Oil Prices Fall on Venezuela Power Shift

Oil markets cheered the overthrow of Venezuelan President Hugo Chavez on Friday, as the benchmark oil price fell nearly 6.5%, reflecting traders’ optimism that any new regime will end the turmoil in a nation that is the United States’ third-largest source of crude and refined oil products.

Chavez’s resignation came amid labor unrest that had brought Petroleos de Venezuela, or PDVSA, to a near standstill. A strike by oil workers and sympathizing union and nonunion workers had cut oil shipments by half or more this week and was beginning to cripple the Venezuelan economy.

With Chavez out of power, analysts were optimistic that markets will settle down and that production in Venezuela will resume its customary high levels. In New York, U.S. light crude slumped $1.52 to $23.47 a barrel, a five-week low.

Market analysts said that, judging from market fundamentals, oil prices were irrationally inflated and due for a decline. Friday’s price drop says more about easing market fears than the likelihood of the new Venezuela government dramatically increasing oil production, they said.

“Venezuela is an issue but not enough to account for a $1.50 drop in oil prices,” said Chris Schachte, an energy analyst at GSC Energy, a trading firm in Atlanta.

But there was no doubt Friday of oil’s importance to Venezuela’s economy and politics. Chavez’s fate was sealed when he fired top PDVSA executives and reshuffled the state-owned oil company’s board of directors, bringing in five members whose only qualifications seemed to be that they were Chavez loyalists.

Analysts were hopeful that, under a new president, the investment climate for foreign oil companies in Venezuela will improve. Several major companies have suspended exploration projects begun in the mid-1990s when the Venezuelan government openly courted foreign oil companies.

“This is not a total shock to the market. It became clear in the last several days that Chavez wasn’t going to make it, especially when he started to lose the support of the military. In Venezuela, that’s not a good thing for a president,” Schachte said.

Robert Berges, Latin America investment strategist for Merrill Lynch in New York, said Chavez’s ouster was good news for Venezuela’s economy overall, which worsened considerably during the three years that the populist, left-leaning ex-paratrooper was in office.

Oil accounts for 80% of Venezuela’s exports, while oil sales supply more than half of the nation’s revenue. The total output of the Venezuelan economy is expected to shrink by 1% this year after growing 2.3% last year.

The Venezuelan currency, the bolivar, lost 30% of its value in February, falling from 765 to the dollar to 1,110, after the government abandoned a controlled devaluation policy and let it float freely. The bolivar has since rallied to the 900 level.

Economic problems caused Chavez’s power base to weaken. “Consumers don’t like devaluations because it reduces their purchasing power,” Merrill’s Berges said.

Confidence in their leaders shaken, Venezuelans increasingly have been converting their savings to dollars and socking cash away in offshore bank accounts. As a result, Venezuela’s capital reserves have dropped by $3 billion to $11billion since the start of the year.

In a report issued Friday, Standard & Poor’s cautioned that turmoil in Venezuela is not necessarily over and that any transitional government may lack the “political clout to take the necessary stabilization and structural reform measures needed to reactivate the economy.”

In 2001, Venezuela averaged 1.28 millions barrels of crude oil per day in shipments to the United States. In addition, the country sends the equivalent of 400,000 barrels of refined products to the United States, including gasoline that is crucial to the East Coast wholesale market. It is the fourth- largest exporter of crude and third- largest overall U.S. supplier of crude oil combined with refined petroleum products.

Shipments of gasoline from PDVSA refineries in Venezuela and St. Croix in the Caribbean also had been slowed by labor unrest.

Combining crude and refined products, Venezuela ranked behind only Saudi Arabia and Canada as energy exporters to the United States in 2001.