Iran has dominated the headlines over the last few weeks, but Venezuela’s oil sector continues to meltdown.
Venezuela’s oil production fell to just 1.197 million barrels per day in September, down 42,000 bpd from a month earlier. However, because things are moving so quickly, that figure is now woefully out of date. With a few weeks left in 2018, many analysts believe production could fall below 1 mb/d.
Venezuela’s oil exports to the United States declined by 19 percent in October, compared to a month earlier. The decline came as a result of maintenance from the country’s upgraders, which turn heavy oil from the Orinoco Belt into exportable forms of oil. Without the ability to process, exports plunged.
But Venezuela is replete with operational and financial problems that are also contributing to the sharp decline in output and exports. Another issue has been the damaged port of Jose, the main conduit for oil exports. A tanker collision in August disrupted shipments from the port for weeks, and it remains only partly operational.
Nobody is hurting more than the Venezuelan people. At least 2.3 million people have fled Venezuela since 2015, according to a new estimate from the United Nations. The country’s inflation rate topped 833,997 percent in October, according to a report from Venezuela’s opposition-controlled Congress. The number is so astronomical that it is virtually meaningless, just as the currency itself is completely worthless.
Fuel shortages are growing worse. State-owned PDVSA has seen its refineries run into the ground, and many are not operational or operating at very low levels. On paper, the refineries can process about 1.3 million barrels per day, but in reality, many have ceased operations due to a combination of factors, including a breakdown in parts, a lack of oil supply to work with, and no financial resources. According to Bloomberg, refinery utilization is down to around 17 percent, down from 50 percent as recently as 2016. PDVSA has also suspended fuel imports because it no longer has the cash. Also, “all but 250 of [PDVSA’s] more than 1,400 tanker trucks used for local distribution” have broken down, according to Argus Media.
With operations grinding to a halt, PDVSA has burned through much of its inventories for gasoline and diesel. As a result, around 80 percent of the entire country’s fuel stations have had to suspend sales, according to Argus. “The national gasoline deficit is the worst it has ever been,” a senior official with the federation of oil unions (FUTPV) told Argus Media in early November. “Venezuela could be completely out of gasoline and diesel for vehicles in as little as a week.” Argus said that PDVSA issued widespread sale suspensions in late October. The dwindling supply of crude oil is now mostly being diverted to the international market so that PDVSA can earn some revenues needed to meet debt obligations.
“There is no gasoline, the production of gasoline in the country is practically paralyzed. The Amuay refinery has no product to produce…In addition, 70% of the gasoline produced in the country is not converted into end consumer product,” Iván Freites, secretary of the workers union FUTPV told Today Venezuela.
Upstream production is also falling apart. Venezuela’s oil production is in “free fall,” according to the head of the IEA, Fatih Birol. “Venezuela production is in a free-fall and we expect that soon it may go to even below 1 million barrels per day,” he said. What does this mean for the oil market? Lately, the tightness exhibited in September and October has all but vanished, with surging U.S. shale production, higher OPEC output, and sanctions relief offered by the Trump administration, which narrowed losses from Iran. Taken together, global supplies look a lot more comfortable than what was expected to be the case just a few short weeks ago.
That doesn’t mean there are not risks, especially if Venezuela’s “free falling” production declines at an even faster rate. Moreover, waivers on Iran sanctions are only temporary, and the Trump administration has repeated its vow to pursue zero exports. With “Iran in the full grip of sanctions and Venezuela continuing to decline, that limited OPEC spare capacity will cast a shadow over the market for some time,” Wood Mackenzie said in a report in early November.
There are no signs of hope for Venezuela at this juncture. Oil production and refining operations are deteriorating at a frightening rate, which will only make the country’s economic crisis even worse.