Can An OPEC Deal Save Venezuelan Oil From Total Collapse?

Tyler Durden's picture

With the nation's currency in full-fledged hyperinflationary collapse, OilPrice.com's Nick Cunningham notes that at times it seems that Venezuela’s economic crisis cannot get any worse. Food shortages, electricity blackouts, and scarce medical supplies have created a humanitarian disaster in Venezuela. However, with each passing month the situation deteriorates, and the crisis appears to be entering a dangerous new phase.

Venezuela’s currency has lost about 60% of its value so far in November, the worst monthly decline on record.

Inflation is thought to be hovering at around 400 percent, according to Bloomberg, although some analysts put it as high as 1,500 percent. “Inflation is going to keep rising, there’s a risk of default, and the political situation is becoming more tense each day. People prefer to protect their money,” Asdrubal Oliveros, director of Caracas-based economic consultancy Ecoanalitica, told Bloomberg.

The horrific humanitarian crisis is only deepening, with food shortages becoming so acute that Venezuelans are starting to flee in large numbers, heading to Colombia, or Brazil, or even setting sail on small boats to seek food, shelter and work on some Caribbean islands. This could yet turn into a major refugee crisis. Venezuela is dangerously short on medical supplies, and the conditions in the country’s hospitals are some of the worst in the world outside of Syria.

The government of Venezuelan President Nicolas Maduro is hoping it will soon get some relief. China has decided to invest $2.2 billion into Venezuela’s decrepit oil sector, in exchange for a larger share of the country’s output. By some estimates, China has dumped $65 billion into Venezuela over the past decade, making the South American country too big to fail for Beijing. Venezuela has been paying that toll back in oil, earmarking some 550,000 barrels per day in output for China. But the latest deal will bring that obligation up to 800,000 barrels per day.

Venezuela needs the investment to repair crumbling energy infrastructure, which is leading to steady declines in oil production. Venezuela’s refineries are also in a sorry state. An explosion recently engulfed a PDVSA refinery. Also, Reuters reports that the country’s refining network is operating at just a third of capacity.

So the Chinese investment is welcome, but it also means that it will have less oil left over for sale. At this point, the government of Nicolas Maduro has little choice. For selfish reasons, China is trying to keep Venezuela’s oil sector from total collapse. “The imperative is to ensure no disruption of oil flow,” said Mei Xinyu, a senior researcher with China’s Ministry of Commerce, according to Bloomberg. “The political situation takes a back seat to the importance of oil production. Even if the opposition party takes power in the future, they’ll still need Chinese loans to pump out oil.” And while China has often been a friend to Venezuela in a time of need, even China’s confidence in its South American ally is wearing thin. Bloomberg reported that the state-owned China National Petroleum Corp. is cutting non-oil investments in Venezuela, noting an “unstable investment climate” and a “growing default risk.”

Maduro has also made an all-out effort to convince fellow OPEC members to agree to cut production at the upcoming meeting in Vienna. He’s confident that a deal is within reach, although one might say that he is simply putting on a brave face because OPEC is the only hope he has left. Oil analysts see oil rising to at least $55 per barrel if OPEC agrees to cut output, according to a Wall Street Journal survey of a dozen investment banks. The flip side is that crude prices could fall back to $40 if OPEC fails. At the time of this writing, Saudi Arabia had backed out of a meeting with non-OPEC members scheduled for Nov. 28 because Saudi

Needless to say, Venezuela’s immediate future could get a lot worse if the Vienna talks fall apart. The state-owned PDVSA recently missed a bond payment, which started the clock on a 30-day grace period before the company is in default. The Venezuelan government has been careful over the years to meet all its debt obligations in order to stay in good stead with the bond markets, so the late interest payment is a bad sign about the deteriorating finances of the state. JP Morgan still believes PDVSA will make the payment, and the deal that Venezuela made with creditors a few weeks ago to extend repayment terms provided a bit of breathing room. But the government’s cash reserves are down to a rather meager $10 billion.

