Venezuela: OPEC agreement pushes up prices but will not alleviate structural problems
October 6, 2016
In September, the average price of Venezuela’s mix of crude oil rose 2.0% over the previous month and edged up to USD 38.3 per barrel. September’s reading marks the first increase in oil prices after two consecutive months of decline. The monthly increase partly reflects the market reaction to the agreement reached by OPEC countries to limit oil production, though the agreement is unlikely to shore up the government’s accounts or alleviate the country’s economic crisis.
OPEC countries provisionally agreed on 28 September to cut output for the first time since 2008. The government hailed the agreement, but it is unlikely to shore up Venezuela’s crisis-struck economy in the short-term as output has been steadily declining and oil prices are hovering at multi-year lows. Suppliers have scaled back production owing to delayed payments and operational challenges, caused in large part by chronic underinvestment in infrastructure along with poor planning in the oil fields.
A final agreement is expected to be reached in November between OPEC and non-OPEC members, such as Russia, where oil-producing countries will define aspects such as country-specific quotas and enforcement mechanisms in order to decrease production from 33.2 million barrels per day (mbpd) to 32.5 mbpd. However, even if November’s meeting proves fruitful, its ability to influence oil prices looks limited against the backdrop of an oversupplied market.
To revamp oil production, the government awarded USD 3.2 billion in contracts to drill over 400 wells to increase output by 0.25 mbpd within 30 months. Foreign firms hoping to participate have criticized the lack of transparency and highlighted structural problems, such as limited imports of diluent and lack of funding from state-owned oil company Petroleum of Venezuela (PDVSA) to carry out the projects.
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. Venezuela’s capability to circumvent a default partly hinges on whether the government and PDVSA will be able to secure an agreement from bondholders for the proposal presented in September to refinance upcoming debt payments due this year and next.