Friday, 28 April 2017

If Venezuela Falls, Will Oil Rise?

In Oil & Companies News 28/04/2017

Signs indicate that Nicolas Maduro’s presidency in Venezuela is in serious peril, as may be the reign of his United Socialist Party. The past couple of weeks have seen several major events that indicate an inauspicious scenario for the regime that has led South America’s fifth largest population to economic failure. If the United Socialist Party falters, and if Maduro is deposed, the consequences for the world oil market could be significant. After all, Venezuela does control the world’s largest known oil reserves and still produces two million barrels per day.
As of April 25, a reported 26 Venezuelans have died in political protests against the current regime. Reporting last week showed that perhaps the protests are not larger only because many Venezuelans are simply too hungry to participate. Though the protests do not make the global news every day, they continue.
At the same time, the Venezuelan government allegedly seized a General Motors plant on April 20. The American auto giant was forced to lay off 2,678 local workers. The government is threatening similar behavior toward a Spanish telecom because of the phone company’s alleged support for the political opposition. Nationalizing or simply preventing foreign businesses from operating is evidence of political chaos.
Yesterday, news came that more than 20 tankers, carrying over 7 million barrels of fuel, are idle off the coast of Venezuela. They are waiting to deliver the cargo, but they are apparently halted because of lack of payment or some other upheaval. In a country with major fuel shortages (despite its crude reserves), this could portend a return to pre-industrial society unless changes come.
In this Feb. 18, 2015 photo, storage tanks stand in a PDVSA state-run oil company crude oil complex near El Tigre, a town located within Venezuela’s Hugo Chavez oil belt, formally known as the Orinoco Belt. U.S. petroleum exports to Venezuela, much of it fuel additives to dilute the country’s heavy crude, have grown 12-fold in the past decade as domestic refineries go unmaintained. (AP Photo/Fernando Llano)
The world is rightly focused on the individual human suffering and hardship in Venezuela, but a change in government could send a wave of consequences (good and perhaps bad) across the global economy, primarily via the oil markets . The consequences would depend on how a governmental revolution unfolded. Here are three possible scenarios:
1. Venezuela engages in a protracted struggle between Maduro and the opposition. This could include continued mass riots, work stoppages (especially by oil workers) and even violence. This is a situation the world does not want for the sake of the Venezuelan people. This is also the situation that could see the largest jump in oil prices for the longest period of time. Such extended political upheaval and uncertainty could cause massive production disruptions and raise oil prices steadily for its duration, possibly easing the burden on OPEC and its non-OPEC partners (such as Russia) who have been trying to raise oil prices through production cuts. This would allow OPEC and its partners to produce at more natural rates, while watching Venezuelan unrest do their job for them. It would also benefit American shale producers, which have been waiting for months for oil prices to rise a little higher to make production profitable.
2. Maduro resigns or is deposed quickly, to be replaced by another member of his United Socialist Party who vows to continue the same socialist policies that have destroyed the country’s economy, caused mass hunger, and nearly crippled the country’s promising energy industry. If a new leader with the same policies takes over, it will essentially stall the situation. Nothing will be settled in Venezuela, and the oil markets will continue to wait and see.
3. Maduro resigns or is deposed quickly, to be replaced by an outside politician who offers increased free-market opportunities. Such a new leader—especially one who finally negotiates reliable and productive oil exploration and production agreements with foreign companies—could vastly improve the revenues Venezuela sees from its promising oil resources. In the long run, a new leader who seeks to cooperate with the world on oil trade and revamp Venezuela’s infrastructure could contribute to global oversupply. On the one hand, OPEC—of which Venezuela is a founding member—will push Venezuela to keep its production low. On the other hand, a new and practical leader would see that Venezuela needs the cash and oil is the way to get it. Plus, Venezuela and even its energy business has debts to pay off, not least of which is to Rosneft. If a new leader comes to power with a plan for free market opportunity, expect an eventual influx of Venezuelan oil on the global market and a resultant depressing effect on prices.


Source: Forbes