Falling Oil Prices Could Push Venezuela Over The Edge

Tyler Durden's picture

"There is nothing good to say about the state of Venezuela’s economy, and this isn’t helping," warns Danske's Lars Christensen as tumbling prices for Venezuela’s oil are threatening to choke off funds (oil is 95% of exports) needed to pay debt.. and that is clear from the collapse of bond prices. The Maduro government desperately needs a rise in oil prices, but Saudi Arabia has so far rebuffed calls for an emergency meeting as it pursues a strategy of waiting out higher cost competitors. OPEC does not plan on meeting until Nov. 27. That is an eternity for a country that is beginning to unravel.

 

 

Submitted by Nick Cunningham via OilPrice.com,

Oil prices continue to slide, putting enormous pressure on oil producers around the world.

Saudi Arabia has insisted it is willing to live with lower prices for quite a while as it seeks to maintain a grip on its market share. Kuwait also indicated its willingness to slash prices in order to keep output level. That sent oil prices lower on Oct. 14, as the markets reacted with a bit of surprise to the unwavering stance by OPEC’s leading members: WTI dropped 4.5 percent.

Lower oil prices are putting a strain on all producers, including Saudi Arabia, but Riyadh is hoping that the economic pain will be much greater for some of its competitors. That includes U.S. shale producers, which have higher average production costs.

In fact, an estimated 2.8 percent of total worldwide oil production could become unprofitable if oil prices drop below $80 per barrel, according to a new report from the IEA. Canadian oil sands projects topped the list, but U.S. shale might not be far behind.

But while Saudi Arabia tests the mettle of North American producers, it could be Venezuela that is the most vulnerable. As a fellow OPEC member, Venezuela has been the most vocal about the need to cut oil production and has called for an emergency meeting of the 12-member oil cartel. That is because Venezuela is in a much weaker position than many of the other member countries, and the recent drop in prices has raised alarm in Caracas.

Using state-owned oil company PDVSA as a piggy bank has allowed the Venezuelan government to increase social spending over the last decade, a key political objective of the late President Hugo Chavez and his successor, Nicolas Maduro. However, using oil revenues for a wide array of spending priorities has also starved PDVSA of money needed for investment in order to boost oil production, let alone keeping output level. Since 2000, Venezuela has seen its oil output drop from 3.5 million barrels per day (bpd) down to 2.5 million bpd.

Venezuela Oil Production

The bad news for President Maduro is that there was major unrest earlier this year even when oil prices were above $100 per barrel. That is because oil makes up 97 percent of Venezuela’s foreign earnings, and the country needs oil prices of around $120 per barrel for its bloated budget to break even.

Venezuela is in an economic crisis. Annual inflation is estimated to be in excess of 60 percent. The country’s economy actually shrank at a rate of 5 percent in the first six months of 2014. Shortages of food, medicine, shampoo, diapers, and other basics are so common that the government rolled out a plan this past summer to fingerprint people at grocery stores.

Crime is so rampant in the capital that people are afraid to go out at night. For those who can afford it, leaving the country has become the best option.

The government is heavily indebted, and Venezuela’s bonds are now competing with Ukraine’s for the mantle of the world’s riskiest. With bond yields surpassing 16 percent, Venezuela cannot keep up. There is a 50-50 chance of default within the next two years, according to credit rating agency Standard & Poor’s.

The sudden 20 percent decline in oil prices since June is compounding the problem and has the potential to throw the country into crisis. “Venezuela’s oil prices have been high for several years now, and the country is still struggling to pay its debt at those prices,” Russ Dallen of Caracas Capital Markets told The Wall Street Journal. Lower oil prices could bring things to a head.

The Maduro government desperately needs a rise in oil prices, but Saudi Arabia has so far rebuffed calls for an emergency meeting as it pursues a strategy of waiting out higher cost competitors. OPEC does not plan on meeting until Nov. 27. That is an eternity for a country that is beginning to unravel.

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Beam Me Up Scotty's picture

"the country needs oil prices of around $120 per barrel for its bloated budget to break even"

So we should pay more so they can pay less?  How about you learn to live within your means.  Your bloated government is a big waster like EVERY OTHER GOVERNMENT IS. 

Bloppy's picture

If prices went back up to $120 Venezuela would instantly up their spending to the $150 level. See how this works?

