1 Important Development Oil & Gas Investors Should Know: Venezuela’s Woes

There are many companies in Singapore’s stock market that are exposed to the oil & gas industry. For instance, as of November 2014, there were 54 such companies. Some of the larger players include the oil rig builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

The last two years have been a rough time for many of the oil & gas companies here. Oil is today sitting at around US$50 per barrel, a far cry from the price of over US$100 that was seen in mid-2014. The decline in oil prices since mid-2014 has hurt the businesses of many oil & gas companies in Singapore’s market.

As such, investors who are interested in oil & gas companies may want to keep up with important developments in the industry. One noteworthy development concerns the nation of Venezuela.

The country is one of the most important oil producers in the world. Back in 2014, Venezuela was the 13th largest oil producer with a production volume of 2.49 million barrels per day. In the first-quarter of 2016, it was still producing 2.4 million barrels per day.

But, events in Venezuela have taken a turn for the worse in the past few months. A confluence of serious structural issues have reduced its oil production. The country’s output for oil has fallen to around 2.3 million barrels per day in May and British bank Barclays expects its daily production level to fall to as low as 1.7 million barrels by the end of the year.

Here are some of the problems confronting Venezuela:

1. Hyperinflation and a shrinking economy

Venezuela’s economy has been facing difficulties for awhile now. In a recent blog post, a senior staff member at the International Monetary Fund estimated that inflation in the country will exceed a staggering 700% this year and that its economy will shrink by 10%. In 2015, Venezuela’s inflation was at a lower but still mighty 181%; its economy contracted by 5.7%.

Many large US companies, such as Coca-Cola, Kimberly Clark, and Procter & Gamble, have either pulled out of Venezuela this year or stopped supporting operations in the country.

2. Civil unrest and infrastructure problems

Venezuela has been through a few rounds of serious civil unrest in the past two years as its economic problems mounted. Meanwhile, basic necessities such as food and water are also in short supply.

3. A lack of money

A recent June article by Bloomberg reported that Venezuela’s state-owned oil company, Petroleos de Venezuela SA (or PDVSA for short) did not have money to pay its providers of support services. For instance, PDVSA owed Schlumberger US$1.2 billion as of 31 March.

If the problems at Venezuela worsen, it could mean that the supply of oil from an important spigot in the global oil production scene would be reduced or turned off.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.