Venezuela Commodities October 2017

Venezuela

Venezuela: Government announces plan to restructure existing debt

November 2, 2017

Oil prices continued to climb higher in October, marking the best reading since July 2015. The average price of Venezuela’s mix of crude oil traded at USD 49.9 per barrel (pb), which marked a 4.4% increase compared to the previous month (September: USD 47.8 pb)

Oil prices were on a general upward ascent for the fourth consecutive month. The latest data continues to indicate that the much-anticipated rebalancing of the global oil market is finally materializing and could be a reality next year. Higher-than-expected compliance with the OPEC output cut deal and expectations that Saudi Arabia and Russia will extend the deal through 2018 have contributed in pushing prices higher. Likewise, expectations of recovering demand and declining oil inventories in the United States have also contributed to higher prices in recent weeks. However, it remains to be seen how increased oil output will impact U.S. oil production down the road. The prospects of higher oil prices could result in higher U.S. oil production and cap additional price gains as a result.

The much-anticipated recovery in oil prices has barely made headlines in Venezuela, as prices remain too low to do anything toward mitigating the severe economic crisis the country is facing. Oil production has been declining steadily for years, and a recent report estimated that output in 2017 has continued to decline from the over 20-year low observed last year. Refineries in different countries such as India and the United States have complained that Venezuela has failed to deliver high-quality crude oil in recent months due to production difficulties. Declining output coupled with difficulty in finding buyers could deprive the country of vital funds despite the recent upswing in prices of the commodity.

The timing of the most recent rise in oil prices coincides with a crucial moment in the country’s debt repayment schedule, with multibillion-dollar state-owned bonds and state-owned oil firm due in the final quarter of this year. The country managed to make two critical PDVSA bond payments of USD 842 million and USD 1.2 billion on 27 October and November 2, respectively. After making the 2 November payment, President Nicolás Maduro announced his plans to restructure the country’s roughly USD 89 billion in debt it has with banks and investors. The government has not stated whether it will honor upcoming multibillion dollar payments due this year or the USD 9 billion due in 2018.

The leveling of U.S. sanctions in August made the task of restructuring existing debt even more difficult, since financial institutions and investors operating under U.S. regulation are forbidden to refinance or restructure existing debt issued by Venezuela. Similarly, issuing restructured bonds in another currency will be extremely challenging since many countries do not recognize the Constituent Assembly elected in late July. Considering the complicated political panorama, the current levels of international reserves that are significantly below the outstanding short- and medium-term debt levels, and the fact that the bulk of the reserves are in the form of gold and other non-liquid assets that are not readily available, a sovereign debt default in the foreseeable future is very likely.

Panelists participating in this month’s LatinFocus Consensus Forecast expect the price for Venezuela’s mix of oils to average USD 43.5 per barrel in 2018 and USD 45.8 per barrel in 2019.


Author: Jean-Philippe Pourcelot, Economist

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Venezuela Commodities November 2017

Note: Price of the Venezuelan mix of crude oil in USD per barrel.
Source: Ministry of Petroleum and Mining.


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