One Way Or Another – Venezuela Will Send Oil Prices Up

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

In a desperate bid to survive its economic meltdown, Venezuela is lobbying other OPEC members to agree to steeper oil production cuts, a move that would likely lead to higher oil prices.

Venezuelan officials have reached out to their counterparts in Iran, Russia and Saudi Arabia to press them on more collective action, according to Argus Media. If there was enough interest, the next step would be an “extraordinary meeting,” which would weigh the option of cutting deeper.

The rumors about deeper OPEC cuts have been floating around since June, when oil prices collapsed into the low-$40s. The markets have grown deeply pessimistic about the health of the oil market, and doubt the OPEC cuts will balance the market by the end of the compliance period in March 2018.

But the behind-the-scenes effort from Venezuelan officials is notable, if only because the South American OPEC members was one of the earliest and most aggressive supporters of the original deal to reduce output. In 2016, for months the more powerful members of the cartel rebuffed Venezuelan pleas, but in the end they agreed to reductions in November after oil prices continued to wallow below $50 per barrel.

The deal pushed prices above $50 for a period of time, but after six months of restraint, the market is back in sub-$50 territory.

However, the urgency for higher prices is more acute now for Venezuela. Protests have spread nationwide in the South American nation as the economy contracts at a torrid rate. Violence is becoming more widespread, and the nation is suffering from political gridlock and economic and social disaster.

Over the weekend, the opposition organized an informal referendum, which attracted more than 7 million votes, to oppose anti-democratic moves by the government. The vote demonstrated widespread anger and opposition towards the government’s upcoming effort to consolidate power in a July 30 vote to rewrite the constitution, a move that would weaken competing institutions like the National Assembly. The referendum opposing the July 30 vote was not recognized by the government, but it was a show of force for the opposition.

There is no way out of the downward economic spiral for Venezuela in the short run without significantly higher oil prices.

Argus Media reports that Venezuelan officials fear that state-owned oil company PDVSA might default “within five months if oil prices remain stuck below $50/bl in second half 2017.”

The Venezuelan government and PDVSA both have a large pile of debt maturing later this year, with $4.9 billion in payments due between August and December, although two-thirds of that belong to the oil company. The key deadlines to watch are October and November – the sovereign and PDVSA have to pay bondholders a combined $3.63 billion in those two months.

The problem is that cash on hand has been in freefall for the last few years, with total holdings somewhere around $10 billion.

At the same time, Venezuela’s oil sector is in a state of crisis. Production has been falling for years, although the declines really started to accelerate since the market downturn that began in 2014. Production stood at 1.938 mb/d in June, down 221,000 bpd from the end of last year. The declines will continue because the state has no money left to invest in maintenance at existing fields, let alone invest in new projects.

Worse, few companies are interested in investing in such an unstable environment, leaving little hope that the private sector can turn things around.

There was even talk recently about the prospect of the state nationalizing some privately-owned assets, a move that would surely scare away the remaining companies doing business in Venezuela. A prominent ally of President Nicolas Maduro said that the upcoming rewrite of the constitution could include state ownership of the oil industry, comments interpreted as a threat at full-scale nationalization

PDVSA was forced to issue a statement earlier this month guaranteeing the “legal security” of foreign companies operating in the country in an effort to tamp down fear that the company’s international partners would see their assets taken by the state. Indeed the company is seeking more cooperation from the private sector, not less. Without any cash to invest or maintain production, PDVSA has reportedly offered stakes in projects to companies such as Russia’s Rosneft in exchange for investment.

"Imagine justifying to your board of directors that you put more money into Venezuela when there was an announcement from the president's top adviser that he was going to nationalize companies," Francisco Monaldi, fellow in Latin American energy policy at the Baker Institute at Rice University in Houston, told Reuters in an interview.

Monaldi made similar comments in a separate interview with Bloomberg in early July: “It would be suicide,” Monaldi said, referring to nationalization. “It would have an enormous cost given that production has fallen so much and that about half of the country’s current output comes from these joint ventures with foreign companies.”

