Venezuela In Dire Straits As Oil Production Falls Further

Authored by Nick Cunningham via OilPrice.com,

Venezuela’s economic crisis continues to deepen. The South American OPEC member is thought to be sitting on nearly 300 billion barrels of oil, far more than any other country in the world, including Saudi Arabia (estimated at 268 billion barrels). But the economy has been in freefall for several years, with conditions continuing to deteriorate.

The economic crisis has morphed into a full-blown humanitarian disaster. Just this week the Wall Street Journal reported on Venezuelan women traveling to neighboring Colombia to give birth because the state of Venezuela’s hospitals are horrific, with shortages of medical supplies and trained staff. Infant mortality is worse than in war-ravaged Syria.

Food and other essential items are also painfully scarce, leading to long lines at shops. Tensions run high because there is not enough to go around.

Now even gasoline is running low in Caracas, Reuters reports, an unusual development for the capital city.

Gas shortages suggests problems for Venezuela’s state-owned oil company PDVSA are deepening. The government depends on oil production for more than 90 percent of its export revenues, and the collapse of oil prices back in 2014, coupled with a long-term slide in output, have ruined the company’s finances.

That, in turn, puts even more pressure on PDVSA. A shortage of cash is straining the company’s ability to import refined products as it falls short on bills to suppliers. PDVSA needs to import refined products to dilute its heavy crude oil, but without enough cash, tankers are sitting at ports unable to unload their cargoes. Reuters also says that “many tankers are idle because PDVSA cannot pay for hull cleaning, inspections, and other port services.”  

Separately, Bloomberg reported that Venezuela’s largest port at Puerto Cabello is quiet, with satellite imagery showing no vessels arriving or departing. “If you can see a country’s economic decline from space, you know it’s in big trouble,” Graham Stock, the head of emerging-market sovereign research at BlueBay, told Bloomberg on March 19. 

The economic malaise has Venezuela’s cash reserves plunging to $10.4 billion, according to the latest estimates, which is equivalent to only 10 percent of the country’s outstanding debt. Graham Stock told Bloomberg that he puts Venezuela’s odds of a default this year at 50 percent.

Inflation is likely over 700 percent annually, but in February the central bank decided to stop publishing money supply data, which surely doesn’t bode well. “If they are not publishing, you know it must be skyrocketing,” Aurelio Concheso, director of the Caracas-based business consultancy Aspen Consulting, told Reuters in an interview.

The economic meltdown and humanitarian crisis has sparked anger across the country, and opposition to the incompetent management of President Nicolas Maduro is growing. That has been met with a clenched fist by the Maduro government, which has jailed political prisoners, weakened the National Assembly and indefinitely delayed gubernatorial elections. In response, 14 Latin American nations plus the United States and Canada are pushing a resolution in the Organization of American States calling on the Maduro government to hold elections and back off his nationwide crackdown. The efficacy of such a move is uncertain, but for a dozen nations in Latin America to intervene in such a way is a testament to how far Venezuela’s stock has fallen. “It’s one more step in the increasing isolation of Venezuela,” Javier Corrales, a professor and Latin American expert at Amherst College, said in a WSJ interview. “It’s a very important step in a region that realizes one of its members is in violation of the democratic precepts of the OAS charter.”

Venezuela’s predicament has ramifications for the oil market. The South American nation was desperate for collective production cuts from OPEC members, and has enthusiastically supported the deal. Venezuela pledged output cuts of 95,000 bpd from October levels, promising to average 1.972 million barrels per day between January and June. Early data shows that Venezuela has not yet followed through on those cuts – Reuters says it is achieving only a 7 percent compliance rate. But the government has ordered cuts from some PDVSA operations in Orinoco Belt, a sign that the Maduro government has intensions to follow through on its pledge. Non-compliance could rattle the resolve of other OPEC members, ultimately leading to an unraveling of the deal, which would likely push oil prices much lower and worsen Venezuela’s crisis.

However, production cuts also run the risk of exacerbating the economic depression that Venezuela finds itself in. Lower production means much less revenue. On top of that, Reuters says that some of the cuts will affect joint ventures that PDVSA has with Eni and Rosneft, two partners that won’t be too happy about being ordered to reduce output.

The bottom line is that Venezuela’s oil output might be heading down whether or not President Maduro wants it to. Fitch Ratings says that a default on PDVSA’s debt is “probable” this year, with an estimated $10 billion in debt payments falling due and only $2 billion in cash on hand. And the company would need much higher prices in order to boost production at any point in the near-term. “Giving the tight liquidity, prices need to be significantly higher to revive output,” Lucas Aristizabal, a senior director at Fitch, told Bloomberg in February. “At least more than $100 to start with.”