Venezuela: Oil prices rally to over one-year high in October
November 3, 2016
In October, the average price of Venezuela’s mix of crude oil rose 11.3% from the previous month to USD 42.6 per barrel. October’s print marks the second consecutive increase in Venezuelan oil prices and the highest price reached since July 2015.
A preliminary agreement by oil-producing countries to cut output from 33.2 million barrels per day (mbpd) to 32.5 mbpd has supported oil prices since September. Statements by Saudi Arabian officials in October on their commitment to reduce production increased confidence in the prospect of reaching a final agreement, though its ability to influence prices remains to be seen. Limited cuts to output, coupled with increased production in key countries such as Nigeria and Libya, will do little to rebalance the oversupplied market. Reluctance by some countries such as Iraq to cut output also undermines efforts to reach a far-reaching agreement. Overall, the deal is unlikely to provide enough support to shore up Venezuela’s public finances or alleviate the country’s economic crisis.
According to the latest OPEC Monthly Oil Market Report released on 12 October, oil production has been declining consistently and is now hovering at multi-year lows. The slump in output reflects a very challenging investment climate, chronic underinvestment in industry, difficulties in importing oil diluents and the problem of outstanding payments with suppliers.
The combination of depressed oil prices and falling production has raised concerns about the cash-strapped government’s capacity to meet its multibillion-dollar international debt obligations. Venezuela’s capacity to circumvent a default partly hinges on whether oil prices will increase enough to improve public finances and enable the country to meet its international debt obligations due in the coming years.