Venezuela: Oil prices drop in June
June 8, 2017
Oil prices declined again in June. In June, the average price of Venezuela’s mix of crude oil traded at USD 40.8 per barrel (pb), marking a 4.2% decrease (May: USD 42.6 pb). Although oil prices have recovered 2.6% of their value from the same month in 2016.
Oil prices in June were constrained by high production and inventories level. Oil production in OPEC countries remains elevated despite record-high compliance with the output cut agreement extended few weeks ago. Likewise, buoyant shale oil production in North America and the latest data pointing to high inventory levels are preventing oil prices from making any significant gains in the near-term. This comes as bad news for the Venezuelan government, which had hoped that higher oil prices would replenish its empty coffers and give it some breathing room to meet the country’s and the state-owned oil enterprise (PDVSA)’s multibillion debt commitments.
Analysts maintain that the government holds an unrealistic view on how higher prices will improve public finances. Oil production in 2016 dropped by 10% to reach an over 23-year low and is likely to decline further this year owing to chronic operational problems. Taking into account conservative price estimates for Venezuelan oil this year and next, oil earnings are to remain depressed, leaving already-depleted international reserves as the only medium to meet the country’s and PDVSA’s bond payments.
The state-owned oil enterprise made a USD 2.8 billion debt repayment in April, but both the sovereign and PDVSA still face USD 5.7 billion in payments including interest this year, with another USD 7.5 billion due next year. International reserves declined from USD 10.6 billion at the end of May to USD 10.1 billion at the end of June. The government has also shown no restraint in curbing imports via FX restrictions in order to secure enough funds to meet debt repayments and to avoid losing access to international financial markets and asset seizures. Imports have been steadily declining since 2014 and preliminary data suggests that imported goods plunged 20% in the first quarter of this year.
In spite of the government’s efforts, many of our panelists consider a credit event inevitable in the foreseeable future, since short- and medium-term debt levels vastly exceed the current levels of international reserves just as oil, the country’s largest source of most dollar earnings, remains constrained by dwindling production and low prices. To complicate matters, the bulk of the reserves are in the form of gold and other non-liquid assets that are not readily available.