Venezuela Siphoning U.S. Oil Exports to China Sinks Bonds

Oil Minister and President of PDVSA Rafael Ramirez
Oil Minister and President of PDVSA Rafael Ramirez said, “There are no reasons to think that we have an unsustainable economy.”Photographer: Meridith Kohut/Bloomberg

Venezuela’s plummeting oil sales to the U.S., its biggest export market, are exacerbating a collapse in the nation’s debt securities.

Bonds issued by Venezuela sank 3 percent on Jan. 31, a day after data released by the U.S. Energy Information Administration showed that 2013 energy sales to the country are headed for a 28-year low. The selloff pushed losses this year to 12.4 percent, more than three times the average 3.93 percent drop among notes from the least-creditworthy developing nations, according to data by Bloomberg.

The tumble in oil exports, Venezuela’s biggest source of dollars, comes as President Nicolas Maduro faces a shortage of U.S. currency that’s caused consumer prices to soar 56 percent and foreign reserves to plunge to a decade-low of $21 billion. Petroleos de Venezuela SA, the state-run oil producer known as PDVSA, is sending hundreds of thousands of barrels a day to China to repay loans totaling more than $40 billion since 2008, at a time when its production is shrinking.

“It’s an indictment of the mishandling of PDVSA,” Edwin Gutierrez, who manages $10 billion of emerging-market debt at Aberdeen Asset Management Plc, said in a telephone interview from London. “The country’s capacity to pay continues to deteriorate.”

Gutierrez said he is underweight Venezuelan bonds.

‘Under Control’

Dollar shortages helped fuel a record 73 percent decline of the bolivar on the black market last year as the country, which imports about 70 percent of the goods it consumes, struggles to pay billions of dollars in debt to food importers and airlines. U.S. currency obligations to private companies have surged to more than $56 billion, according to Barclays Plc. The government failed to pay $8.7 billion to companies in 2013 that provide goods from grains to toilet paper, Caracas-based researcher Ecoanalitica estimated last month.

“There are no reasons to think that we have an unsustainable economy,” Oil Minister and President of PDVSA Rafael Ramirez said in an interview on the Televen television network on Feb. 2. “Oil revenues are under control. Venezuela has never not met its commitments. We’ve never stopped paying.”

Venezuelan exports of crude and petroleum products to the U.S. averaged 792,000 barrels a day in the first 11 months of last year, according to data published on the U.S. Energy Information Administration’s website. That daily average over all of 2013 would result in the lowest rate since 1985.

Output Drops

Rising domestic demand, declining production at PDVSA and a boom in North America shale oil output are also deepening the drop in exports to the U.S. that began during the government of former President Hugo Chavez.

Production declined to 2.45 million barrels a day in December from a daily average of 2.9 million barrels reported in 2012, a Bloomberg survey showed. Crude rose 0.7 percent today to $97.09 a barrel as of 2:24 p.m. in New York.

Venezuela is exporting 640,000 barrels a day to China, Ramirez told reporters in Caracas on Nov. 27. About 310,000 barrels a day are used to pay back loans, he said at the time.

“From a financial point of view, for Venezuela, it’s not very smart,” Russell Dallen, the Miami-based head trader at Caracas Capital Markets, said in a telephone interview. “They obviously have to sell the oil at much cheaper rates because of the freight costs. But it was a political decision.”

Credit-default swaps, used to protect against bond losses stemming from non-payment, indicate a 65 percent chance that Venezuela will halt payments over the next five years, second only to Argentina, data compiled by Bloomberg show.

‘Strong Argument’

Francisco Rodriguez, senior Andean economist at Bank of America Corp., said investors should hold on to their Venezuelan bonds.

“Our bottom line on Venezuela long-term continues to be positive,” Rodriguez said in a Jan. 28 report. “The country has strong capacity to pay, is not depleting its assets, and will sooner or later get out of its fiscal mess by devaluing. Given that its yields are similar to those of countries with much more serious near-term capacity problems, there is a strong argument to hold its bonds.”

The extra yield investors demand to own Venezuelan dollar-denominated bonds instead of Treasuries has surged 2.85 percentage points this year to 12.87 percentage points, data compiled by Bloomberg show. That’s the highest among 56 developing nations included in the Bloomberg USD Emerging-Market Sovereign Bond Index, apart from Argentina.

“Every day that goes by without a change in the policy mix gets us that much closer to that so-called day of reckoning,” Peter Lannigan, a managing director at broker-dealer CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “In Venezuela, the theme in the market for a while now has been, ‘I don’t like the fundamentals, but they’ve got oil. I don’t like the economic policy mix, but they’ve got oil.’ It’s eventually going to catch up with them.”

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