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Crude Economics
Cheap Crude Could Push Venezuela’s State-Owned Oil Firm into Default

Cheap crude prices are pummeling Venezuela’s budget at a time when its economy is already in shambles, and it looks like there’s a good chance that the country’s state-run oil company could default on billions of dollars of debt. If that happens, it could end up hampering the South American country’s ability to export oil, and in so doing could paradoxically help ease the oversupply that’s helped land it in such a precarious position. Reuters reports:

State-run firm PDVSA faces around $5.2 billion in payments to bondholders in 2016, much of it in October and November, a sum that some experts say it will be hard-pressed to meet after the government used nearly all of its available cash reserves to pay $1.5 billion in maturities last week.

A default could curtail some of the OPEC member’s exports by crippling its ability to import crude and fuels used to blend its extra heavy oil, experts and sources say. It could also degrade the quality of domestic gasoline by limiting purchases of necessary components. […]

Without imports of light crudes and diluents like naphtha that have rose to some 110,000 barrels per day (bpd) in 2015, PDVSA may be unable to export an estimated 235,000 bpd of its own heavy blends, according to calculations based on Thomson Reuters trade flows data – a disruption that could help curb an oversupplied global market.

Global crude supply is still outstripping demand by over one million barrels per day—a glut that is actually creating logistical headaches as the world runs out of places to store all of that excess oil, forcing tankers to take longer trips to ease bottlenecks—so a default of Venezuela’s state-run oil firm and potential resultant supply disruption of a quarter million barrels per day isn’t going to take us back to the days of $100+ crude.

That said, it could inspire a less robust rebound. If that happens, Caracas will lose valuable revenues at a time when it’s already teetering on the brink, and likely cede that market share to American shale companies which, as we recently learned, are keen to up capital spending if oil prices creep up into the $40 range again.

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  • Gene

    I think my headstone will read “Math Always Wins.”

  • Andrew Allison

    It’s not at all clear that any slack resulting from Venezuelan reduced exports won’t be picked up by other producers, many of whom appear to be making up in volume what they’re losing in price. The resulting loss in market share could be permanent.

    • f1b0nacc1

      Couldn’t happen to a nicer country

  • Kevin

    Couldn’t the export the heavy crude to Houston’s refineries and blend it with ligniter US crude there?

    That wouldn’t solve Venezuela’s domestic gasoline shortage but woukd alleviate their ability to earn export earnings (until they run out if credit to import goods necessary to maintain production….)

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