Despite presiding over a period when the Venezuelan economy has been imploding – with skyrocketing inflation, rampant corruption and massive food shortages – Nicolas Maduro was re-elected as President last week. In an election branded as a ‘sham’ by many in the international community, the result does nothing to address the chronic issues that are plaguing the country. In fact, they are set to prolong even further now.
In the wake of the election, the US unveiled fresh sanctions against Venezuela. These include measures to prevent US companies from purchasing Venezuelan government debt, crippling its financial system even further. Targeted sanctions at crude oil – the country’s main source of income – have thus far not been mooted, but even the general sanctions are making it very difficult for the country to do business. In response, Venezuela is depending on the generosity of its buyers, negotiating to have shipments paid for in currencies other than the US dollar or in barter. It already has such agreements in place with Turkey, China and Russia, and last week raised the possibility of accepting payment in Indian rupees. India remains a significant importer of Venezuelan crude, but there have also been signs that it is growing impatient with the situation.
Such moves are mere band aids. PDVSA is in a lot of trouble, being debt-stricken. ConocoPhillips has already moved to seize oil products produced by PDVSA at the Isla refinery in Curacao, demanding it as payment for the nationalisation of its assets. The Isla refinery itself is the centre of another drama – with Curacao wanting to move away from PDVSA to courting a Chinese investor, though the latter has faced trouble raising cash as well. Forget about raising cash to explore new fields; PDVSA can barely even cover the costs of running its existing ones.
But the main impact of the Venezuelan implosion has been on the oil markets. Already jittery with the new sanctions on Iran, the situation in Venezuela has raised nerves even more. With the two key political sanctions in play, oil prices are now at four year highs. The IEA has already started discussions with major oil producing nations on their ability to cover the Venezuelan shortfall. Venezuela’s crude production has already fallen by some 400,000 b/d so far in 2018 and there are worries that this could dip below 1 mmb/d in the near future. This puts the OPEC supply freeze deal under pressure, with key OPEC producers worrying about the creation an unwanted spikes in crude prices that are not based on fundamentals. OPEC members and Russia are readying to fill the gap, driven by the long standing swing producer, Saudi Arabia stepping-in once again.
President Maduro claims that he will double Venezuela’s oil production by the end of the year, with the help of OPEC. That will be the latest, but certainly not the last, of his broken promises. As Venezuela's oil industry is on the verge of collapse, the world is preparing for the worst case scenario right now.
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Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b
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