Venezuela's Perfect Storm for Oil May Be About to Break
https://www.bloomberg.com/gadfly/articles/2017-07-21/venezuela-oil-storm-may-be-about-to-hit-the-market"We may be about to see the first sovereign producer to unequivocally fail.
"The oil producer in question is Venezuela, and that assessment comes courtesy of Helima Croft, who is global head of commodity strategy at RBC Capital Markets and formerly worked with both the Council on Foreign Relations and the CIA.
In a global oil market mired in excess inventory and low expectations, Venezuela is the most tangible of wildcards. Its tragic and volatile mix of a failing, oil-dependent economy, political gridlock and simmering unrest is well known at this point.
But things are building to a head, partly due to the relentless logic of the bond market and partly due to the more proprietary logic of U.S. foreign policy.
Venezuelan bonds, which haven't looked rock-solid for a few years, crashed this week as embattled President Nicola Maduro renewed calls to rewrite the country's constitution, which would effectively disenfranchise the millions of Venezuelans who oppose him and entrench his regime. The U.S. has warned it may impose much tougher sanctions if Maduro goes ahead with his plan.
Whether Maduro will, and what those sanctions might be, are the big unknowns here. But there's an awful confluence of factors that could quite easily push this toward a debacle by the end of the year.
Venezuela's economy is in free-fall: By the end of this year, it will have shrunk by 32 percent compared to where it was at the end of 2013, according to International Monetary Fund forecasts. Also by the end of this year, the government is on the hook to pay back more than $5 billion in debt -- including bonds owed by the state-owned oil champion, Petróleos de Venezuela, S.A., or PdVSA -- plus billions more in interest. As of this week, Venezuela's international reserves stood at less than $10 billion.
Meanwhile, mismanagement, a lack of investment and re-nationalization of foreign oil companies' interests have caused Venezuela's oil production to slump from around 3.3 million barrels a day a decade ago to about 2 million now. Even allowing for the fact that domestic consumption has dwindled along with GDP, Venezuela's surplus of oil available for earning export dollars has shrunk considerably.
Compounding this is the fact that the country must devote a lot of its output to paying off loans from China and Russia, further reducing the actual amount it can use to generate cash. Francisco Monaldi, a fellow in Latin American energy policy at Rice University's Baker Institute for Public Policy, estimates that could be as little as 800,000 barrels a day....
