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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Will OPEC Be Forced To Call An Emergency Meeting Soon?

Oil prices dropped to fresh lows during midday trading on January 20, with WTI dipping below $27 per barrel and Brent trading under $28.

The crash in oil since December has only deepened the pain for oil-exporting countries, even for those within OPEC. Despite the cartel’s inability to agree on a production target at its meeting in early December, some of its members are clamoring for action.

Venezuela recently requested an emergency meeting in a letter sent to the other 12 members of OPEC. That is not necessarily news since Venezuela did the same thing last year, but there are growing fears that the South American nation may not be able to hold out much longer with oil prices so low. Related: When Will Petrobras’ Fire Sale Start?

According to Bloomberg, OPEC has not issued an official response to Venezuela’s letter, but it is difficult to see Venezuela succeeding in bringing the disparate members together. An emergency meeting requires the approval of all member nations, and if anything is clear, it is that Saudi Arabia and its Gulf state allies are steadfast in their current course.

That creates an impossible situation for Venezuela. Oil prices are showing no signs of turning around, and Venezuela is running low on foreign exchange and the government might be unable to meet debt payments this year and next. Related: Kenya Hoping to Export Oil, Despite Global Downturn

In a sign of how the vice of low oil prices is squeezing the South American OPEC member, the Venezuelan state-owned oil company PDVSA recently asked its international partners to cover the cost of imported naptha for its heavy oil production at a joint venture project.

Oil from the Orinoco oil belt is so heavy that it needs to be diluted with naptha, or a light form of crude. But PDVSA needs to import naptha, typically from the U.S. Gulf Coast. The joint venture that PDVSA has with Chevron and Repsol, for example, can require around $9 million per month for imported naptha, according to Reuters. Up until now, PDVSA covered that cost, but in recent days it sent a letter to its partners, telling them that they have to pay for the imported naptha now, presumably because PDVSA no longer has the resources to do so. Related: Does Buffett See A Bottom In Oil Prices

Dwindling resources have led to requests from suppliers for prepayment before cargoes are delivered to Venezuela. The possibility of nonpayment is very real.

It seems that the only thing that can rescue Venezuela from its rapidly approaching financial crisis is a strong rebound in oil prices. But without cooperation from OPEC, that might not happen anytime soon.

By Charles Kennedy of Oilprice.com

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  • SH on January 20 2016 said:
    "Emergency Meeting" carries no weight with OPEC. Several of those have already been held with no unilateral decisive action or impact on the market. OPEC is history and dead.
  • Bob on January 20 2016 said:
    The Saudi's (along with the other Gulf members) are being very naive and showing that they don't really understand how US bankruptcies work. US shale companies that go through bankruptcy will become much more competitive as part of the US bankruptcy process. Sure current owners will be wiped out but the companies will continue to pump oil as ownership will merely pass to their creditors. As part of the US bankruptcy process, the US shale companies will be able to write down their assets and eliminate much of their debt (as it will be converted to equity) thereby greatly reducing their break even point. In the end, the Saudi's market share strategy pushing US shale companies through US bankruptcy restructuring will back fire on them and guarantee that oil will stay much lower for much longer as it will make the US shale industry much for competitive for the future.

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