Venezuela: Oil prices edge up in May
June 8, 2018
The average price of Venezuela’s mix of crude oil reached USD 65.2 per barrel (pb) in May, the highest level in over three years. The reading was slightly above the average of USD 64.2 pb recorded in April, representing a 1.7% month-on-month increase in oil prices. Oil prices rallied for most of May, which reflected a combination of restricted supply from key producers, strong demand emanating from healthy global economic growth and escalating geopolitical tensions in the Middle East. In year-on-year terms, Venezuelan oil prices were up 53.0% in May.
Global oil prices have gradually climbed since early 2017, largely a result of the agreement among OPEC members to cut production. On 22 June, the cartel and non-OPEC oil producers will meet in Vienna to decide whether to ramp up production or maintain current supply levels. OPEC production data for May is not yet available but is likely to show a continuation of falling Venezuelan oil output. Production had dropped to 1.44 million barrels per day (mbpd) in April, down from March’s 1.48 mbpd.
Oil production in Venezuela has plummeted in recent years due to mismanagement of oil fields, poor maintenance of infrastructure, and insufficient investment to develop new projects. The industry’s dire state has been highlighted by recent media reports showing that Venezuela’s state-owned oil firm PDVSA might have to announce a force majeure on some of its oil contracts, essentially declaring it cannot deliver the oil it promised to its customers. The heightened possibility of PDVSA taking such action points to the exceedingly tight pressure its operating capacity is under and is a worrying sign of further declines in output and exports. This bleak scenario is aggravated by the new wave of U.S. sanctions imposed on 21 May which ban U.S. companies and citizens from buying debt or other assets owed to Venezuelan government entities, further hindering the capacity of President Nicolás Maduro’s government to raise much-needed cash from PDVSA.
Author: Javier Colato, Economist