While the short-term crisis is acute, there aren’t a lot of reasons to be any more confident about the longer-term. There are still very decent odds of a major debt default at some point, which will only make the crisis worse, if that is possible. Venezuela is a “failing state,” as The New Yorker put it recently. The country has already lost roughly 300,000 barrels per day this year. More losses could be coming.

Judging by the decoupling of default risk and oil prices in recent weeks, it appears Maduro has crossed the tipping point...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
hedgeless_horseman's picture

 

I love being able to buy worthless Venezualian oil with my highly-valuable US Petrol Dollars.

Thanks, Citgo!

Thanks, Bretton-Woods!

 

There has never been a better time to buy a 2017 Cadillac Escalade!

MSRP: From $73,395

MPG: Up to 15 city / 22 highway

Dimensions: 204? L x 81? W x 74? H

Horsepower: 420 hp

Fuel tank capacity: 26 gal

Theta_Burn's picture

With the largest reserves on the planet, the Venezualians have taken the crown away from the obama administration as the most inept...

King Tut's picture
King Tut (not verified) Theta_Burn Nov 28, 2016 12:56 PM

I did not know that about their reserves but isn't their sludgy oil a bitch to refine unlike ME light sweet?

Theta_Burn's picture

Yes.

Its mostly bunker, refiners hate it, but eventually it will be the next low hanging fruit.

silverer's picture

I thought one of its advantages was it was pretty low sulfur. That's a big plus, according to the vaunted and glorious EPA.

hedgeless_horseman's picture

 

 ...isn't their sludgy oil a bitch to refine unlike ME light sweet?

 

Houston, Texas, for the mother-fucking win!

In 1993 CITGO entered into a joint venture agreement with Lyondell Chemical to form the Lyondell-CITGO Refinery Company in Houston; of which Lyondell owned 58.75 percent and CITGO owned the remaining 41.25 percent.

On Aug. 16, 2006, Lyondell Chemical Company bought CITGO's share, and as a result, Houston Refining became a wholly owned subsidiary of Lyondell.

Products

The refinery has the ability to transform heavy, high-sulfur crude oil into fuels such as reformulated gasoline and low-sulfur diesel, as well as other products such as jet fuel, heating oil, lubricants, petroleum coke and aromatics. It also has the ability to transform Light Sweet Crude into Naphthenic Lube Oils, as well as treat White Oils in its Lube Oil Complex.

Capacity

Crude run capacity: 268,000 barrels per day (42,600 m3/d)

Gasoline: 120,000 bbl/d (19,000 m3/d)

Diesel: 95,000 bbl/d (15,100 m3/d)

Sweet Crude run Capacity: 7,000 bbl/d (1,100 m3/d)

Naphthenic Lube oils: 3,600 bbl/d (570 m3/d)

 

https://en.wikipedia.org/wiki/Houston_Refining

NoDebt's picture

"crisis appears to be entering a dangerous new phase."

I'm hoping it's the phase where Maduro cleans out the palace of everything that isn't nailed down and high-tails it to the airport under heavy gunfire.

silverer's picture

Buy a three year old one for about $25K. Such a deal.

KnuckleDragger-X's picture

Nobody in their right mind would invest in that giant turd. They've screwed everybody over, starting with their own people, and even if prices magically jumped to all time highs, it would barely slowed the collapse. Systemic socialism is a one way street, and they are far past the point of no return.....

King Tut's picture

The US is past that point as well but the dollar as Reserve Currency helps us out- for a while

King Tut's picture
King Tut (not verified) Nov 28, 2016 12:54 PM

I thought the Venezuala govt got their gold back- shouldn't their currency be rock solid?/s

tradebot's picture

How much for your women?

hedgeless_horseman's picture

 

If they look like Miss Venezuela, Mariana Jimenez, then probably more than you want to spend.

