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Venezuela's crude oil production is declining amid economic instability


Venezuela's crude oil production has been on a downward trend for two decades, but has experienced significant decreases over the past two years. Crude oil production in Venezuela fell from an annual average of 3.2 million barrels per day (b/d) in 1997 to an average of 2.4 million b/d in 2015 (Figure 1). More recently, Venezuela's crude production fell from a monthly average of 2.3 million b/d in January 2016 to 1.6 million b/d in January 2018. A combination of relatively low global crude oil prices and mismanagement of Venezuela’s oil industry has led to the accelerated decline in production. Venezuela's economy is extremely dependent on oil revenue, so the production declines are having a negative impact on the country's finances as well.

Figure 1. Venezuela average annual crude oil production


Several indicators suggest that Venezuela's crude oil production will likely continue to decline in the near future. The number of active rigs has fallen from about 70 in the first quarter of 2016 to an average of 43 in the fourth quarter of 2017 (Figure 2). In addition, recent reports indicate that financial difficulties, such as missed payments to oil service companies, a lack of working upgraders, a lack of knowledgeable managers and workers, and declines in oil industry capital expenditures, have also contributed to production declines.

Figure 2. Venezuela monthly rig count


The United States is the largest importer of Venezuela's crude oil, receiving an average of 618,000 b/d in 2017, or about 41% of total Venezuelan exports. China and India received approximately 386,000 b/d and 332,000 b/d, respectively, in 2017. The remaining 186,000 b/d of exports during the year went to countries including Sweden, the United Kingdom, Germany, Cuba, Singapore, and others (Figure 3).

Figure 3. Venezuela monthly crude oil exports


Venezuela produces extra-heavy crude oil in the Orincoco Oil Belt area and relies extensively on imports of lighter liquids (diluents) to blend with this crude oil to make it marketable. Financial difficulties have recently prevented the state-owned oil company, Petroleos de Venezuela SA (PdVSA), from importing the necessary volumes of diluent on several occasions to sustain production and exports.


In 2017, refiners in the United States and Asia reported crude oil quality issueswith imported crude oil from Venezuela, resulting in requests for discounts or discontinuation of purchases. Venezuela's crude oil exports to the United States fell from 840,000 b/d in December 2015 to 437,000 b/d in December 2017 (the latest month for which EIA import data are available). As recently as September 2017, Venezuela was the third-largest supplier of U.S. crude oil imports after Canada and Saudi Arabia, occupying a top-three spot since 2015. In December 2017, Venezuela fell behind Canada, Saudi Arabia, Mexico, and Iraq based on average imported volumes of crude oil during the month.


The fall in exports to the United States is especially harmful to Venezuela's economy because U.S. refiners are among the few customers that still remit cash payments to Venezuela. Some volumes shipped to China, for example, are sent as loan repayments. In January 2018, Venezuela exported about 360,000 b/d of crude oil to China, based on tanker tracking data. Venezuela's exports to India—also a cash remitting customer—have fallen to the lowest levels in about five years. In January, only about 220,000 b/d of Venezuelan crude oil was destined for India, about 20% lower than the level in January 2017, according to crude oil shipping data. This level includes volumes sent to Essar’s Vadinar refinery in India to service debt that Venezuela owes to Russian oil company Rosneft (Rosneft co-owns the Vadinar refinery).


Although the Venezuelan government has not published any economic data in more than two years, Venezuela's National Assembly reported in mid-March that inflation was more than 6,000% between February 2017 and February 2018. The International Monetary Fund projects that inflation will reach 13,000% in 2018 and that Venezuela's economy will contract 15%, resulting in a cumulative GDP decline of nearly 50% from 2013 through the end of 2018.


Venezuela also has high levels of debt with a variety of creditors. During the last quarter of 2017, when Venezuela was late making some bond payments, the main rating agencies declared the country in selective default . Venezuela has more than $8 billion in bond payments coming due in 2018. Given the country's precarious financial situation, a general default is possible. In addition to about $64 billion worth of debt in traded bonds, Venezuela owes $26 billion to creditors and $24 billion in commercial loans, according to Torino Capital, although some estimates place Venezuelan debt as high as $150 billion.


Venezuela's crude oil production is projected to continue to fall through at least the end of 2019, reflecting that crude oil production losses are increasingly widespread and affecting joint ventures. These projections reflect that crude oil production losses are increasingly widespread and affecting joint ventures. With the reduced capital expenditures, foreign partners are limiting activities in the Venezuelan oil sector. Venezuela's economy is heavily dependent on the oil industry, and production declines result in reduced oil export revenues. Venezuela's economy contracted by nearly 9% in 2017, based on estimates from Oxford Economics.


U.S. average regular gasoline and diesel prices increase


The U.S. average regular gasoline retail price rose 5 cents from the previous week to $2.65 per gallon on March 26, 2018, up 33 cents from the same time last year. Rocky Mountain prices increased nearly nine cents to $2.53 per gallon, Gulf Coast prices increased nearly eight cents to $2.38 per gallon, West Coast and East Coast prices each increased nearly six cents to $3.27 per gallon and $2.59 per gallon, respectively, and Midwest prices increased two cents to $2.52 per gallon.


The U.S. average diesel fuel price rose nearly 4 cents to $3.01 per gallon on March 26, 2018, 48 cents higher than a year ago. Rocky Mountain prices rose nearly seven cents to $2.99 per gallon, West Coast prices increased over five cents to $3.44 per gallon, Gulf Coast and Midwest prices each increased nearly four cents to $2.82 per gallon and $2.93 per gallon, respectively, and East Coast prices increased nearly three cents to $3.04 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 1.2 million barrels last week to 35.6 million barrels as of March 23, 2018, 9.7 million barrels (21.4%) lower than the five-year average inventory level for this same time of year. East Coast and Midwest inventories each decreased by 0.5 million barrels, while Gulf Coast inventories decreased by 0.2 million barrels. Rocky Mountain/West Coast inventories rose slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 8.2% of total propane/propylene inventories.


Residential heating oil prices increase, propane prices decrease


As of March 26, 2018, residential heating oil prices averaged almost $3.10 per gallon, nearly 4 cents per gallon higher than last week and 51 cents per gallon higher than last year's price at this time. The average wholesale heating oil price for this week averaged almost $2.12 per gallon, nearly 11 cents per gallon higher than last week and 52 cents per gallon higher than a year ago.


Residential propane prices averaged $2.48 per gallon, almost one cent per gallon lower than last week but nine cents per gallon higher than a year ago. Wholesale propane prices averaged $0.88 per gallon, 1 cent per gallon higher than last week and nearly 21 cents per gallon higher than last year's price. This is the last data collection for the 2017-2018 State Heating Oil and Propane Program (SHOPP) heating season. Data collection will resume on October 1, 2018 for publication on Wednesday, October 3, 2018.


For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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