The glaring divide between OPEC’s “haves”—those member countries who are pumping at near full production capacity and have a buffer of substantial financial reserves to withstand a sustained price decline—and OPEC’s “have nots”—those within the group with declining capacity from lack of investment and little if no financial buffer to weather the current price collapse— has become more readily apparent in the past several weeks. No greater sign of this divide was Venezuelan President Nicolas Maduro’s feverish tour of several OPEC nations as well as China and Russia to seek support in shoring up oil prices and to secure financial aid for his struggling economy.
While Maduro reported he was successful in gaining $20 billion in new Chinese investment for a number of projects in the Latin American country and that the Qatari government had pledged to lend him “various billions”, his pleas to Riyadh and Doha to moderate OPEC’s current strategy and agree to cut the group’s production to begin an oil price recovery most certainly fell on deaf ears.
And why not, giving that the strategy pushed by Riyadh and supported by the other member countries of the Gulf Cooperation Council (GCC) in OPEC apparently is beginning to see results, particularly in terms of hitting non-OPEC producers where it hurts and reclaiming market share. Reports show that in the past six weeks, the U.S. oil rig count has fallen by 209, marking the sharpest six-week drop since tracking began in 1987, with the oil rig count falling by 55 in the week ending January 16th and the count for horizontal rigs that are used in shale production dropping 48 in the same week, reflecting its biggest single-week decline.
OPEC also got encouraging news from the latest monthly oil market report from the International Energy Agency (IEA)—at least in the short term. In its report released on January 16th, the IEA pointed to declining oil prices cutting into non-OPEC production growth in 2015, with the organization reducing its estimates for non-OPEC supply growth by 350,000 b/d. The IEA now forecasts non-OPEC supply growth at 950,000 b/d for this year.
However, in its report, the IEA did suggest that “A price recovery—barring any major disruption—may not be imminent, but signs are mounting that the tide will turn.” And, interestingly enough, the IEA indicated that U.S. oil output for 2015 will remain pretty strong, with supply growth falling by a mere 80,000 b/d. The market watchdog sees larger losses in production growth during the year from Colombia (175,000 b/d) and Canada (95,000 b/d).
The IEA now puts its call for OPEC crude at 29.2 million b/d for 2015, a tad higher than OPEC’s own adjusted call of 28.8 million b/d announced a day earlier, which was reduced by about 100,000 b/d from OPEC’s December monthly report. And, OPEC itself boosted its previous estimate for U.S. oil production for 2015 by 90,000 b/d to 13.81 million b/d in its latest report, but it also lowered its forecast for U.S. supply growth for the year from 1.05 million b/d to 950,000 b/d, which is now in line with the IEA’s new forecast.
There are no indications that OPEC’s GCC contingent is wavering on its stance on maintaining the group’s high production levels, currently over 30 million b/d for the seventh consecutive month. In the midst of Maduro’s touring of OPEC nations and China and Russia, U.A.E. Oil Minister Suhail Mohamed al-Mazrouei, speaking at an energy event in Abu Dhabi, argued that OPEC “cannot continue protecting a certain price … We are concerned about the balance of the market but we cannot be the only party that is responsible to balance the market.”
Venezuela has been a strong opponent of Riyadh’s plan to stem non-OPEC production through a painful price war and market share battle, given that the Latin American producer’s economy is in shambles. Maduro is facing increasing heat at home, where inflation has risen to 64 percent, the country appears close to defaulting on its foreign bonds, food shortages are on the rise and the latest polls suggest he only has support from 22% of the population. The Venezuelan leader, admitting last month that his country is in recession, has insisted that the financial crisis is the result of an “economic war” waged by political foes.
Maduro received the full royal treatment during his visit to Saudi Arabia on January 11th, meeting with Saudi Crown Prince Salman Bin Abdul-Aziz, Deputy Crown Prince Muqrin Bin Abdul-Aziz, Intelligence Chief Prince Khaled Bin Bandar and several sons of the ailing King Abdullah Bin Abdul-Aziz, who has been hospitalized since December 31st, as well as Saudi Oil Minister Ali Naimi. While the official Saudi Press Agency gave no details about Maduro’s visit with the Saudi leadership, the Venezuelan government released a statement saying that, “We agreed to work to recover the market and oil prices with state policies between the two energy powerhouses.”
In Doha on January 12th, Maduro spoke to Venezuelan state television, declaring that, “We’re finalizing a financial alliance with important banks from Qatar that will give us sufficient oxygen to help cover the fall in oil prices and give us the resources we need for the national foreign currency budget.” He indicated that the financing would involve billions of dollars covering 2015 and 2016.
Maduro met more kindred spirits for supporting a return to higher oil prices through production cuts while visiting Iran. In Tehran on January 10th, Maduro first met with Iranian President Hassan Rouhani and later with Iranian Supreme Leader Ayatollah Ali Khamanei. Both Iranian leaders took the opportunity of Maduro’s stop in Tehran to again accuse Saudi Arabia (and ostensibly the United States) through veiled references of instigating the price rout for political reasons. Rouhani called on OPEC members to “neutralize schemes by some powers against OPEC and help stabilize an acceptable oil price in 2015.” The Ayatollah, on his part, insisted that, “Our common enemies are using oil as a political weapon and they definitely have a role in the sharp fall in oil price.”
The fact that Maduro turned to Beijing and Moscow for financial help is no great surprise, although Russia—also hard hit by oil prices that have collapsed 60% since last summer—may not be in the strongest lending position currently to help bail out Caracas and it is questionable how much aid Maduro was pledged when he met with Russian President Vladimir Putin on January 15th. Following that meeting, the Venezuelan leader declared that, “I have got the funds needed so that the country can maintain its rhythm of investment, of imports and economic stability.”
While Maduro announced during his visit to Beijing earlier this month that he had signed bilateral deals with the Chinese government for $20 billion in new Chinese investments in projects in the Venezuelan energy, industrial and housing sectors, he gave few details and it is unclear if these deals will entail a loan-for-oil arrangement that has come to typify Chinese-Venezuelan agreements.
The Chinese government had cultivated a strong relationship with Maduro’s predecessor, Hugo Chavez, beginning in 1999, and it was Beijing that Chavez increasingly turned to when his Bolivian Revolution started hitting tough financial times and the Venezuelan president had to boost borrowing to cover government spending and debts. Since 2007, China has offered Caracas as much as $50 billion in credit in exchange for dedicated oil supplies.
Indeed, in April 2010, the Chinese government stated that it had signed seven cooperation deals with Venezuela, including a framework agreement for financing that entailed the China Development Bank offering Venezuela a $10 billion loan and an additional credit worth approximately $10.4 billion. As required by the Venezuelan law that was passed to endorse the financing, Caracas was to repay China with no less than 200,000 b/d of crude in 2010, no less than 250,000 b/d in 2011, and no less than 300,000 b/d in 2012. The question today is how much of Venezuela’s crude output is already committed to repaying existing Chinese loans and how much more will be heading to Asia’s largest market from the latest deals?