Nicolas Maduro, the Socialist president of recession-hit and hyperinflation-stifled Venezuela, was the most vocal supporter and promoter of an OPEC deal to reduce oil supply in a bid to lift prices.
The cartel – against all odds, as Phil Collins would say – managed to reach that much-hyped and much-coveted deal last week. And no one appeared more desperate for the deal than Venezuela.
Maduro rejoiced and praised the OPEC agreement as “a victory for the Bolivarian Peace Diplomacy”. And crude oil prices have jumped by around 15 percent since the deal was sealed on November 30.
With government coffers depleting thanks to low crude oil prices along with state oil company PDVSA on the cusp of default, Maduro had been actively pursuing shuttle diplomacy to try to get OPEC members together around some sort of compromise on a deal to cut supply. But let’s admit it, when Saudi Arabia, Iran and Iraq were waiting to see who’ll blink first and concede more ground to the rivals in a possible deal, they probably didn’t give much thought about how minor-producer Venezuela would feel or react to a deal or no-deal.
Nevertheless, a deal is now a fact, at least on paper. On the surface, Maduro got what he wanted: OPEC pledged to cut crude supply, prices rallied, the Socialist regime’s rhetoric thrived.
However, even if an OPEC deal will help Venezuela fill some gaps in the short term, it is unlikely that the deal will have a material impact on an economy running a triple-digit inflation and currency devaluation reminiscent of Weimar Germany. And it would hardly stop the Venezuelan government from using its oil company PDVSA as a piggybank instead of reinvesting export revenues into oil production.
Venezuela’s crude oil exports account for around 95 percent of its export revenues, OPEC’s facts and figures about the country show. So higher oil prices will indeed benefit Venezuela’s US-dollar income. Related: Here’s How Close Of A Call the OPEC Deal Really Was
In OPEC’s supply-cut agreement, Venezuela is committing to cut 95,000 bpd from a reference production level of 2.067 million bpd. Venezuela is also one of the three OPEC members – together with Algeria and Kuwait - appointed to monitor the implementation of said cuts.
Thus, Venezuela – whose production has been steadily falling over the past year, to the tune of around 300,000 bpd – would have to shave almost another 100,000 bpd. Some would argue that higher oil prices would offset lower production. But if crude prices rise only moderately and the markets lose its OPEC-induced euphoria, Venezuela may not gain as much as Maduro may have hoped.
Furthermore, Venezuela’s eagerness to play a very active role in OPEC talks and its sitting on the ‘monitoring committee’ that would supervise the implementation of the cuts could tank the country’s plans for imminently lifting its oil revenues. Being a part of that supervisory committee calls for - at least on paper - Venezuela to stick to its pledge to cut output, even if other OPEC members go rogue. And they often tend to do just that, as former long-serving Saudi oil minister Ali al-Naimi said last week.
Venezuela’s PDVSA barely escaped bankruptcy in October, and an OPEC deal may buy it a few months more. Although it’s hard to imagine that Maduro would leave his only US-dollar cash cow to die, PDVSA revenues are not currently being used to invest in the replacement of ageing oil infrastructure or even to pay oilfield services companies. In April of this year, Schlumberger (NYSE:SLB) said it was scaling back activity in Venezuela as a result of “insufficient payments received in recent quarters and a lack of progress in establishing new mechanisms that address past and future accounts receivable”. Related: What You Need To Know About The World’s Biggest IPO
Venezuela’s battered economy took a terrible turn when oil prices started crashing in 2014, and the International Monetary Fund (IMF) expects the Venezuelan economy to shrink 10 percent this year and another 4.5 percent next year. Consumer prices forecasts are off the charts: 475.8 percent inflation this year and 1660.1 percent next year.
This hyperinflation is causing Venezuela to launch, as of December 15, 2016, notes of 500 bolivar to 20,000 bolivar. Currently, the largest-denomination note of 100 bolivar is officially worth US$0.15, or just US$0.02 based on unofficial exchange rates.
If oil prices gain some ground and remain at US$55, they would help Venezuela’s oil revenues in the short term, and may further Maduro’s rhetoric of a ‘peaceful Socialist victory’.
But a looming PDVSA default, dire economic indicators, and Maduro’s clinging to power en route to dictatorship are further complicating Venezuela’s efforts to boost oil income while cutting production. If oil prices do not stay at least around US$55 for a fair amount of time, Maduro’s OPEC ‘victory’ will not be victory for Venezuela at all.
By Tsvetana Paraskova for Oilprice.com
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