Venezuela's Economy Agonizing Meltdown Could Quickly Spike Oil Prices Higher!

by James DiGeorgia | 02/29/2016 07:28 PM
Venezuela's Economy Agonizing Meltdown Could Quickly Spike Oil Prices Higher!

Boca Raton ( I've been warning for past several months that Venezuela is on the road to economic ruin. The Venezuela economic crisis has now worsened to the point where the country lacks the ability to make critical bond payments owed by its state oil company, PDVSA, that could potentially lead to the eventual shutdown of the county's oil exports .

Venezuela's lack of foreign reserves and revenues is making it impossible for it to cover the costs of critical oil equipment and supplies needed to maintain the country's current 2 million barrels a day of oil exports.

PDVSA is literally at risk of defaulting on approximately US$5.2 billion in payments that are due to its bondholders through the end of this year. The socialist Maduro government has already been forced to exhaust nearly all of its foreign reserves last week when it paid US$1.5 billion in maturities. All attempts at re-negotiating bond payments and/or obtaining more credit have been unsuccessful.

While the bulk of PDVSA's bondholder payments this year are not due until October and November, the lack of foreign reserves is still likely to immediately begin to cripple its ability to export an estimated 235,000 barrels a day (bpd) of its heavy blends, according estimates based on Thomson Reuters trade flows data.

Venezuela absolutely must import light crude and diluents to blend its extra heavy oil to facilitate as much 15% of its current oil exports. The dire economic situation in Venezuela and its lack of foreign reserves is already spooking key PDVSA suppliers who are becoming increasingly hyper-vigilant over the danger of winding up as unpaid creditors. Suppliers have already been suffering long payment delays.

Some of Venezuela's suppliers of light crude and diluents have resorted to using middle-men or seeking much higher prices to sell PDVSA supplies to hedge the risk of non-payment. Even these strategies are becoming harder and harder to implement. The imminent danger of a complete Venezuelan economic collapse has finally begun to force all of Venezuela's suppliers, even the middle-men and high price suppliers, to simply walk away from doing any business at all with the country.

Make no mistake: Venezuela is approaching the tipping point where the lack of credit and foreign reserves will not only result in Venezuelan oil exports being cut by 235,000 bpd, but there's a real risk that the economic crisis could shut down the balance of its current 2 million bpd of oil exports.

PDVSA is approaching the point where it will no longer be able to maintain its oil producing infrastructure. This could bring Venezuela's oil exports to a complete halt. Virtually all of the revenue being brought in by the country's state-owned PDVSA is secured against existing loans.

At the current market price of oil, Venezuela simply has no free flowing cash coming in. In truth, the country and its state owned oil company are both bankrupt.

The Venezuelan government and PDVSA have been begging its partners, including U.S. Chevron (NYSE:CVX, Russia's Rosneft (ROSN.MM), Spain's Repsol (REP.MC), and China's CNPC, to step in and provide more diluents. So far the companies have shown no sign of willingness to help.

The reason PDSVA’s requests for help from its business partners are falling on deaf ears is obvious...

A dramatic cut or complete shutdown of Venezuelan oil exports would be a huge win for oil exporters and producers all over the world - including every partner PDVSA is appealing to for help. A 235,000 bpd decrease in the flow of Venezuela's oil exports could drive the price of oil up by as much as 10% or even 15% immediately. If it becomes clear that Venezuela oil exports are starting to grind to a complete halt, the price of oil could quickly rise 30% to 35%.

Saudi Arabia and the oil Kingdoms of the Middle-East strategy to allow the price of oil to drop in order to target high cost North American shale oil producers, as well as Russian production, has also helped to decimate the Venezuelan economy. It may ultimately take its 2 million bpd production completely off the market.

The Venezuelan economic crisis may very well be setting up a big upside profit opportunity for oil patch investors in the weeks and months immediately ahead.
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