it has close strategic ties to China, Venezuela would mostly just harm itself with the move to “free the nation from the oppression of the dollar,” as Nicolas Maduro put it.

Venezuela told oil traders it will no longer accept or offer U.S. dollars in payment for crude oil and fuels, the Wall Street Journal reported earlier this month, citing sources familiar with the developments. As a result, traders have started converting dollars into euros, and PDVSA’s foreign partners operating in the country may have to switch to euros as well.

Two days later, on September 15, Venezuela started publishing its oil prices in yuan. The move went against earlier reports that Maduro would favor the euro. As it is unlikely that China would ever join the U.S. on its quest to force Maduro to end his campaign to rewrite Venezuela’s constitution in what many see as a step in bringing the downtrodden country closer to dictatorship, the choice of yuan seems a safe one, if nothing else, compared to the European currency.

The European Union refused to recognize the outcome of the Venezuelan vote, but has so far stopped short of imposing sanctions. However, earlier this month, the office of German Chancellor Angela Merkel didn’t rule out EU sanctions on Venezuela.

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Olduvai II: Exodus
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