The Strategist

Venezuela: Unobvious influencer of the oil market

04/25/2017 - 13:34

When it comes to oil prices, one should not disregard Venezuela. Aggravation of the economic and political crisis in the country can seriously affect the market.

max pixel
max pixel
The country with the world's largest oil reserves is experiencing economic collapse and, as a result, mass protests against the government of President Nicolas Maduro. MarketWatch quotes James Williams, an energy economist at WTRG Economics: "Now the country’s condition is worse than in the last two decades. Corruption, violence, lack of food and almost no drugs have increased".  

In addition to other troubles, oil carriers are delaying shipping and are demanding a trial on Venezuela's refusal to pay for transportation, Williams says. According to recent reports, a Russian carrier blocked supply of Petróleos de Venezuela SA oil (PdVSA), as the state oil company of Venezuela has delayed payment of shipping fees. The amount of debt is estimated at millions of dollars.

The risks associated with Venezuela can lead to a price jump of at least $ 0.5 per barrel, Williams said. In the event that "for some reason oil exports stop abruptly", the change could reach $ 5 per barrel.

Last Thursday, General Motors announced termination of operations in Venezuela "because of illegal judicial seizure of the company’s assets". Although the reason for the capture is unclear, there is nothing unusual in this event, especially when it comes to assets in the oil industry.

Analysts say that if the government plans to solve problems by seizing foreign assets, Venezuela's situation will only get worse. Michael Lynch, Head of Energy and Economic Research, says: "In economic matters, the government has behaved, to put it mildly, clumsily, but seizing foreign oil assets is suicide. Already, the industry is suffering from a shortage of qualified personnel, and replacement of foreign engineers at enterprises will be extremely difficult. This means that oil production will decrease".  

The industry’s experts believe that the current production of oil in Venezuela is about 2 million barrels a day, the lowest level in the last 14 years. Any capture will be a "short-sighted and desperate" move and will only "accelerate the continuing decline in oil production in the country", says Brian Youngberg, senior energy analyst at Edward Jones. He notes that many companies, such as Exxon Mobil, have long since turned off production in Venezuela.

The country's economy suffered a severe blow when the global glut of the crude oil market caused a drop in prices: Brent and WTI had fallen by about 60% from 2013 to 2015. Tyler Richey, Co Editor at The Sevens Report says: "If we talk about future, the general state of oil production in Venezuela is unlikely to improve. Most likely, this will lead to a further decline in volumes, and, of course, we can expect price growth. But at the beginning of this year, Venezuela in one way or another exceeded the quota for production agreed with OPEC, so these are still empty words from a market point of view". In accordance with the OPEC agreement earlier this year, Venezuela pledged to reduce production to 1.972 million barrels per day.

According to S&P Global Platts, production was estimated at 2.01 million barrels in January. However, while Williams resumes rising oil prices due to the deplorable economy of Venezuela, some believe that the country is unlikely to have a strong impact on the world market. Richey says: "Venezuela will continue to have a limited impact on world prices now. They are pumping as much as they can, because they need it, and there no change expected here. But at the same time, they will not be able to increase volumes without investments, so do not expect a bearish influence on the market from their side".