What happens next is unclear. The government and the opposition are heading for a major clash over the July 30 vote to revise the constitution. The opposition fears a dictatorship-in-the-making. But either way the country’s economy is standing at the abyss.

To complicate matters further, the U.S. government warned about “swift economic actions” if Maduro’s government moves forward with the July 30 vote. “The United States will not stand by as Venezuela crumbles,” President Trump said in a statement. The White House could target PDVSA in an effort to cut into Venezuela’s oil revenues, a move that could very well destabilize the country further.

Venezuela’s roughly 2 mb/d of oil production hangs in the balance, which, if lost in some sort of sudden calamity, would certainly send oil prices sharply up.

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RagaMuffin's picture

U.S. government warned about “swift economic actions” if shale oil lenders are put at risk............\S

Looney's picture

 

The United States will not stand by as Venezuela crumbles

Now, after we “taught” North Korea a lesson, are we gonna send 2 or 3 Carrier Groups to Venezuela?

Stay the fuck out of it, Donald! Dontcha have a bunch of things to do here, at home?   ;-)

Looney

RagaMuffin's picture

LoL, The United States will not stand by as Venezuela crumbles......just bomb it(CITGO) to keep it from falling into Russian hands?

Ghost of PartysOver's picture

Any country that cuts oil production is just giving that production to another country.   Every country screaming and crying for oil cuts are countries whose internal finances are for shiat.  Time to pay the piper.

Blue Balls's picture

Yep.  Exactly why cartels only work in the USA when the market can be closed off.

Michigander's picture

If Maduro was mart, he’d sell PDVSA to British Petroleum, let them invest and bring the business back into profitability, and then renationalize it.

Treason Season's picture

Jumping the queue here just to say Tyler's coverage of Venezuela is consistently reactionary propoganda. EOM

shovelhead's picture

This 'reactionary' term...

Is this in reference to the 'Glorious Revolution' of the Proletariat?

It seems to be a favorite descriptor to use on opponents by The Communist Party.

Are you a card carrier or just the armchair variety?

halcyon's picture

One word to Cunningham: no.

Get back to doing research.

 

Hume's picture

Of course they want others to cut.  They are de facto cutting by their imploding infrastructure, and they want the others to bail them out.  

waterwitch's picture

What happens next is unclear

 

war seems pretty clear

Bill of Rights's picture

More gaming the black tar....

Vardaman's picture

Pure BS.  The only refineries that can handle Venezuela's heavy oil are in the US (which has not been receiving any) Venezuela (where the refineries are not running anywhere near capacity) and China.  Of course, Cuba and Massachusetts are missing out on that wonderful subsidized oil, but their share of the market is miniscule.  Pure BS...

shovelhead's picture

They should reciprocate and send Venezuela their gummint cheese.

Joe could call it "Velveeta for Venezuela".

Byte Me's picture

Utter BS

The OilExps in the US are barking to OWN Vz.

 

youngman's picture

I bet when we put sanctions on his oil...GS will buy it thru a shadow company and ship it around the world and eventually back to the USA and sell it as Saudi oil or something...but Thursday is a state wide strike....we will see how that goes...I still think the military will turn against him in the end...

kavabanga's picture

But before due to tech analyzis it can fall futher. Somewhere in 48$ area.

https://www.tradingview.com/chart/UKOIL/nOHZygj1-Resistance-at-49-5/

News on Oil gona be released soon.

Let's see what ha??enes.

adr's picture

So every country is pumping at a loss right now? How did they ever make it for the hundred years oil was under $20?

$100 oil was a product of Wall St fakery, not the reality of the global economy. 

Oil belongs below $35. Every dollar above $35 sucks the lifeblood of the global economy. Is it any wonder why the real economy ended in 2001 and the multiple expansion debt fueled stock market orgy took over. 

