Deepening default fears cast shadow over Venezuela’s oil flows
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."