Bloomberg News

Venezuelan Bond Rout Deepens on Oil Price Decline

November 25, 2013

Venezuelan Military Stand Outside an Electronics Store

The lost revenue is adding to concern over Venezuela’s creditworthiness after President Nicolas Maduro sent in the army to help enforce price controls at some stores and called on congress to grant him special powers to fight the “parasitic bourgeoisie.” Photographer: Meridith Kohut/Bloomberg

The slump in Venezuelan oil prices is depriving the South American nation of its main source of revenue and threatening bondholders already suffering the worst losses in emerging markets.

Average prices of Venezuelan crude exports, responsible for 95 percent of the nation’s foreign currency earnings, fell to a 16-month low this month and ended last week at $93.98 a barrel. Each $1 dollar decline in a barrel of oil costs Venezuela about $700 million per year, according to estimates from state-owned Petroleos de Venezuela SA.

The lost revenue is adding to concern over Venezuela’s creditworthiness after President Nicolas Maduro sent in the army to help enforce price controls at some stores and called on congress to grant him special powers to fight the “parasitic bourgeoisie.” Venezuela’s debt securities have declined 7 percent this month as borrowing costs touched a 22-month high of 14.56 percent, according to JPMorgan Chase & Co.

“With this reduction in oil income, the government won’t be able to maintain spending levels,” Barclays Plc analyst Alejandro Grisanti said today in telephone interview. “It’s not positive for bondholders.”

The difference between oil prices this year and last year has so far reduced income by $3 billion, Grisanti said.

Current Account

“Oil prices in the low $90s would leave Venezuela with a current account deficit,” Ben Ramsey, an economist at JPMorgan Chase & Co., said in a telephone interview from New York. The New York-based bank cut its recommendation on Venezuela bonds to neutral from overweight in a report dated Nov. 12.

The consequences of lower oil prices could include a devaluation, spending cuts and tighter monetary policy, “raising risks of a social and political backlash,” according to Ramsey.

Maduro ordered more stores to reduce prices this month after annual inflation accelerated to 54 percent in October, the highest rate in 16 years and the fastest in the world.

Dollars are becoming increasingly scarce, limiting the supply of products from medicine to milk in a country that imports about three-quarters of the goods it consumes. Venezuela’s international reserves fell to $20.7 billion on Nov. 15, the lowest in nine years.

Yield Spread

The extra compensation that investors demand to own Venezuelan bonds instead of U.S. Treasuries has risen to 11.52 percentage points this month, the highest in emerging markets, according to JPMorgan.

Venezuelan oil prices have fallen even as Brent crude, the benchmark grade for more than half the world’s oil, hit a six-week high on Nov. 22 of $111.05 as envoys haggled over language in their efforts to ease the standoff over the atomic ambitions of Iran, whose oil exports have been reduced by sanctions. Brent crude has rallied 13.6 percent from its 2013 low of $97.69 a barrel on April 17.

Iran and world powers reached an initial accord on Nov. 24 that broke the decade-long diplomatic impasse over its nuclear ambitions.

The gap between Brent and Venezuela’s basket price hit a two-year high of $17.57 on Nov. 21, according to data compiled by Bloomberg.

“Venezuela’s oil basket is declining primarily due to declines in heavy oil prices,” Ruth Krivoy, an oil analyst from Sintesis Financiera, the consultant firm for GlobalSource Partners, said in a telephone interview from Caracas.

Pipeline Threat

TransCanada Corp.’s proposed Keystone XL pipeline may displace Venezuelan crude, pushing prices even lower, because the project would allow U.S. refineries to source more Canadian oil, said Tissot Associate Consultant Roger Tissot in a phone interview from British Columbia. NuStar Energy LP on Nov. 8 canceled a long-term agreement with PDVSA for 30,000 barrels a day of crude.

“If the Canadians go ahead with the Keystone Pipeline to export heavy oil from Canada to the U.S. Gulf Coast, that would cut off that little window of opportunity that is left for Venezuela,” Tissot said.

To contact the reporter on this story: Pietro D. Pitts in Caracas at ppitts2@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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