Venezuela: Oil prices broadly stable in July and August after short-lived upward trend
September 12, 2016
In August, the average price of Venezuela’s mix of crude oil was almost stable, dropping a modest 0.3% over the previous month and inching down to USD 37.6 per barrel. August’s reading marked a second consecutive minor drop in oil prices after four consecutive monthly increases. Oil prices continue to hover at low levels but have recovered notably from the multi-year low reached at the beginning of this year.
Recent reports from the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) paint a dim picture of Venezuela’s oil sector. According to the latest report from OPEC released on 12 September, Venezuelan oil production dropped from 2.36 million barrels per day (mbpd) in July to a multi-year low of 2.33 mbpd in August. The IEA noted that oil output had declined steadily from May to July due to the energy crisis that struck the oil-rich country. Delayed payments to suppliers, who are scaling back their activity, and operational challenges, caused in large part by chronic underinvestment in infrastructure along with poor planning in the oil fields, are behind the continued fall in production.
The combination of depressed oil prices and falling production has raised concerns about the cash-strapped government’s capacity to meet its international debt obligations. Oil represents broadly 95% of Venezuela’s exports and more than half of public sector revenues. Depressed oil prices put significant pressure on the country’s finances and over USD 4.7 billion in foreign debt payments are due in October and November alone. While this year’s budget assumes an oil price of USD 40 per barrel, analysts have pointed out that the government needs a break-even oil price that is well above USD 100 per barrel. Developments in the oil market indicate that prices will pick up again later in this year, but will not reach the high levels achieved during the commodities boom or that are needed to alleviate Venezuela’s dismal financial situation.
Venezuela’s capability to circumvent a default partly hinges on the whether the government and the state-owned oil company Petroleum of Venezuela (PDVSA) will be able to secure an agreement to refinance upcoming debt payments. While the head of PDVSA said in August that a debt swap plan was being prepared, the closure of any such deal has not yet been officially announced.