Latin Lefty Meltdown
Bargain Oil Is Crushing Venezuela

Venezuela’s death spiral continues apace, with the latest dire tiding being the fact that the country can’t afford to pay for its money. Yes, you read that correctly: Venezuela’s financial situation is so dire that in addition to shortages of medicine, toilet paper, and food, the country is finding it difficult to pay for printing its own currency.

Gross mismanagement of the economy over a very long period is the root cause of all this chaos, but the bearish oil market has really turned the screws on Caracas over the past two years. In fact, as Bloomberg reports, Venezuela may be the one producer hardest hit by bargain crude:

The Latin American nation with the world’s largest oil reserves relies on crude shipments for 95 percent of export revenue. It will default this year barring a large jump in the oil price or a financial bailout, said Thomas Olney, a London-based analyst at consultants FGE. Credit-default swap traders have put the chances of non-payment through June next year at 67 percent, according to data compiled by Bloomberg. […]

Venezuela requires a higher price than almost every other OPEC member to balance its budget. RBC Capital Markets estimates it stands at $121.06 a barrel for this year. Only Libya, which didn’t attend the latest talks, needed more, according to the International Monetary Fund.

These breakeven levels—the prices various petrostates require to balance their budgets, or that private companies need to operate profitably—serve as important markers for the health of the world’s oil producers. Caracas has long needed oil to stay above $120 for it to stay in the black, which is why it’s being hit so hard by the collapse of oil prices over the past 22 months. Even if oil prices doubled overnight—an eventuality that’s hard to imagine, given how oversupplied the current market is—Venezuela would still be running a budget deficit.

This is affecting Venezuela’s ability to produce oil, too, and analysts expect the country’s recent struggles to keep its lights on to reduce its crude output by as much as 200,000 barrels of oil per day this year. It’s possible too that the country’s state-owned oil company could default on payments to its bondholders this year, which would surely crimp its ability to produce. A Venezuelan drawdown would help reduce the global glut and potentially kick of a price rebound, but that won’t help Caracas if it’s selling less of its most important export.

We’re watching a major economy circle the drain, and it isn’t pretty.

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