Venezuela: Venezuelan oil price nears USD 40 in June
July 7, 2016
In June, the average price of Venezuela’s mix of crude oil rose 7.9% over the previous month, reaching USD 39.7 per barrel. Average oil prices have remained above USD 30 per barrel for three months in 2016 and June’s average marked the highest reading since October. Despite June’s increase, oil prices continue to hover at historic lows.
Oil prices have followed an upward trend in recent months. Supply outages in oil-producing states such as Argentina, Colombia and Nigeria have pushed prices up. Similarly, a slow rebalancing in oil markets have contributed to pushing prices upwards. However, the rally in prices that started at the beginning of the year came to an abrupt halt on 23 June after the United Kingdom voted to leave the European Union. After the result were announced, oil prices dropped slightly but recovered in the next few days. The Brexit vote is expected to increase volatility in the market but should not have any long-lasting impact on oil prices.
Recent reports released by the state-owned oil enterprise PDVSA and Organization of Petroleum Exporting Countries (OPEC) paint a bleak picture of the country’s oil industry. Venezuelan oil production in 2015 reached on average 2.7 mbpd, slightly below 2014’s production of 2.9 mbpd. Although production remained largely unchanged from last year, the slump in prices for commodities resulted in oil earnings dropping over 40% in 2015. To make matters worse, according to the latest report from the OPEC that was released on 13 June, Venezuelan oil production dropped from 2.49 million barrels per day (mbpd) in April to 2.37 mbpd in May, a multi-year low. May’s reading illustrates that oil production in Venezuela is not immune to the ongoing economic and political crisis. Temporary disruption amid electricity rationing likely limited output. In addition, delayed payments to suppliers due to limited supply of foreign currencies and chronic capital underinvestment are two other factors that potentially weighed on production.
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 more than USD 8.0 billion in foreign debt payments are due this year alone. While the 2016 budget assumes an oil price of USD 40 per barrel, analysts have pointed out that the government needs a breakeven oil price that is well above USD 100 per barrel. Latest developments in the oil market indicate that prices will continue its 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.