Crude Economics
Caracas Could Unwittingly Balance the Oil Market

The oil market has been oversupplied for more than two years now, as upstart U.S. shale producers and sluggish global demand have created a glut that has seen prices tumble from more than $110 per barrel in June of 2014 down below $50 today. This has understandably caused great consternation for producers around the world, but it’s been especially unwelcome for petrostates whose national budgets had grown accustomed to those heady $100+ days. OPEC, led by Saudi Arabia, has thus far opted not to cut production, choosing to endure rather than intervene, but that’s pushed many of the cartel’s poorer members towards fiscal ruin.

As a result, delegates from both within and without OPEC will meet in Algeria next month to discuss a plan to freeze oil production and attempt to incite a price rebound. However, this strategy failed in Doha four months ago, and there’s little reason to expect it might have the sort of impact its designers will be hoping for. But Venezuela could unwittingly accomplish what all of this planning likely won’t, as the WSJ reports:

While freezing production at a higher rate of output isn’t really bullish, a major exporter’s stumble would be. It is already happening, but the global oil market has yet to feel the impact. Venezuela produced the least oil in June in over 13 years and output had declined by more than 200,000 barrels a day in just the first half of 2016. That is half an Alaska’s worth of output.

…Now, though, even without a political breakdown, lack of field maintenance and a shortage of cash could cripple exports. For example, Venezuela’s production of heavy oil actually requires the production of lighter varieties for blending before it is sold since upgrading capacity is limited. Falling domestic output of that type of crude means Venezuela has to import crude at a time when it faces shortages of basic foodstuffs.

There’s an unmistakable irony to the fact that one of OPEC’s most desperate members—one of the petrostates pushing hardest for a freeze deal—could itself solve the global glut problem through its own struggles to keep output up. Venezuela is circling the drain, and crude producers from U.S. shale formations to Saudi Arabia’s massive oil fields could all stand to benefit.

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