No sooner do I tell the teeming millions about the ways and woes of Venezuela do they call the Batphone and the Saudis pick up.
For what it’s worth, Venezuela is a swing decision among all of these talks. They are in the balance of so many major players and it’s not going to go unnoticed anymore. The Venz have always been in the whisper room with Russia. That’s because the Venz had lent a helping hand to Russia when deals were opening up with China.
See, the Venz do a lot of business with China and always have. China buys almost 13% of Venz exports (12.9) and they the Venz buy about 12.1% of their hard earned Bolivars on China imports. So when the Saudis were talking with Venezuela, by proxy they were talking to Russia and China. This fits nicely with the chatter last week that the Russians were planning on meeting with OPEC to talk about oil production cuts.
If you think about it, this comes together nicely. Venezuela is a country that is on the brink of economic collapse. The inflation rate just hit hyperspeed and they need to do something now. The low oil prices over the past year has crushed the economy and although the United States has never put sanctions on the Venz, they have been hurt the most by the U.S. increase in production. It’s important to understand what I’m saying here. It’s not only the increase in crude oil production, it’s the rise in refinery production too.
I think you’ve heard me enough talking about the record crude runs in 2015 (16.1M b/d) and that’s helped push Venz refineries out of the picture. Venezuela had a once proud 1.3M b/d of refining capacity, but a lot of it has been mishandled the past few years. Damage had taken its toll and with the low oil prices, there wasn’t much room in the budget to bring them all back up to speed. This exacerbated the oil income losses as the United States wasn’t buying as much crude from Venezuela and the demand for refined product waned too.
Not only did the loss of demand for refined product crimp the exports to the United States, the U.S. exports of gasoline and diesel replaced even more of Venz production. We can only guess how much production has taken been lost in the past year. Our best estimates is that there’s only 1M b/d of refining capacity at best and crude oil production may be barely over 2M b/d.
Most of their crude production is heavy grade and they’ve been losing that share to Canada as they've doubled U.S. imports of crude (2.9M b/d 2015) in the past few years. The Saudis have also held market share in the United States at the expense of the Venz as those barrels coming to America have been mainly heavier grades. So now the Venz are caught in fierce competition with the Saudis and Russians on crude and the United States on refined products. Cue the meeting this weekend with Saudi Arabia.
It was a reality check to tell them that if nobody cuts back here, the Venz are going to cut out. OPEC is worthless to them if they can’t maintain oil revenues to maintain their oil system. Now the ball is in OPEC’s court. It’s time to see if they care or if they are about to let one of their own leave and never be seen again.