US likely to slap tough oil sanctions on Venezuela — and that’s a ‘game changer’ for Maduro

CNBC

  • Venezuelan President Nicolas Maduro won re-election to another six-year term on Sunday, despite widespread anger over the South American country’s crushing economic and social crises.
  • “The next step is sanctions against the oil sector,” Diego Moya-Ocampos, principal political analyst for Latin America at IHS Markit, told CNBC’s “Squawk Box Europe” on Monday.
  • Maduro’s leftist administration is almost entirely dependent on crude sales in order to try to decelerate its spiraling crises.

Nicolas Maduro re-elected president for fresh 6-year term  

The U.S. is almost certainly preparing to impose targeted crude sanctions against Venezuela, analysts told CNBC on Monday, in a move likely to constitute a “devastating” blow for the oil-dependent state.

Venezuelan President Nicolas Maduro won re-election to another six-year term on Sunday, despite widespread anger over the South American country’s crushing economic and social crises. The vote was marred by low voter turnout, allegations of vote-rigging and an opposition boycott.

“The next step is sanctions against the oil sector,” Diego Moya-Ocampos, principal political analyst for Latin America at IHS Markit, told CNBC’s “Squawk Box Europe” on Monday.

“This is crucial because (Venezuela’s) oil sector represents 25 percent of GDP (gross domestic product), 50 percent of fiscal revenues and 97 percent of revenue from foreign exchange… So, obviously, sanctions on the oil sector in Venezuela will be a game changer.”

Oil sanctions would be ‘devastating’

Amid widespread food shortages, the collapse of the country’s traditional currency and relentless hyperinflation, Maduro was widely expected to emerge victorious on Sunday. The socialist leader is now set to serve as Venezuela’s premier until at least 2024.

Officials from the United Nations, the U.S., the European Union and Venezuela’s regional neighbors have all denounced the presidential election as a sham.

Venezuelan President and presidential candidate Nicolas Maduro attends the closing rally of his campaign ahead of the weekend's presidential election, in Caracas, on May 17, 2018.

JUAN BARRETO | AFP | Getty Images
Venezuelan President and presidential candidate Nicolas Maduro attends the closing rally of his campaign ahead of the weekend’s presidential election, in Caracas, on May 17, 2018.

Meanwhile, in the aftermath of Maduro’s disputed success, all eyes have turned to see whether President Donald Trump‘s administration will impose sanctions on the country’s all-important oil sector — as it has repeatedly threatened to do.

Alongside the EU, surrounding Latin American countries have also warned Caracas they would be prepared to take additional measures against Maduro’s government if it went ahead with the election.

“Oil sanctions would be devastating to the Venezuelan economy and to the regime’s internal stability as they would very strongly impact the revenues that flow through the patronage regime,” Fernando Freijedo, Latin America analyst at the Economist Intelligence Unit, told CNBC via email.

‘Epic story of economic mismanagement’

Maduro’s leftist administration is almost entirely dependent on crude sales in order to try to decelerate its spiraling crises.

Yet, the country’s production collapse has seen its crude output drop to around 1.4 million barrels a day (bpd) in recent months — a spectacular fall of nearly 40 percent since 2015.

“The sharp decline in oil prices has nothing to do with the dire state of the economy… (Instead) it is an epic story of economic mismanagement and indeed widespread corruption,” IHS Markit’s Moya-Ocampos said.

Protesters seen marching toward the OEA while holding the Venezuelan flag at the demonstration.

Roman Camacho | SOPA Images | LightRocket via Getty Images
Protesters seen marching toward the OEA while holding the Venezuelan flag at the demonstration.

The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. Brent crude futures have since rebounded to multi-year highs of nearly $80 a barrel, amid a tightening energy market and ongoing OPEC-led production cuts.

Venezuela is blowing debt payments ahead of a huge, make-or-break bill

  • Venezuela’s state oil giant has two massive bond payments coming due in the next two weeks.
  • The oil-dependent nation missed several debt payments totaling nearly $350 million last week.
  • Analysts don’t expect Venezuela to default in the coming weeks, but the missed payments have rattled the market.
Nicolas Maduro, president of Venezuela, speaks during a swearing in ceremony for the new board of directors of Petroleos de Venezuela SA (PDVSA), Venezuela's state oil company, in Caracas, Venezuela, on Tuesday, Jan. 31, 2017.