King Tut's picture

Have you ever seen a good looking CA/SA woman over 40YO? i sure haven't

Fed-up with being Sick and Tired's picture

I dunno, King Tut, your Mom is pretty hot.

silverer's picture

It seems to me they are really hot when in their late teens and twenties, many into their thirties. Having kids seems to do them in. Many get the "midriff" tire. It's not fair, but hey... what is?

silverer's picture

Cute girl. Wonder if she's in Venezuela now?

Justin Case's picture

Had to take a second look, thought someone posted a picture of our house keeper.

Chuckster's picture

What is: "collapse?"  Cannibalism?  New leaders?  New government?  Civil war?   What about the USA?  Don't we have enough problems of our own to solve?

Justin Case's picture

You have many problems and yoar country needs to stop helping the collapse of other countries, I agree.

tyrone's picture

"Cannibalism?"
yes, that is already underway in most prisons.

Shlomo Schwartzman's picture
Shlomo Schwartzman (not verified) Nov 28, 2016 1:01 PM

OPEC deal save them? 

IDK, can Humpty Dumpty be glued back together with ETFs?

Maybe they could evolve and adapt to digesting gravel or air in the interim.

Their Jew-run central bank is merely a (((coincidence))).

yngso's picture

Vzla needs first of all a real govt, and then and lots of foreign investment.

Stan Smith's picture

Short answer... Uhmmm... NO!

SomethingSomethingDarkSide's picture

Followed by a hearty laugh/cackle of course

pndr4495's picture

I can hear AMERICAN DAD saying that. I wonder what kinds of covert assets exist down there? The last people to know the answer to that one will be American Citizens.

inosent's picture

sadly, no. it seems ppl in venezuela are just too stupid.

the.ghost.of.22wmr's picture
the.ghost.of.22wmr (not verified) Nov 28, 2016 3:11 PM

VETA (FTZ)

 

Venezuelans Eating Tasty Animals (From The Zoo)

Mr.Kowalski's picture

Time to flee this rats nest.. Colombia and Brazil will probably wind up with half of Venezuela's population by this time next year.

BitchesBetterRecognize's picture

any deal with OPEC is bad if you ain't an Arab nation- neither will be helpful to have the only source of revenue used as a political weapon by an Inept Dictator- IOW - nothing will change IF the Venezuelan government structure & philosophy remains in power.   

samjam7's picture

Argentina is reporting 600 Venezuelan immigrants arriving each week. Northern Brazilian state of Roraima is thinking of implementing emergency measures due to a surge in unemployed, homeless Venezuelans fleeing across the border.

Besides the current well known shortages there appears to be a cash and gasoline shortage surfacing in recent weeks. Long queues have been reported in several cities in the northwestern states of Lara. PDVSA said this was due to Hurricante Matthew disrupting refining proccesses but Venezuelans know better than to believe this. 

Cash shortage is severe, as the government promised to finally issue new larger-denominated bills in December (20.000 VEF being the largest one, currently already only worth 5.5 USD). The current 100 Bolívar Bill in circulation is worth 2.7$ cents. As arguably nothing can be bought with the lump of paper, ATMs have run dry and people are forced to pay by card if they want to purchase anything (of the few things one can still find on the shelves).

Arguably the death-cross for the country has been crossed a while ago, it's a slow death only due to the firm grip of the military and its powrful funders in China backing the crumpling regime. The military, deeply entrenched in the Colombian drug business (why do you think Maduro was so eager to help Santos get a peace deal with the FARC guerrillas who funnell all those drugs across the border?), and ship it in small planes ontwards to the Caribbean, Venezuela has turned into a failed Narco-State. 

I haven't even mentioned its gold reserves and huge projects of mining in virgin rainforest Maduro announced early this year to 'help boost the economy'. One may only hope he doesn't make it long enough so that at least its nature may get spared by this nightmare unfolding. 

Oh, I nearly forgot, ¡Viva Fidel Castro! Or how did it sound in this chat only two days go?