Venezuela Heading For Steepest Oil Output Drop in 14 years, Now An International Supply Risk

Columbia University’s Center on Global Energy Policy says Venezuela was already having economic problems when the oil price was at $100 per barrel

As calamitous as Venezuela's declining oil production has been for the economy of that country, it has now reached a point where it constitutes a supply risk for the global market, says Columbia University's Center on Global Energy Policy.

In a report, the Center states, "Venezuela will represent a growing supply risk for oil markets in 2017; while on average crude oil exports in the first half do not yet show an important decline from the same period a year ago, the latest data point to a deteriorating trend."

Last month, the republic's crude production dropped to 2.15 million barrels per day (bpd), compared with an average 2.4 million in 2015, in June alone, its crude reserves fell more than 300,000 bpd.

Reuters, in reviewing data from company sources, believes Venezuela, "which holds the world's largest crude reserves, is on track to suffer its steepest annual oil output drop in 14 years."

Equally troubling, Venezuela's strategy of expanding production by tapping into the Orinoco belt has proven to be a bust because the heavy crude is less desirable to refiners and sells for less than lighter grades of oil that are easier to process.

And because the country is on the brink of debt default, it is highly unlikely it can rely on blending the heavy oil with higher-priced light crudes purchased from other exporters to make it more marketable, according to the Center, which says if credit issues prevent the importation of light oil then net exports could fall by another 300,000 bpd.

Capping the bad news is the death blow realization that "Venezuela was already having economic problems when the oil price was at $100 per barrel," the Center states, meaning a price recovery won't help a country where the economy is expected to shrink by 10 percent this year and consumer prices have risen over 700 percent.

Still, Venezuela's woes seem to be a gain to the market overall: ANZ bank notes that "News of an imminent collapse in oil output from Venezuela also supported prices," in reference to oil's two-week price rally.

Last week, Venezuelan president Nicolas Maduro said he is rallying support to organize a meeting with the Organization of the Petroleum Exporting Countries in the the hopes of stabilizing oil at $40 - a move that caused Greg Priddy, director of global energy with Eurasia Group, to remark that the beleaguered leader "came across as very desperate."