Venezuela: OPEC agreement pushes up oil prices to over one-year high
January 12, 2017
In December, the average price of Venezuela’s mix of crude oil rose 17.1% from the previous month to USD 44.9 per barrel (November: USD 38.4). December’s increase is the highest since July 2015 and was supported by the agreement reached by OPEC and non-OPEC members in December to cut output starting in 2017.
Venezuela committed to cutting output by 95,000 barrels per day to rebalance the oversupplied oil market and prop up depressed oil prices. The cash-strapped country hailed the output agreement as a lifeline for the government as it suffers a foreign currency crunch and faces multibillion-dollar payments due in a couple of years.
Whether oil-producing countries will stick to the agreement is a moot point. The cartel has a poor track record of complying with production quotas since it lacks enforcement mechanisms. A challenging external scenario and weak public finances in some countries might compel some signatories to renege on the deal. Other factors which could undermine the agreement’s success are the speed at which American shale producers resume production as prices go up and the energy independence plan outlined by U.S. president-elect Donald Trump.
Analysts conclude that the agreement is not a solution to the country’s economic problems. They expect oil prices to pick up slowly and stabilize but do not envisage them reaching the highs of the commodities supercycle. Venezuelan oil output is currently hovering at multi-year lows and production is not expected to pick up anytime soon in a challenging investment climate and with outstanding payments to suppliers and difficulties in importing oil diluents, among other obstacles. These factors, coupled with conservative forecasts for the evolution of oil prices, suggest that the agreement alone cannot solve the country’s manifold economic problems, including the multibillion debt coming up for repayment by the state-owned enterprise.