Venezuela Commodities July 2016

Venezuela

Venezuela: Rally in Venezuelan oil prices comes to a halt in July

August 4, 2016

In July, the average price of Venezuela’s mix of crude oil dropped 5.2% over the previous month, reaching USD 37.7 per barrel. July’s reading marks the first drop in oil prices after four consecutive monthly increases. Oil prices continue to hover at historic lows but have recovered notably from the multi-year low tallied at the beginning of this year.

Recent reports released by the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) paint a dire image of Venezuela’s oil industry. The IEA noted that oil output had declined sharply in the second quarter of the year largely due to the energy crisis that struck the oil-rich country. The slide in output underscores delayed payments to suppliers and operational challenges caused in large part by chronic capital underinvestment. The report went on to add that the decline in oil output seems irreversible in the short- and medium-term. According to the latest report from OPEC that was released on 12 July, Venezuelan oil production dropped from 2.37 million barrels per day (mbpd) in May to 2.36 mbpd in June, a multi-year low.

The reports raises concerns as to how the government will improve public finances and meet its international debt obligations. Oil accounts for about 95% of Venezuela’s exports and more than half of public sector revenues. The plunge in oil prices has put significant pressure on the country’s finances and over USD 4.7 billion in foreign debt payment are due in October and November alone.

In August, the head of the state-owned oil enterprise PDVSA said that a debt swap plan was ready and will be announced soon. According to the government, PDVSA is holding talks with international banks over the restructuring. PDVSA has to offer bondholders very accommodative terms to secure a debt swap given the severity of the current economic crisis. Analysts consider that PDVSA is willing to face the expensive costs to gain some financial breathing room in the short term.

While the 2016 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. The latest developments in the oil market indicate that prices will resume their upward trend, but will not reach the high levels achieved during the commodities super cycle or that are needed to improve Venezuela’s dire financial situation.

Panelists participating in this month’s LatinFocus Consensus Forecast expect oil prices to average USD 34.3 per barrel this year, which is up USD 1.0 per barrel over last month’s projection. In 2017, the panel sees oil prices rising to USD 42.9 per barrel.


Author: Jean-Philippe Pourcelot, Economist

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Venezuela Commodities July 2016

Note: Price of the Venezuelan mix of crude oil in USD per barrel.
Source: Ministry of Petroleum and Mining.


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