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Schork Oil Outlook: Is Chavez' Influence Waning?

A deteriorating situation in Venezuela puts future U.S. imports from that country at risk.

In just the last two weeks we have seen Venezuela:

Devalue its currency

Venezuela receives oil revenues in dollars, that’s good for the government, but bad for Venezuelan citizens who have to now bid for goods on the black market with devalued bolivars. As such, economists predict inflation could hit 70% this year.

Institute rolling blackouts along the power grid

Due to a drought, the country is struggling to maintain hydroelectric load which supplies more than two thirds of the country’s electricity.

Don the jackboot… again

The government ordered the shutdown of Radio Caracas Television Internacional (RCTV), a cable television station critical of the Chavez government.

Cry crocodile tears for Haiti

Venezuela turned down a request by the Paris Club, IMF et al. for nations to forgive debts owed by Haiti. According to a Wall Street Journal article, Haiti’s $167 million debt to Venezuela is one of its biggest.

Meanwhile, despite the doubling in oil prices in 2009, the country is struggling to pay its foreign vendors. As such, rig counts are falling.

The analysts at "The Schork Report"assert that, intuitively, rig counts and output should have a direct relationship, seasonal factors considered.

So it comes as a surprise that Venezuela’s rig count seems disproportionately detached to output. Consider that December 2008 had 74 rigs producing 2.32 MMbbl/d, while December 2009 had 46 rigs producing 2.22 MMbbl/d. So it doesn’t say much about rig efficiency when a 38% decrease in rigs lead to just a 4% drop in output.

The current rig count is at its lowest since 2004, but Venezuela can, and has in the past, produced even greater output given current rig counts. If the 46 rigs operating in December were working as efficiently as they were in 2003-07, we would expect Venezuelan production to be around 2.60 MMbbl/d, 17% higher than December’s actual output.

How much lower can rigs go before output is affected? Short answer: Very low. Long answer: 2003, which saw Venezuelan workers strike in opposition to Chavez, had an average of 31 rigs producing 2.33 MMbbl/d. More recently, Venezuelan production has been steady at 2.22 MMbbl/d since October despite 7 rigs going off-line by December.

What’s more, American dependence on Venezuelan oil has been decreasing. No doubt Venezuela remains one of our top sources of imported oil, but demand is weakening.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.