Elsewhere:

Local TV stations forced to cover Ebola closures like a severe weather event in January http://tinyurl.com/qebg7xg

Dr Strangemember's picture

I can only hope that the hot venezualan Indy Car driver, Milka Duno, moves here if things get really bad there.

 

 

Beam Me Up Scotty's picture

Bloppy:

You are spot on.  Thats how every government works here too:  Local, state, federal.  There is never a budget surplus, because they always just spend it all.  And then they need even MOAR when they have budget deficits.  I am sick of being a slave so someone else can have their pet project. 

Manthong's picture

Well, they could just go and entrust their gold to Goldman Sachs.
I’m sure GS can help them make up the temporary shortfall, and then give it back.

Emergency Ward's picture

What's really great is that Venezuela could take the paper receipts for that gold to use as collateral for near-ZIR loans from JPM and BoA.

Richard Chesler's picture

Fuck Masburro and his ignorant free shit army.

 

ZerOhead's picture

Covering ebola like a severe weather event makes sense since Obama's "Climate Scientists" have already linked this outbreak to global warming...

http://www.newsweek.com/climate-change-ebola-outbreak-globalization-infe...

BigJim's picture

I'll say one thing for the warmists - what they lack in integrity they make up for with imagination.

Speaking of lack of integrity... whatever happened to Flakmeister? She was fun!

0b1knob's picture

< Over the cliff and into the trashbin of history is a good place for Venezuela.

< That cliff done been gone over long time gone.

max2205's picture

Stupid.....why does a oil rich country have to borrow anyway.

Default and move on

disabledvet's picture

Diesel fuel is 25 cents a gallon over there I think. Most of which is refined in the USA I might add!

If we have a full fledged Ebola outbreak in the USA he entire country will be on lock down.

The President was given the war plan his "briefing" would be my guess.

If I'm right...he might have even had a question or two...

BigJim's picture

This whole 'ebola' hysteria in the US media is kind of amusing. It echoes the hysteria over terrorism... Americans seem rather more terrified of dying than most other people. I wonder why that is?

Peter Pan's picture

Oil rich but toilet paper poor.

all-priced-in's picture

America is also an oil rich country.

 

 

Glass Seagull's picture

 

VZ yield curve looks like shit...because it sucks...BAD!

Emergency Ward's picture

Why doesn't Maduro issue a decree that oil is $120 a barrel?

Glass Seagull's picture

 

 

BC OPEC trolls will have the US sack his ass and then they'll split up VZ's gold based off of geographic proximity to Riyadh

StychoKiller's picture

As far as I know, the only other thing Venezuela has to export besides Oil is Hawt Babez!

Kirk2NCC1701's picture

Venezuela, pull an "Iceland" or an "Argentina":  Default.

Then start selling Oil for CNY and Gold.

Debeachesand Jerseyshores's picture

So rich yet so poor.Progressive Liberalism at it's finest....

Quinvarius's picture

Nobody gave a crap when they pushed gold $600 below profitable long term mining costs.

Joe A's picture

I read somewhere that Hezbollah had/has training camps in Venezuela and that the country is buddy buddy with Iran, Saudi Arabia's arch enemy in the ME. So SA is trying to get rid of several competitors at the same time: Russia, Iran, US shale oil and gas, Canadian oil and gas and Venezuela's oil. SA is making enemies but as long as they can manage to fool the Obama administration they can carry on.

ghostzapper's picture

How much those bonds gonna be worth if/when crude hits $40?  Gartman and Cramer should know can we ask them please.

tumblemore's picture

I'd estimate the chance of the neocon's lastest anti-Putin wheeze not having unintended consequences somewhere, somehow at precisely 0.00%

 

Monty Burns's picture

Bingo!  You get today's prize.

Those people have declared war on Russia in all but name.

fxrxexexdxoxmx's picture

But when Putin threatens others with hydrocarbon blackmail it is only a chess master trying to win the game. When it is done to him it is called war. Putin sounds like a crybaby to me.

Billy Sol Estes's picture

They are already trying to divest CITGO assets.

youngman's picture

I wonder if they can re-nationalize again the oil companies....but look at it this way...oil is cheaper than Toilet Paper now....I bet the people are waiting for Muduro to drop the price of gas from 25 cents a gallon to 23 cents...why not ..the price is down...

