Oil Prices: Department of “Y Parió la Abuela”

14

We break from full-blown political crisis mode for a short update on a whole other reason Venezuela is completely screwed.

The single most important economic indicator in Venezuela is flashing nuclear crisis mode. Traders all around the world are fully aware of the carnage in oil markets since the summer of 2014, but they sure as hell weren’t prepared for a -20% crash-inside-the-crash in the first two weeks of 2016, and now are having seizures over this headline:

14:45:46  *WTI OIL FALLS BELOW $30/BBL FOR FIRST TIME SINCE DEC. 2003.

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We don’t need to look too far into the complex reasons behind the biggest slide in oil prices in recorded history to know what the correct reaction is here:

 

 

Nominal prices of oil aren’t accurately reflecting the magnitude of the coñazo. When looking at the real (inflation-adjusted) time series, turns out we are dangerously close to all-time lows in oil prices. One barrel of oil is worth about 20% less than its value during the “Caracazo” riots of Feb. 1989, and there are only very brief moments in the last 30 years where WTI oil has settled below current levels after adjusting for inflation.

One of those moments ended up in Hugo Chavez becoming President of Venezuela, so you know stuff is getting serious down here.

Let’s not forget that our slimy, heavy output from the Orinoco Belt is worth less than international crude oil. About 24 dollars per barrel now, according to our Presidente Obrero. And the knockout punch: taking into account demographic growth and the reduction in oil output over the past two decades, our in-house estimates suggest that real oil income per person in Venezuela has gone down more than two-thirds from its 2008 highs, to its lowest level in at least 30 years.

This crash is not only erasing the so-called “Commodities Super-cycle” worldwide, but it’s also one major force pushing Venezuelan society into economic chaos in 2016. (The other major force is named Luis Salas.)

Bond markets are very aware of the apocalypse scenario. Wall Street bookies are pricing in 72% odds that the Republic and/or PDVSA are going to default over the next 12 months, inferring from the prices on Credit Default Swaps. More interesting, perhaps, is the carnage in the bonds themselves: Venezuelan Government bonds maturing on February (only 6 weeks from now) are trading at 86 cents on the dollar, putting the interest rate at an unprecedented, astronomical, unconceivable 142% annualized return.

A la miiiiiiiiieeee....
A la miiiiiiiiieeee….

Yikes.

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14 COMMENTS

  1. I heard this somewhere else:

    Chavismo came to power thanks to oil at $10, and will leave power thanks to oil at $10.

    In the meantime, I add, we squandered yet another oil boom cycle

  2. Yessiiiiir!

    The MUD needs to keep the pressure on the political side (Do not accept the TSJ ruling) because Chavismo is acting strong but is at his weakest moment.

    You know that billete mata galan, and Chavismo sin cartera is an insult to Venezuelas intelligence. Keep the pressure on MUUUD

  3. Well, I guess the good news is that Venezuelans have become accustomed to suffering under this despicable regime…the bad news is that it’s going to get even worse.

  4. “We break from full-blown political crisis mode for a short update on a whole other reason Venezuela is completely screwed.”

    🙁

  5. I believe that Venezuela’s oil basket price is around $25/bbl. The Orinoco alquitran/bbl. is much higher cost, probably at least double to produce (although Venezuela would probably be happy to sell it well below cost, as it has done with its money-draining aluminum/steel industries–Venezuelan economics at its best, even pre-Luis Salas).

    • The aluminum/steel could be sold below cost while the oil shipments could subsidize it. What would subsidize the oil, cocaine shipments??

  6. Low oil prices (obviously) doesn’t bode well for chavismo, but I highly doubt prices will stay this low within the next 5 years. But it does give the opposition the opportunity to either recall Maduro or win the presidency in 2018.

  7. Saudi saved up $750 Billion during the oil boom.
    Venezuela not only squandered the money from the oil boom but also borrowed against future profits from the Chinese. When will the people finally realize that their saviors (Chavez and Maduro) are bigger crooks than any of the previous Presidents?

  8. The latest from El Kid:

    “Maduro’s choice of Salas as strongly indicative of the policy approach that we can expect going forward. Salas holds views which contrast strongly with those of economic orthodoxy, including the belief that deficit monetization does not cause inflation and that supply and demand are unrelated to price formation”

    “While we continue to believe that Venezuela has the capacity to service its debt and avoid a default event in 2016, we are now much less certain about the strength of administration’s resolve to do so.”

    “In 2015 the government made the choice to honor debt obligations ahead of an election in which it ended up losing a Congressional supermajority by a thin margin. It would make sense for authorities to reevaluate their choice from a political standpoint given a potential recall referendum in 2016, in our view. The nearer the referendum, the shorter the effective horizon of policymakers and the more likely that they could try to shift resources from debt service to other expenditures that could improve their electoral prospects.”

    #damn

    • “In 2015 the government made the choice to honor debt obligations ahead of an election in which it ended up losing a Congressional supermajority by a thin margin.”

      A thin margin??? They lost 57% to 41% and 112 seats to 55 seats.

    • Yes – it is that bad. Some Venezuelan crudes are discounted by over $10 versus Brent, so you are looking at prices currently less than $17 per barrel

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