Potential US oil sanctions boost risk of Venezuela default
Houston, US - The spectre of tighter US sanctions is pushing up the perception that Venezuela is getting closer to defaulting on its bonds.
Venezuela is awaiting possible further restrictions after the US, its largest trading partner, sanctioned President Nicolas Maduro after he held elections on Sunday for a new assembly that will rewrite the constitution. US Treasury Secretary Steven Mnuchin said in announcing the measures, including freezing Maduro’s assets in the US, that additional sanctions were ‘on the table’.
The implied probability of Venezuela missing a payment over the next 12 months rose to 62 per cent on Monday, according to credit-default swaps data compiled by Bloomberg. That’s the highest level since March 2016. The odds of a credit event over the next five years increased to 95 per cent. Venezuelan stateowned oil and natural gas company, Petroleos de Venezuela SA’s (PDVSA) dollar bonds due in November extended losses after the announcement and are trading at only 74.33 cents on the dollar.
Further sanctions ‘would increase the probability of default given PDVSA’s already dire liquidity situation and because it would give Maduro a potential scapegoat to blame for the government’s inability to pay’, said Risa Grais-Targow, a senior analyst at Eurasia Group in Washington.
“If the US bans exports of crude and products, it would have a mild impact on PDVSA, as their import costs would go up on increased transportation costs as they source lighter crudes and products from farther afield.”
Venezuela has increased imports of oil and products from the US in recent years amid low oil prices and lack of maintenance at its refineries. Oil output fell to a 14-year low of 1.97mn barrels daily in June, according to data compiled by Bloomberg. PDVSA’s refineries were operating at 43 per cent of their capacity in June amid lack of oil and equipment breakdowns, according to Bloomberg calculations based on data from a person familiar with operations.
The US is a net importer of Venezuelan crude, bringing in 741,000 barrels a day in 2016, according to data from the US Energy Information Administration. It exported 105,000 barrels a day of crude and fuel in the same period to Venezuela and Curacao, where PDVSA’s 335,000 barrel a day Isla refinery is located.
PDVSA buys US oil for the Isla refinery to make up for falling domestic output of lighter, or lower-density, grades of crude oil, said Andy Lipow, president of consultant Lipow Oil Associates LLC in Houston. If Venezuela can’t buy from the US, it will need to pay up to get supplies from other countries.
“If Venezuela is able to find suppliers willing to extend credit to them, they will certainly need to pay more for those supplies,” he said in a telephone interview.
Employees work at a Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela on March 23