Venezuela: Venezuelan oil prices tumble in March, compounding pressure on public finances
April 6, 2017
Venezuelan prices dropped in March after having risen uninterruptedly since the OPEC and non-OPEC output cut agreement came into force in January. In March, the average price of Venezuela’s mix of crude oil dropped 7.4% from the previous month to USD 43.0 per barrel (pb) (February: USD 46.4 pb). March’s print was 9.7% lower than at the start of the year but was 44.5% higher than on the same day in 2016.
Oil prices came under pressure in March after reports from the U.S. Energy Information Administration showed that U.S. crude stockpiles had increased in annual terms as the country ramped up its oil production. The decline in prices observed in March has raised concerns about the effectiveness of the OPEC and non-OPEC output deal. 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.
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, however, 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 is due to make a USD 2.8 billion payment this month. For 2017, both the sovereign and PDVSA face USD 8.5 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. The spread premium on credit default swaps had narrowed considerably in past months, though it has widened in recent weeks due to the latest political developments.
Many of our panelists consider a credit event inevitable since debt levels vastly exceed the current levels of international reserves (USD 10.4 billion at end of March). 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. Economist Mauro Roca from Goldman Sachs comments that the country could run into trouble as soon as the end of the year once liquidity conditions become too critical or servicing debt too politically costly:
“In any case, and even when alternative financing could help to postpone a default for another year, international reserves just do not seem to be enough to keep financing Venezuela’s persistent hard currency shortfall. At some point, any lingering willingness to pay will be overborne by an insufficient financial capacity. After all, both macroeconomic dynamics – as reflected in the inflation-growth backdrop – and the political environment continue to deteriorate.”