Peter Pan's picture

Economics is a lousy science but when it is made subservient to geopolitics it beomes even worse.

the grateful unemployed's picture

the poorer the oil producing nations get the more oil they want to sell. the more oil they sell the lower the price goes, the poorer they get, the more oil they want to sell (meanwhile smart hedgefund guys in the US, using rehypthocated assets, buy up that oil and put it in long term storage)

JAFAH's picture

rehypthocated assets - bingo

Not just the oil but the rocks it is trapped in is the long game.

That being said I've worked with a few Venezuelans recently that have all told me the same story of the oilfield there being locked up - as in logistic wise be prepared to wait and wait until some bureaucrat  approves something and all the anti-corruption guys approve it as well. Sounds like a good place to work if you like doing nothing but waiting for days on end.

Everybody needs a job, but are they qualified or can they do it effeciently, the unions don't care.

Quantum Nucleonics's picture

That might be true, but the hedge funds are not that smart, note how they all got their faces ripped off this week.

wmbz's picture

Tough shit bitch!

Screw your gubmint first, before and because they will screw you!

SethDealer's picture

I'd like to see Venezula go broke and all their babes move to Merica, that would be cool

fibonacci&#039;s claus's picture

how else are the elites going to steal chavez's recently repatriated gold

Salsipuedes's picture

"Price discovery" is whatever works today for the destruction of dissent tomorrow.

gwar5's picture

Socialist Paradise. They had oil, women and everything, and still managed to fuck it all up in just a few years.

 

What ever happened to Chavez's $3 Billion stash that he gave himself in the 8 years he was dictator?  We'll never know, but that's how socialists really roll, 'Fuck the little people'.

Nue's picture

I laugh at Venezuela until I remember that my country is run by idiots with grand ideas as well.

orangegeek's picture

more socialism

 

more unions

 

shorter work days

 

these are the solutions  - LMFAO!!!!!!!!!!!!!!!!!!!!!

earleflorida's picture

Funny, but... back in the mid 19th c. there was talk of building a 'Nicaragra Canal'[?], rather than the 'Panama [opened Aug. 15, 1914] Canal'.

The Suez  [opened Nov/1869] Canal through the Mediterranean via Red Sea vice-versa was a colossal engineering triumph.

A year ago the Chinese [CCP] Communist Government had open['d] negotiations with Nicaragua and Venezuela. The talks concluded in May-Sept 2013 to build a... 'Nicaragua Canal', bypassing the USSA's (Monroe Doctrine/ Truman Doctrine/ Eisenhower Doctrine/ Nixon Doctrine/ Bush #41 & #43 Doctrine and Obama's ' South China Sea 'PIVOT', Doctrine`aire?') undisputed ownership of all open sea lanes?!?

South America is rich, rich... in natural resources, and not the 'Banana Republic Kind?'

Note:  "7 Fascinating Facts About the Panana Canal (& Suez Canal viva the French)"   {(originally the Nicaragua Canal was the best route because of the semi-hospitable terrestrial`terrain, compared to the known infestation/ swamps of a desease ridden'd Panama!)} *Note2)  The Nicaragua Canal will be deeper and with a much wider girth and Lanes for China's 'Super`Super Heavy Duty Tankers. Note#3) $40 Billion is a drop in the bucket when you've got Trillions$$$ sloshing around, whilst looking for an opportune-tyme to invest. Advantage China and survival goes to Venezuela/ Nicaragua future of semi-autonomous sovereignty?

http://www.history.com/news/7-fascinating-facts-about-the-panama-canal

"China to Build $40-Billion Canal through Nicaragua"       10/31/2013         http://www.thenewamerican.com/world-news/north-america/item/16844-china-to-build-to-build-40-billion-canal-through-nicaragua

"The Folly of Embracing China as a Financial Angel"   10/22/13    *(*looking at what's going on with Russia/ Europe and Ukraine and the Rockefeller/ Rothschild's Houses... someone or something is causing a global seimic disturbance as to whom or who controls all the "NatGas" energy for the next couple of centuries)

http://www.thenewamerican.com/economy/commentary/item/16764-the-folly-of-embracing-china-as-a-financial-angel

 

Note:*  Important [SHOVE?} Push? ---  'US Strategy: Between the 'Pivot' and 'Air-sea-Battle'        http://www.eastasiaforum.org/2012/08/26//us-strategy-between-the-pivot-and-air-sea-battle/           

and this: _____ Has America run-the-course of containment against tyme, oar has she tired of Imperialism???            http://en.wikipedia.org/wiki/George_F._Kennan

 

jmo