As OPEC Tries to Squeeze Rivals, One of Its Own Feels the Pinch

  • Back-to-back opposition, OPEC blows make Maduro's job harder
  • Barclays says country could stop debt payments as soon as Feb.

Can OPEC Change Pessimism Around Oil Prices?

Forget the opposition. OPEC is doing more to ruin the holiday season for Venezuela President Nicolas Maduro than any of his rival lawmakers.

Maduro stepped up attacks on his opponents this month after they won enough seats in congressional elections to challenge his government. While bonds initially rallied on optimism the opposition victory could lead to more market-friendly policies, Maduro’s comments quickly killed that euphoria. Now, it’s the rout in oil that’s doing the most damage to the prices of the securities.

Oil, by far Venezuela’s biggest export, has plunged 17 percent to an 11-year low since the Organization of Petroleum Exporting Countries abandoned production limits at its Dec. 4 meeting. Venezuela’s benchmark bonds due in 2027 are at the cheapest since August, and traders see a 71 percent probability that the country will default in the next 12 months, credit-default swaps show. That’s up from 61 percent the day before the OPEC decision.

“The initial reaction to the election results was positive, but then oil just collapsed,” said Phillip Blackwood, a managing director at EM Quest, which advises Sydbank A/S on its debt holdings. “The bills still need to be paid and that comes from oil.”

Oil at these levels could prevent Venezuela from meeting its debt obligations as soon as February, Barclays Plc said Friday. The OPEC member relies on income from oil sales for almost all of its hard currency. It may need to sell $20 billion of gold or other assets to meet next year’s commitments, Alejandro Arreaza, Alejandro Grisanti and Sebastian Vargas, analysts at Barclays, said in a report to clients. Venezuela’s crude basket fell to an 11-year low $29.17 last week.

“The latest decline in oil may have undermined government confidence, putting even this payment at risk,” they wrote.

The yield on Venezuela’s bonds due in 2027 rose 4.56 percentage points from Dec. 9 to 26.16 percent as of 11:05 a.m. in New York on Tuesday, handing investors a loss of 17.5 percent in less than two weeks, the steepest in emerging markets.

Trying to pinpoint the exact oil price that Venezuela needs to guarantee its debt payments is tricky, because up-to-date economic and fiscal reports from the government are rare. Barclays estimates that it needs at least $50 oil on average; Nomura Holdings Inc.’s head of fixed-income strategy Siobhan Morden puts the number at $62.

“We always thought with oil prices between $40 and $50 and a good plan of
economic adjustments, it wouldn’t be necessary to modify debt or restructure,” said Henkel Garcia, director of Caracas-based consultancy Econometrica. “Now, the current cash flow of dollars makes paying debt difficult, even if the right measures are taken.”

At a chaotic meeting in Vienna that was expected to last four hours but extended to nearly seven, OPEC tossed aside the idea of limiting production to control prices. Instead, it went for the one-year-old Saudi Arabia-led policy of pumping, pumping, pumping until rivals are squeezed out of market share. Brent crude oil plunged to the lowest since July 2004 on Monday, trading as low as $36.04 a barrel in London.

Venezuela’s foreign-currency reserves fell 31 percent to $14.64 billion on Thursday from a year earlier, according to the central bank. The government has $5.2 billion of bond payments due next year, plus an additional $5.5 billion to cover PDVSA’s debt, data compiled by Bloomberg show.

Venezuela is struggling after years of nationalizations and intervention left the country dependent on oil giant Petroleos de Venezuela for almost all its exports. But production at the company known as PDVSA has been falling. Output is down 0.6 percent from its 2014 average, compared with an increase of 4.7 percent across the Organization of Petroleum Exporting Countries, according to data compiled by Bloomberg.

“I don’t think many people in the market believe they’ll continue to service their debt in the medium term with oil at $35,” Blackwood said. “It’s now a question of whether they get through 2016. No one’s looking much beyond that and even that’s a tough call.”

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