Dead Man Walking: Venezuela’s Energy Industry

Dead Man Walking: Venezuela’s Energy Industry

The oil market just gets more fascinating by the day, though not always for positive reasons.

Here’s the main reason: Venezuela is collapsing as a society.

Consider this latest report from The Wall Street Journal on Venezuela’s capital, Caracas…

This city is unraveling fast: water doesnt reach most homes, mass transit is grinding to a halt and businesses are closing in the face of hyperinflation expected to top 13,000% this year.

Shot gun toting troops wearing camouflage and balaclavas run checkpoints. Cash is so scarce people cant pay for the small necessities like a bus fare.

What happens to the price of oil — and energy stocks — when a major producer descends into total anarchy?

I guess we’re about to find out.

Yet here’s why you, as an Aussie investor, should care about this right now…

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Venezuelan oil production is going to crumble, and possibly completely collapse.

You cannot run an energy industry with starving workers, no hard currency, and no capital investment or maintenance.

The Maduro regime is also jailing the management of the state oil firm and installing people with no industry experience.


Venezuelan oil production was down 29% in 2017. It’s going lower in 2018.

The more that oil production goes down, the more likely the country is to default on its outstanding debts.

I’ve been reporting on Venezuela for a while now. The situation is getting much worse. Venezuelan creditors are now prepared to seize the country’s assets outside its borders.

This means Venezuelan tankers are close to not being able to enter international waters. That could cut off Venezuela’s access to the global oil market completely.

Venezuelan oil is ‘heavy’, and it’s sent to refineries outside the country to mix with the lighter blends that makes it saleable on the international market.

This is not going to turn around anytime soon. No energy company is going to invest under these conditions.

One energy analyst says we’re potentially looking at the removal of 500,000 barrels a day from the global market.

This could push oil even higher than it is now. And it could be great news if you hold some of the best oil stocks on the market…

Oil outlook: Iran out, US up

On top of developments in Venezuela, don’t forget that the US has declared financial war on Iran.

The Trump administration is going to put the squeeze on Tehran. Iranian oil exports are about to get crunched.

It’s not a one way bet, however. It never is in any market.

The swing factor is American wildcatters — oil prospectors.

High oil prices will incentivise more drilling all over North America.

We now know that the Permian Basin is experiencing pipeline bottlenecks and various supply issues.

However, the United States has more than one shale basin. There’s a rise in the number of drilling rigs in Oklahoma, Colorado, Wyoming and even South Texas.

This might keep the oil market stable for the moment. We’ve had a reasonable run-up so far this year. It might be time for a pause as everyone makes sense of what’s happening.

OPEC, an oil cartel, just released its monthly report. Much of the increase in world supply at the moment is coming from oil-producing nations not part of its 14-member club.

However, there’s no doubt Saudi Arabia will do everything it can to push oil higher so it can cash-in while the going is good.

OPEC is due to meet in Vienna in roughly six weeks. I think it’s almost certain that Saudi Arabia will push to keep the previously agreed production cuts in place. Whether OPEC can hold together — historically not a great bet — is the open question.

I still think the risk is that oil spikes. But markets are designed to fool the majority of people most of the time. There’s always the possibility of a spooky dip just to fake us all out.

Only time will tell.

One person not complaining about all this is BHP Billiton Ltd [ASX:BHP] boss Andrew Mackenzie…

The happiest man on the ASX

The rise in oil is generating interest in the US shale assets BHP is putting up for sale. We can expect a deal here soon.

The higher oil goes, the more cash is likely to pour in for its petroleum division.

BHP is not getting out of oil completely. It’s merely shifting its focus away from onshore assets to the Gulf of Mexico.

This is making BHP look a lot more interesting as an investment than many might have thought even last year. The company also says the outlook for coal and iron ore is quite strong in the short term.

For now, it appears to have some strong tailwinds. This could help fire the Aussie market over 2018. And it could result in a strong bounce for the best oil stocks on the ASX.

In my view, they come no better than a tiny Aussie explorer operating in the Gulf of Mexico.

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Callum Newman,
Editor, The Daily Reckoning Australia