Venezuela Commodities July 2017

Venezuela

Venezuela: Oil prices edge higher in August on increased political uncertainty

August 2, 2017

Oil prices picked up in August, reaching the highest print in six months. The average price of Venezuela’s mix of crude oil traded at USD 45.7 per barrel (pb), which marked a 5.6% increase compared to the previous month (July: USD 43.2 pb).

The month-on-month increase in oil prices largely reflects the latest domestic political developments and continued decline of U.S. crude inventories. Surprisingly, Hurricane Harvey, which resulted in the closure of numerous refining plants in the United States, was not a substantial factor behind the price increase. Instead, the latest price movements reflect growing tensions between Venezuela and the United States following the 30 July Constituent Assembly vote. On 25 August, after much speculation, the U.S. government introduced more severe sanctions on Venezuela such as forbidding the debt-ridden government and the state-owned enterprise, PDVSA, from issuing new debt and equity, and impeding entities either from or within the U.S. from dealing in pre-existing Venezuelan government bonds.

The U.S. government stopped short of forbidding PDVSA from conducting day-to-day transactions in USD such as paying suppliers or receiving export earnings, although such measures could be implemented in the near future. Such sanctions would deprive the country of its main source of foreign currency and impede PDVSA from complying with its debt repayments on dollar-denominated debts, which would trigger a credit event.

The latest political developments have raised the prospect of a sovereign debt default as multi-billion-dollar debt payments are due this year and next. With international reserves standing at USD 10.1 billion at the end of August, the government is scrambling to avoid a credit default which could see creditors seizing assets and the government losing access to international financial markets. The latest U.S. sanctions and a growing public backlash against the institutions which are providing the government with a financial lifeline have made renegotiating existing debt to ease the short-term debt burden increasingly difficult.

In spite of the government’s compliance record so far, most 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 source of over 90% of the country’s dollar-denominated earnings—remains constrained by dwindling production and low prices. Oil production in 2016 dropped by 10% to reach an over twenty-three-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 expected to remain depressed, leaving already-depleted international reserves as the only resource for meeting bond payments. The government has shown no restraint in curbing imports via FX restrictions in order to secure enough funds to meet debt repayments in spite of the growing humanitarian crisis in the country. To complicate matters, the bulk of the reserves are in the form of gold and other non-liquid assets that are not readily available.

Panelists participating in last month’s LatinFocus Consensus Forecast expected the price for Venezuela’s mix of oils to average USD 42.9 per barrel in 2017 and USD 45.2 per barrel in 2018. An updated LatinFocus Consensus Forecast will be published on 12 September.


Author: Jean-Philippe Pourcelot, Economist

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Venezuela Commodities September 2017

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


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