The Crisis In Venezuela Could Trip Up Global Oil Markets

Political and economic turmoil in the South American country could soon send the market into a deficit.

By Alexandra HartMarch 19, 2018 3:44 pm| ,

The political and socioeconomic crisis in Venezuela that has thrown the country into a downward spiral for years shows no sign of slowing down. The U.N estimates more than a million refugees have fled the country so far, in the face of skyrocketing inflation and a scarcity of food and basic necessities. The crisis has put a strain on the region, as nearby nations struggle to accommodate an influx of refugees.

And the way things are shaping up, we could soon be feeling the economic ripple effects of the crisis worldwide – in the form of an oil deficit. Matt Smith, director of commodity research at ClipperData, says that although the global oil market has been oversupplied for years, it’s currently closer to being back in balance, thanks to OPEC cuts. But we could soon see supplies tip in the opposite direction.

“The concern now is that you have Venezuela, who’s production is around 1.6 million barrels a day, is going to continue to drop to then push us into a deficit,” Smith says. “They were producing about double that at the turn of the century, 3.5 million barrels a day. But due to this constant under investment, we see their production continue to dwindle and dwindle.”

That could mean higher prices closer to home. Venezuela is still one of the leading exporters of crude oil to the United States, after Canada and Saudi Arabia. Smith says we still receive over half a million barrels per day of crude oil from Venezuela, so a drop in production there will shake up how we get our oil.

“The US will have to source their heavier oil from elsewhere,” Smith says. “So maybe it pulls in more from Mexico or the Middle East, which will ultimately just lift their prices for their oil that they’re buying, which ends up being reflected through the price at the pump.”

That’s the best case scenario. But if things go south more quickly, it could cause a much bigger shakeup in the global markets, especially if global oil demands continue to rise as the International Energy Agency forecasts.

“The big concern really is that we see their production precipitously drop off and that’s the fear that is rising up in this highlighting of the deficit,” he says. “If you saw their operations grind to a halt or half that production, that would be a lot of oil taken off the market, be it 600,000 barrels a day. And that’s enough to really put everything out of whack.”