Venezuela has been a major player in global crude trade for years, accounting for an average of 5% of annual seaborne crude exports over the past two decades. However, amidst an escalating economic crisis, crude output and exports from the country fell notably in 2H 2017. With output decline projected to continue, it seems to be a case of not if crude exports will fall this year, but by how much?

Slipping Lower
In 2017, Venezuela was the world’s ninth largest crude exporter, shipping 1.6m bpd of crude – equal to 4% of seaborne crude exports. However, the country’s crude output has been steadily declining for the past decade, falling from 2.8m bpd in 2008 to 2.0m bpd in 2017. This fall largely arose due to long-term financial and technical mismanagement within state oil company PDVSA, but issues worsened after the oil price crash in 2014, which sparked severe cash flow problems due to the country’s reliance on oil revenue. Despite the continued fall in output, crude exports initially held relatively steady. However, last year, this began to change.

Caracas Starts To Crack
Against the backdrop of intensifying economic crisis, Venezuelan crude output fell 12% in 2017 to 2.0m bpd, the lowest level in almost 30 years. The decline largely took hold in 2H 2017, and by December output stood at just 1.6m bpd. Cash shortages meant that PDVSA struggled to buy the diluents needed to produce and ship heavy crude, a situation further exacerbated by the country’s selective default on its sovereign debts in November. As a result, crude exports took a notable hit, and by December were down 36% y#o-y to just 1.1m bpd. The fall in shipments was not evenly distributed between buyers. Exports to the US and India (Venezuela’s only two significant cash-generating markets) each fell over 50% y-o-y in December. Meanwhile, exports to China actually rose over 20% y#o#y in the month, but, significantly, shipments to China are now largely part of oil-for-loan deals that generate no income.

The Only Way Is Down?
The decline in output has continued in 2018 so far, with production in March falling to 1.5m bpd. The situation has had tangible impacts on the oil market; overall compliance with the OPEC-led supply cut deal hit 163% in March, but had Venezuelan output held at its allocated level, this figure would have stood at around 120%, meaning Venezuela likely contributed significantly to the recent tightening of global oil supplies. Similarly, exports are expected to continue to fall, with the projected 0.5m bpd drop in Venezuelan shipments in 2018 providing a notable counterbalance to the projected 0.7m bpd rise in US crude exports, moderating the projection for global seaborne crude trade growth in 2018 to around 3%. With further US sanctions or PDVSA entering full default both possible, the outlook could deteriorate during the year.

So, with oil revenue central to the Venezuelan economy, the recent fall in exports looks to be perpetuating a vicious cycle. Some have reported that output could fall to 1m bpd by end 2018, a collapse that would be unprecedented in a country not at war. Even in the best-case scenario, it seems all but certain that Venezuela will continue to be a significant downside risk to global oil supply and exports this year.
Source: Clarksons