Deepening default fears cast shadow over Venezuela's oil flows

Sat Feb 27, 2016 11:23am EST
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By Marianna Parraga

HOUSTON (Reuters) - As Venezuela grows closer to exhausting nearly every means of paying its debt, some oil market participants are seriously pondering the possible implications of an unprecedented event: the default of a major crude producing company.

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.

With the risk growing and payment delays to suppliers already emerging, some firms that sell to PDVSA have begun hedging their bets by using intermediaries or seeking higher prices, fearful they might never get paid, according to sources who deal with the firm.

"A possible PDVSA default is worrying for everybody," a source from a U.S. oil company that buys from PDVSA told Reuters. And if they scrape together enough funds to pay off bondholders, "they will not be able to pay suppliers."

The implications of a default for global oil supplies swamped by the biggest glut in decades are difficult to divine, but experts are closely watching the deteriorating finances of exporters for anything that could jolt markets.

"Of course, Venezuela is at the top of the list," Daniel Yergin, vice chairman of analysis firm IHS, told Reuters last week.

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.   Continued...

Oil workers weld a new pipeline at PDVSA's Jose Antonio Anzoategui industrial complex in the state of Anzoategui April 15, 2015.  REUTERS/Carlos Garcia Rawlins