Few countries need oil’s rally to last more than Venezuela, where the economy’s expected to shrink 8 per cent this year and a lack of petrodollars has seen shops run short of consumer goods.
The Latin American nation with the world’s largest oil reserves relies on crude shipments for 95 per cent of export revenue. It will default this year barring a large jump in the oil price or a financial bailout, said Thomas Olney, a London-based analyst at consultants FGE. Credit-default swap traders have put the chances of non-payment through June next year at 67 per cent, according to data compiled by Bloomberg.
Following the collapse of oil-freeze talks in Qatar this month, Venezuelan Energy Minister Eulogio del Pino warned crude may revisit the 12-year lows of earlier this year as supply continues to swamp demand. Even with a rebound since February, prices remain 60 per cent below their 2014 high. That’s crippling for a country facing spiralling debts, triple-digit inflation and rolling shortages of basic goods.
“Venezuela has enormous financial problems with prices at these levels,” Robert Campbell, an analyst at consultants Energy Aspects Ltd. in New York, said by phone.
Venezuela requires a higher price than almost every other Opec member to balance its budget. RBC Capital Markets estimates it stands at $121.06 a barrel for this year. Only Libya, which didn’t attend the latest talks, needed more, according to the International Monetary Fund. International benchmark Brent crude traded at $47.34 a barrel at 10:09am on the London-based ICE Futures Europe exchange Thursday.
“The longer the economic crisis continues, the greater the risk to actual oil output becomes,” said Christopher Louney, an analyst at RBC Capital Markets. He described Venezuela as OPEC’s “most at-risk producer.”
The failure of the Qatar gathering was a setback for Del Pino. The lobbying campaign he embarked on before the meeting appeared to pay off when the world’s two biggest oil producers, Saudi Arabia and Russia, tentatively agreed in February to freeze output at January levels. Yet during an April 17 meeting in Doha, Qatar, the Saudis’ refusal to rubber stamp a deal shunned by Iran outweighed Del Pino’s lobbying efforts.
Crude prices slumped as much as 7 per cent the following day as prospects for rebalancing the market dissipated. Speculation that a consensus would be reached had boosted prices more than 30 per cent since mid-February.
The failure of the plan now piles more pressure on Venezuela and state-owned Petroleos de Venezuela, which have to make about $14 billion in bond payments over the next year. Any hope of ramping up output to maximise revenue is likely to be thwarted as electricity rationing curbs production and refining.
The government earlier this month announced four-hour rolling blackouts for most of the country except residents of Caracas, as a drought crippled generation at the giant Guri hydroelectric dam. On April 26, Venezuela declared a two-day work week for government workers and said it was seeking international help to save its power grid.
Venezuela is requesting emergency international help from the United Nations for public works funding and construction to help the country recover from an “extreme situation,” President Nicolas Maduro said.
“There is a definite risk of a supply disruption in Venezuela,” said Olivier Jakob, managing director at consultants Petromatrix.
Petroleos de Venezuela declined to comment for this story.
The country is pumping about 2.38 million barrels a day, according to estimates from FGE, which said output may fall to 2.23 million a day by the end of the year “with potential for further downside.” Del Pino, the energy minister, last week put the level higher, at 2.8 million barrels a day, in comments to reporters in Moscow.
Energy Aspects predicts a decline to 2.25 million a day by the end of this year. That compares with about 3.3 million a day 14 years ago, data from the Joint Organisations Data Initiative show.
Efforts to maintain production are also hindered by moves from several international oil-service companies to scale back operations in the country. Schlumberger Ltd. said April 12 it will reduce activity in Venezuela after failing to collect enough payments from the national oil company. Weatherford International Plc announced self-imposed cuts there in 2014.
For a nation on the brink of bankruptcy, a slowdown of its most lucrative industry couldn’t come at a worse time. The economy shrank 5.7 per cent last year and is expected to contract 8 per cent in 2016, according to the IMF. Inflation is projected to rise to nearly 500 per cent. Trying to elevate the price of oil as a “quick fix” just isn’t enough, according to Carlos Rossi, president of Caracas-based EnergyNomics.
“Venezuela has two options: either find someone to lend us plenty of money to bridge the gap, or tighten our belts and reduce imports well past tolerable levels,” Rossi said by email. “That Venezuela will default in its debt payments this year to bondholders is all but a foregone conclusion.”
