Venezuela in the Face of Oil Prices Collapse (and Coronavirus)

The collapse of oil prices has a full impact on the Venezuelan economy. The scenario occurs in combination with two variables that aggravate the situation: the economic blockade and the crisis unleashed by the coronavirus.

“Venezuelan oil fell from $ 49 to $ 24 a barrel, which hits the country’s income hard,” said Venezuelan President Nicolás Maduro at a press conference referring to the difficulties the country is facing in the scenario of the coronavirus pandemic and the “collapse of oil prices” during the so-called “black monday”.

These are “prices similar to those of 2014”, Vladimir Adrianza Salas, Venezuelan international analyst, explains to Sputnik. That year also saw an abrupt drop in oil prices that hit the Venezuelan economy squarely and was largely the cause of the economic difficulties that were unleashed in Venezuela.

This situation is now more difficult, because “currently seven US executive orders and more than 300 US sanctions weigh on Venezuela – coercive measures – that hinder the traditional operation of the national oil industry,” according to Adrianza Salas.

Maduro denounced that situation when pointing out what he called the “brutal” persecution against oil export vessels by the United States government: “our ships are being chased, threatening the countries that are going to buy from us.”

On the same Thursday of Maduro’s announcements, a new North American blow to the Venezuelan oil industry took place with the sanction, through the Treasury Department, on TNK Trading International SA , a subsidiary of the Russian oil company Rosneft Oil.

That attack was added to that of February 18 against Rosneft Trading, another subsidiary of the Russian oil company. Both have been accused of marketing Venezuelan oil, something that is legal but due to a unilateral US Sanctions is being seen as forbidden.

In this way, the abrupt drop in oil prices adds to the blockade on the PDVSA oil industry.

International forecast
The trigger for the drop in oil prices was Saudi Arabia’s decision to increase production and lower oil sales prices.

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The immediate result was that “the marker price (Brent) fell in one day, something that has not been seen since 1991, from 59 to 33 dollars a barrel,” said Maduro.

“A recovery is not predictable under current conditions,” explains Adrianza Salas. The collapse was already preceded by signs: one of them, recent, was the decrease in oil demand by China due to the brakes imposed by the coronavirus.

It was precisely because of this drop in demand that the oil extraction reduction agreement was proposed. As this was not achieved, and an increase in production was forecast with strategic buyers on the downside, prices fell sharply.

“Annual oil demand has been forecast to fall this year, due to the economic situation manifested in the crisis created by the coronavirus and although, in the middle of the year, as several Chinese analysts have stated, the coronavirus crisis could come to a point of equilibrium, the world economy is not forecast to grow for the rest of the year and, consequently, the growth in demand for crude oil,” says Adrianza.

Another factor to understand the collapse has to do with the competition between oil producing countries, within which three have a determining weight: the United States, Saudi Arabia and Russia.

“There are conflicting interests between Saudi Arabia and the Russian Federation in oil matters, both are trying not to lose markets, and the Saudis are once again trying to recover the markets lost in the US due to the exploitation by US companies of shale oil by fracking in that nation.”

Possible agreement?

Maduro explained that since the day of the oil collapse and the serious situation of the stock markets and world markets, the government has contacted the partners of OPEC and OPEC +, a group of 11 countries, including Russia, that signed an agreement in 2016 to reduce production and defend the price.

“An agreement of OPEC and non-OPEC countries (OPEC +) could balance prices by reducing supply in a concerted manner, but there are no indications at the moment that this could happen,” says Adrianza Salas.

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The question of an agreement between producing countries is central to the stabilization of the oil market. The Venezuelan president recalled the positive impact of the December 2016 agreement that achieved “stable, safe and predictable oil markets.”

“In these circumstances, the stabilization agreements between OPEC, Russia and other oil-producing countries have been demonstrated for the health and balance of the world’s economy and finances,” he said.

At the moment there are no announcements about a possible agreement, and the global economy is going through a scenario of uncertainty and crisis marked by the coronavirus linked to the oil collapse that centrally affects the oil producing and exporting countries, among which is Venezuela, but also the United States.

Implications
The fall in prices “particularly affects the producers of fracking oil, since with prices around 30 dollars a barrel, the correct operation of these sources is not possible,” explains Adrianza Salas.

This means that North American production, increased sharply with fracking in recent years, will be hit by the collapse if this scenario continues, a situation that could give greater urgency to Washington’s plans to try to seize Venezuelan oil.

Regarding the Venezuelan scenario, Adrianza estimates that “the situation could worsen even more”, because the collapse is added to “the fall in national production, the economic blockade and the lack of resources to invest in raising production national.”

This scenario is aggravated by the global economic picture hit by the coronavirus effect . Together they make up “catastrophic announcements for the field of the economy, finance and oil,” announced President Maduro, pointing out how in some cases the economy of entire regions has been paralyzed.

That is why the president demanded that the US “in the midst of this pandemic lift all these unjust and illegal sanctions that it has to pursue Venezuela’s finances, oil and economy.”

But there is something else, which Adrianza points out: “According to several analysts, there are several bubbles to burst in current world capitalism, to which is added the accumulation of external debt of developed countries, which far exceeds 100 trillion dollars.”

Instability is deeper than can be assumed. It is about “the delicate situation of the world economy after the crisis of 2008,” highlights the international analyst.

This set of variables gives rise to a new, dangerous, complex scenario. The results and outcomes do not seem to be on the near horizon. “The forecast is reserved, we have to wait,” concludes the international analyst.

Featured image: President of Venezuela Nicolas Maduro and PDVSA CEO, Manuel Quevedo. © Photo: PDVSA

Source URL: Actualidad Sputnik

Translated by JRE/EF