Here’s what Venezuela’s deepening crisis means for oil prices 

Venezuela

Venezuela and its worsening economic and political crisis may be an underappreciated wild card when it comes to the outlook for oil prices.

The nation, which has the world’s largest oil reserves, is suffering an economic collapse that has sparked massive protests against the government of President Nicolás Maduro.

“The country is in [its] worst shape in two decades,” said James Williams, energy economist at WTRG Economics. “More corruption, more violence, little food and almost no medicine.”

Adding to the nation’s woes, oil shippers are now seizing cargoes and going to litigation over Venezuela’s apparent failure to pay for shipping, said Williams.

Recent news reports said that a Russian shipper held up a shipment of oil by Petróleos de Venezuela SA, or PdVSA, because the Venezuela state-run oil company owes millions of dollars in unpaid shipping fees.

The risks tied to Venezuela are worth at least a 50-cent risk premium to oil prices per barrel, said Williams. And “if there is an event that stops [oil] exports abruptly,” that premium could climb to $5 a barrel, he said.

Expropriation blues

Auto maker General Motors GM, +0.92%  announced Thursday that it had ceased operations in Venezuela “due to an illegal judicial seizure of its assets.”

While the reason behind the GM seizure is unclear, the move isn’t unusual—especially when it comes to assets in the oil industry—as the country continues the nationalization drive that began under the late Hugo Chávez, Maduro’s predecessor. The government of Maduro and Chavez has expropriated more than 1,400 companies and private assets since taking power in 1999, The Wall Street Journal reported, citing figures form industry group Conindustria.

And if the government’s solution includes seizing more foreign assets, Venezuela’s problems could worsen, analysts said.

“The government has shown itself to be very clumsy at best when dealing with the economy, but seizing foreign oil assets would be suicidal,” Michael Lynch, president of president of Strategic Energy & Economic Research, told MarketWatch.

“They already suffer from a shortage of skilled personnel and replacing whatever foreign engineers are there would be extremely difficult—meaning [oil] production would begin sliding,” he said.

Industry estimates peg oil output from Venezuela at about 2 million barrels a day—its lowest in roughly 14 years.

Any seizure would be a “shortsighted and desperate” move by Venezuela and only “accelerate the ongoing decline in oil production in the country,” said Brian Youngberg, senior energy analyst at Edward Jones, noting that many companies, such as Exxon Mobil, pulled out of the country years ago.

“Not only does the government lack the funds necessary to revitalize the nation’s oil industry, they have just made it essentially impossible to court investment from international oil companies after the seizure of the GM assets,” said Tyler Richey, co-editor of the Sevens Report.

Venezuela’s ‘government has shown itself to be very clumsy at best when dealing with the economy, but seizing foreign oil assets would be suicidal.’

Michael Lynch, SEER

Just last month, a World Bank arbitration panel said Venezuela won’t have to pay Exxon Mobil Corp. XOM, +0.65%  $1.4 billion after the country confiscated company assets during a wave of nationalizations in 2007, according to The Wall Street Journal.

Venezuela “wasn’t exactly a welcoming climate for foreign investment before the current [economic] turmoil, but it’s especially troubling in this environment,” said Robbie Fraser, commodity analyst at Schneider Electric.

Oil dependence

The nation’s economy took a huge hit as a global glut of crude-oil supplies caused a roughly 60% plunge in prices, with global benchmark Brent crude LCOM7, -0.09% and U.S. benchmark West Texas Intermediate crude CLM7, -0.10%  dropping around 60% from 2013 to 2015.

“The fundamental backdrop of the Venezuelan oil industry is very unfavorable as we look ahead,” said Richey.

“This will likely lead to a continuation lower in the trend of Venezuelan oil production, which is modestly supportive of prices going forward,” he said. “But earlier this year, the country was producing over their OPEC quota anyway, so as far as markets are concerned, it’s a bit of a wash in the near term.”

Under the OPEC agreement, it pledged to lower output to 1.972 million barrels a day at the start of this year. In January, output was estimated at 2.01 million, according to S&P Global Platts.

But while Williams sees a potential premium in oil prices tied to Venezuela’s poor economy, some played down the country’s impact on the world oil market.

“As it stands now, Venezuela will continue to have a limited effect on global prices because they are still pumping as much as they can out of necessity, and that won’t change,” said Richey. “But again, they won’t be able to increase output either without investment, so they will not have a bearish impact on the market either.”

Source: MarketWatch

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