Carlos Becerra | Bloomberg | Getty Images
Nicolas Maduro, president of Venezuela, speaks during a swearing in ceremony for the new board of directors of Petroleos de Venezuela SA (PDVSA), Venezuela’s state oil company, in Caracas, Venezuela, on Tuesday, Jan. 31, 2017.

One week before Venezuela faces a critical debt payment, the distressed petrostate is already late on a series of smaller bills — and no one can say exactly why.

The nation’s state-owned oil giant, Petroleos de Venezuela, SA, has two major bond payments totaling about $2 billion coming due in the next two weeks. While the market expects the company, better known as PDVSA, to avoid default, the missed payments have rattled investors and raised fresh questions about how long embattled President Nicolas Maduro’s regime might last.

“You’re cutting close to the edge of not enough money in the checking account to pay the bills,” said Ray Zucaro, chief investment officer at RVX Asset Management, an asset manager specializing in emerging and frontier markets.

Last week, Venezuela missed five coupon payments totaling nearly $350 million tied to the debt of PDVSA, the government and the utility Electricidad de Caracas. That stoked a minor sell-off in a number of outstanding bonds.

Santelli Exchange: The

Santelli Exchange: The “bitcoinization” of Venezuela  

As for the upcoming payments, the first is due next Friday. The price of that bond dipped from a one-year high of $86.80 last week to $83.48 on Monday. It has rallied from a 12-month low of $62.50 on Aug. 1.

PDVSA needs to pay $841 million in principal, plus interest, on that bond. It’s a critical moment for Venezuela because a default is seen as hastening Maduro’s demise. Making matters worse, the collateral against the bond is Citgo, PDVSA’s Houston-based refining and retail subsidiary.

The following week, on Nov. 2, a nearly $1.2 billion PDVSA bond is maturing. Total outstanding obligations for 2017 are about $3.4 billion, and there’s no grace period for the two biggest payments.

As Venezuela’s economic and political crisis worsens, foreign reserves have dwindled to just $9.9 billion. But analysts and money managers say more than half of that could be in gold and illiquid assets.

The market currently puts the odds of a Venezuelan default at 15 percent, according to an analysis by RVX Asset Management, but Zucaro said he believes the chances are closer to 40 percent. The environment is deteriorating, he said, as Venezuela’s latest election results are being questioned and as sanctions on the country expand to include measures that prevent it from raising new funds.

Given the severe cash crunch, it’s possible that Venezuela skipped out on the five coupon payments, which have a 30-day grace period, in order to allocate those funds to the payment due on the Oct. 27 bond, Zucaro said.

Without help, Venezuela cannot pay liabilites alone: Daniel Osorio

Without help, Venezuela cannot pay liabilities: Daniel Osorio  

Edward Glossop, an emerging markets economist at Capital Economics, said that’s possible. Since Venezuela is essentially locked out of capital markets, the impact of missing the payments on its ability to borrow is negligible, he said.

But Glossop believes another explanation is more likely: that U.S. sanctions have created technical problems that have forced Venezuela to make alternative arrangements to pay its debt, delaying payments. Some U.S. institutions could be refusing to deal with the government for fear of sanctions, he said. However, he doesn’t doubt Maduro’s willingness or ability to pay, given that making debt payments has been a priority.

Capital Economics projects that Venezuela is unlikely to default until 2019, though Glossop says it faces another round of hefty payments in 2018.

“Next year is quite tough again. It will be sort of touch and go,” he said. “If oil prices remain where they are, we think they could get through.”

Helima Croft, global head of commodity strategy at RBC Capital Markets, believes Maduro will continue to rely on Russia to bail out the regime. Russia’s biggest oil company, Rosneft, has given PDVSA financial support.

“While it makes sense that they will preserve as much cash to avoid default, they will not be able to do it without Russia. So the question will be how much acreage will this cost them?” she said in an email. “Rosneft is acquiring Venezuelan assets at fire sale prices.”