Deep­en­ing de­fault fears cast shadow over Venezuela’s oil flows

The Pak Banker - - MARKETS/SPORTS -

As Venezuela grows closer to ex­haust­ing nearly ev­ery means of pay­ing its debt, some oil mar­ket par­tic­i­pants are se­ri­ously pon­der­ing the pos­si­ble im­pli­ca­tions of an un­prece­dented event: the de­fault of a ma­jor crude pro­duc­ing com­pany. State-run firm PDVSA faces around $5.2 bil­lion in pay­ments to bond­hold­ers in 2016, much of it in Oc­to­ber and Novem­ber, a sum that some ex­perts say it will be hard-pressed to meet af­ter the govern­ment used nearly all of its avail­able cash re­serves to pay $1.5 bil­lion in ma­tu­ri­ties last week.

A de­fault could cur­tail some of the OPEC mem­ber's ex­ports by crip­pling its abil­ity to im­port crude and fu­els used to blend its ex­tra heavy oil, ex­perts and sources say. It could also de­grade the qual­ity of do­mes­tic gaso­line by lim­it­ing pur­chases of nec­es­sary com­po­nents.

With the risk grow­ing and pay­ment de­lays to sup­pli­ers al­ready emerg­ing, some firms that sell to PDVSA have be­gun hedg­ing their bets by us­ing in­ter­me­di­aries or seek­ing higher prices, fear­ful they might never get paid, ac­cord­ing to sources who deal with the firm.

"A pos­si­ble PDVSA de­fault is wor­ry­ing for ev­ery­body," a source from a U.S. oil com­pany that buys from PDVSA told Reuters. And if they scrape to­gether enough funds to pay off bond­hold­ers, "they will not be able to pay sup­pli­ers." The im­pli­ca­tions of a de­fault for global oil sup­plies swamped by the big­gest glut in decades are dif­fi­cult to di­vine, but ex­perts are closely watch­ing the de­te­ri­o­rat­ing fi­nances of ex­porters for any­thing that could jolt mar­kets. "Of course, Venezuela is at the top of the list," Daniel Yer­gin, vice chair­man of anal­y­sis firm IHS, told me­dia last week.

With­out im­ports of light crudes and dilu­ents like naph­tha that have rose to some 110,000 bar­rels per day (bpd) in 2015, PDVSA may be un­able to ex­port an es­ti­mated 235,000 bpd of its own heavy blends, ac­cord­ing to cal­cu­la­tions based on Thom­son Reuters trade flows data - a dis­rup­tion that could help curb an over­sup­plied global mar­ket.

Most of the coun­try's es­ti­mated 2 mil­lion bpd of ex­ports, a por­tion of them se­cured against long-term loans, would likely still flow as PDVSA's en­tire out­put is not de­pen­dent on im­ports and it has been in­creas­ing ship­ments to political al­lies. Crude blend sup­plies to the United States and Asia could also be sus­tained if PDVSA's part­ners, in­clud­ing U.S. Chevron (CVX.N), Rus­sia's Ros­neft (ROSN.MM), Spain's Rep­sol (REP.MC) and China's CNPC, step in to se­cure more dilu­ents, as PDVSA has al­ready asked them to do. Yet a de­fault would also likely re­duce fuel com­po­nents im­ports, which have risen to some 85,000 bpd due to grow­ing use of cheap high-oc­tane gaso­line and fall­ing do­mes­tic pro­duc­tion.

Venezuela was the United States' third crude sup­plier last year and Latin Amer­ica's sixth-largest buyer of US fu­els. While PDVSA's pend­ing fourth-quar­ter debt pay­ments of some $3.3 bil­lion ap­pear be­yond its means, a de­fault is far from a cer­tainty, and its pres­i­dent Eu­lo­gio Del Pino said this week it is tak­ing all mea­sures to avoid it. Even so, short of a sud­den, un­ex­pected re­cov­ery in crude prices, as­set sales, new loans or re­fi­nanc­ing agree­ments, the odds look long, said Ben­jamin Ram­sey from JP Mor­gan.

While not yet call­ing for a credit event in Venezuela, a JP Mor­gan re­port said PDVSA's best in­ten­tions "can­not none­the­less trump the cold, hard re­al­i­ties of di­min­ished cash flow."

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