Venezuela: Oil prices remain depressed in April
May 10, 2017
Oil prices have experienced a weak recovery after declining in March. In April, the average price of Venezuela’s mix of crude oil traded at USD 44.1 per barrel (pb), marking an increase of 2.6% (March: USD 43.0 pb). Although oil prices have recovered 39.5% of their value from the same day in 2016, they are now down 7.0% since the start of the year.
Conservative forecasts for the evolution of oil prices, coupled with uncertainty as to whether signatory countries will agree to extend or deepen the current deal, is preventing prices from making strong gains in the short-term. This comes as bad news for the Venezuelan government, which had hoped that higher oil prices would help improve its empty coffers and give it some breathing room to meet the country’s and PDVSA’s multibillion debt commitments and palliate the profound crisis.
Analysts maintain that the government holds an extremely optimistic and 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. 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 payment in April. International reserves only dropped USD 300 million and remained above USD 10.0 billion at the end of April, suggesting that the bulk of the payment was done through the allocation of foreign currency to the private sector in Q1. For 2017, both the sovereign and PDVSA face USD 5.7 billion in payments including interest, with another USD 7.5 billion due next year. Despite the large debt burden, financial markets remain confident that the country will continue complying with its debt payments despite the political cost it has to pay. The government has shown no restraint of curbing imports via FX restrictions to secure enough funds to meet debt repayments. 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 debt levels vastly exceed the current levels of international reserves (USD 10.1 billion at end of April) and oil, the source of most dollar earnings of the country, remain 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, as liquid assets have been depleted to under USD 1.0 billion.