The economy can't function in a high price base commodity environment. It ends up costing more to produce anything than the price you can sell the end product for 

A socialist making promises to his people based on unrealistic oil prices isn't my problem. It is the fault of the people for believing they could have something for nothing. The global personality trait destroying the world. 

RedBaron616's picture

As always, when the profits are piling high, companies get sloppy and don't worry themselves about efficiencies, especially when the profits are rolling in for that many years. I am sure more people were hiring than should have been and no one worried too much about lean six sigma or any such stuff. It was eat, drink, and be merry, but now the party has ended and the hangover is enormous.

Economies can function in a high price base commodity environment. It has worked in Europe for years. Their fuel prices have always been steep and yet they managed just fine. The problem in America isn't commodity prices. The problem is government manipulation of the market and currency, including the Federal Reserve. There lies the problem as well as an ever mounting National Debt. 

Ben Tornilloed's picture

Belongs below $35???  Based on what?  do you have a PhD from Princeton in economics?

Cordeezy's picture

yeah, I doubt Venezuela will have much of an effect.  

 

www.escapeamazon.com

 

just the tip's picture

i don't know why the author failed to mention, during all the bondholder and payment schedule jibber jabber, that mother russia holds those bonds.  as well as an impounded tanker as collateral for a past missed payment schedule.  i'm sure goldman and jpmorgan have invested heavily in venezuela's calamity, but i bet john mccain on his death bed would not allow russia to take possession of citi service old refineries in the US.

shovelhead's picture

Those Citgo stations will have signs in English and Cyrillic

"Under New Management".

Boris may even wash your windshield and check your oil too.

daveO's picture

And 'skim' your cards.

BritBob's picture

Meanwhile - further down the continent 

The company Rockhopper Exploration says it has achieved a "fabulous achievement"Rockhopper Exploration Plc revealed the discovery of a "site of world class" in the Sea Lion sea area north of the Falkland Islands.

The company chairman, Pierre Jean-Marie Henri Jungels, made the announcement at the last shareholders meeting of the company. He said it is a "fabulous achievement", comparable to the reserves reported in Argentina private company Pluspetrol . (Diario Digital Notife 14th Dec 2016)

What about the Argentinians?

Falklands – Territorial Waters: https://www.academia.edu/10574593/Falklands_Islands_Territorial_Waters

 

and

Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-

https://www.academia.edu/33898951/Argentinas_Continental_Shelf_Claims_-T...

 

Ben Tornilloed's picture

Los Malvinas SON Argentina!!!

Moving and Grooving's picture

Whenever I see the word 'obsessed', I think of BritBob. Every. Time.

Bwana's picture

Nothing to see here folks! Just another country bankrupted by socialism or communism. If the present socialist leaders of Venezuela wanted to have the country recover they would step down and allow the country to recover. Instead they are pushing to become a socialist/communist dictatorship. Margret Thatcher said , "Socialism works until you run out of other peoples money." Why can't people understand this. Once the government has consumed all the public and private wealth of the entire country the government moves for absolute control to cover up their mistake.

I have never understood why when any country builds a very bloated central government that it can't afford; they then decide the cure to the problem is to go socialist/ communist which always because of the increased responsibilities and functions of government causes the already bloated government to increase in size and cost which bankrupts the entire country.

This has been going on since the Spartans installed socialism in 400 BC. Spartan also means you have little or nothing which is what the people end up with. In the last 2,400 years numerous countries have tried the socialist/communist route to financial freedom and it has never worked. Why, because mathematically it cant work regardless of who runs the operation. You can't add 2 + 2 to get 5 no matter how many times you try to do it.

We here in the US have three tiers of government bloating themselves toward bankruptcy of our nation. I don't know of a single local, state or our federal government that is willfully cutting back on hiring and taxes.  Trump is trying but the deep state won't allow it. The three tiers of government are starving the finances of workers to where they cannot afford children or more children. The only large families are the very rich or welfare families. Our federal government is now trying to reduce the amount they spend to 50% more than they take in as opposed to the 80% overage Obama spent. This will not end well.