Oil near two-year high as tightening market attracts buyers

CNBC

  • OPEC to meet this month to discuss production cut pact
  • Strong demand also supports crude prices
  • Middle East producers raise prices to Asian buyers

Oil jack pumps are pictured in the Kern River oil field in Bakersfield, Calif.

Jonathan Alcorn | Reuters
Oil jack pumps are pictured in the Kern River oil field in Bakersfield, Calif.

Oil prices rose on Friday, nearing their highest levels in more than two years, with buyers attracted by expectations of an extension to a global pact to cut output that has reduced oversupply.

Global benchmark Brent futures traded up 41 cents at $61.03 a barrel, approaching levels around $61.70 a barrel last seen in July 2015. Brent has risen around 38 percent since its low in 2017 reached in June.

U.S. West Texas Intermediate (WTI) crude traded at $54.78 a barrel, up 24 cents. WTI is around 30 percent above its 2017 low hit June.

This week’s U.S. Energy Information Agency (EIA) report on crude inventories and exports showed a large draw in U.S. stocks, showing that market is rebalancing.

“Wednesday’s EIA report was bullish so the longs took profit then but now the uptrend is reasserting itself. Roll-over of the OPEC/non-OPEC deal looks certain and is also supportive,” said Tamas Varga, senior analyst at London brokerage PVM Oil Associates.

crude oil production oil derrick

If crude oil passes this price, it opens the door to soar  

The Organization of the Petroleum Exporting Countries meets at the end of November to discuss further action after it agreed nearly a year ago with Russia and other producers to hold back 1.8 million barrels per day (bpd) of oil supply.

Russia said on Thursday the deal, which is due to expire in March, could be extended if necessary but that a decision was not imminent.

While supplies are being withheld, demand is also rising, especially in China, whose roughly 9 million bpd of imports have surpassed those of the United States to top the world’s crude importer list.

“China’s oil demand growth appears to be accelerating,” investment bank Jefferies said.

Physical oil prices are also rising. Saudi Aramco, the UAE’s ADNOC and Qatar Petroleum have all raised their crude prices for Asian buyers, with Aramco’s December premium over the average of the Oman and Dubai benchmarks now at the highest in three years.

Traders also eyed risks from ongoing financial troubles of OPEC-members Venezuela and its state oil company PDVSA.

The government and PDVSA owe some $1.6 billion in debt service and delayed interest payments by the end of the year, plus another $9 billion in bond servicing in 2018.

The next hard payment deadline for PDVSA is an $81 million bond payment that was due on Oct. 12 but on which the company delayed payment under a 30-day grace period. Failing to pay that on time would trigger a default, investors say.

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.”

Big buyer of Venezuelan crude oil halts purchases from national oil company

CNBC

  • The fifth largest U.S. buyer of Venezuelan crude, PBF Energy, has halted direct purchases from state-run oil company PDVSA.
  • PBF is the second buyer in as many months to go elsewhere for its oil and further disagreements could spell new hardships for PDVSA.
  • Venezuela relies on oil for over 90 percent of export revenue and U.S. refiners are among its largest cash-paying customers.

Reuters

The fifth largest U.S. buyer of Venezuelan crude, PBF Energy, has halted direct purchases from state-run oil company PDVSA, according to four sources, deepening a rift amid sanctions on the OPEC-member country.

PBF is the second buyer in as many months to go elsewhere for its oil and further disagreements could spell new hardships for PDVSA, which owes bondholders $1.2 billion in debt payments due this month. Venezuela relies on oil for over 90 percent of export revenue and U.S. refiners are among its largest cash-paying customers.

In August, the Trump administration imposed sanctions on Venezuela, in part barring new financial arrangements with PDVSA. Those restrictions have banks refusing to issue letters of credit needed to assure some oil sales.

PBF notified PDVSA last month it “is not going to take any more Venezuelan crude cargoes” from the state-run firm, said a PDVSA source who could not be identified because the information was not public.

That notification came after a more than 40-day standoff over a previous shipment. In July, a Venezuelan heavy oil cargo intended for PBF sat off Louisiana awaiting a letter of credit to complete the sale. The tanker discharged in August.

Neither company would say whether the agreement is terminated. The Parsippany, New Jersey-based refiner declined to comment on “business confidential information.” PDVSA did not respond to a request for comment.

PBF has not directly purchased oil from PDVSA since early September, according to Thomson Reuters trade flows data. But the refiner has bought Venezuelan crude from intermediaries in recent months, the data say.

Intermediaries currently working with Venezuela are traders and oil firms who purchase crude from PDVSA and assume the risk of any default in a transfer.

PBF also has increased imports of heavy oil from other nations, including Colombia.

The tanker Gold Sun arrived in Venezuela’s Jose port this week to load crude for PBF. Reuters trade flow data has not yet disclosed further details about the shipment.

PBF typically buys at least two 500,000-barrel cargoes per month from PDVSA, and through September was the fifth U.S. largest importer of Venezuelan oil, receiving almost 52,000 barrels per day (bpd) from different suppliers, according to the Reuters data.

A struggle to keep customers

In September, PDVSA also lost a supply contract for naphtha and natural gasoline to Brazilian petrochemical firm Braskem SA.

Falling output and oil-quality issues have contributed to PDVSA’s struggles to retain customers, and the situation worsened once its name appeared in a U.S. sanctions list.

The sanctions imposed in August do not stop U.S. entities from continuing trade relationships with PDVSA, but they ban new long-term financing for the company, its subsidiaries and the Venezuelan government. They also require business partners to notify the Department of Treasury about certain transactions.

The heightened level of scrutiny has not been welcome by U.S. refiners, according to the trading sources.

Venezuela in September sent less than 500,000 bpd of crude to the United States, its main destination for oil exports. The volume marked a 38 percent decline compared with the same month in 2016, according to the Reuters data.

The South American country has been looking for new buyers for its barrels since sanctions began, according to officials including President Nicolas Maduro. It recently started posting its crude prices in Chinese yuan, aiming to build a “currencies basket” to untangle banking operations and move off U.S. dollar-based sales.

Better without you

As PDVSA tries to expand its portfolio of customers, PBF and other U.S. refiners are looking elsewhere, too. Separate from its 33,000-bpd contract with PDVSA, PBF has started buying Venezuelan crude from trading firms, while negotiating with PDVSA over other forms of payment, according to the data and sources.

Eulogio Del Pino, Venezuela’s oil minister, said on state television in August that PBF “are the ones who have to pay ahead of time if they want us to load.”

PDVSA’s insistence that PBF prepay for cargoes hamstrung negotiations, the PDVSA source and one of the traders said, while the refiner suggested an open credit mechanism that would allow it to pay at least 30 days after delivery.

“There’s no reason for PDVSA to start demanding prepayments other than retaliation for the sanctions and lack of cash, but those problems should not be transferred to the buyers,” one trader said.

PBF has sought alternatives to Venezuela’s heavy crude oil to meet its refineries’ feedstock requirements. In September, it bought from Royal Dutch Shell a cargo of Colombia’s PB19 crude, a grade that is rarely sold on the export market, according to the Reuters data.

Disruptions in imports from Venezuela also have affected Phillips 66, the firm said in August. PDVSA’s supply to the U.S. refiner’s Sweeny facility in Texas has dropped by more than two thirds this year in part due to oil quality issues forcing the firm to cancel cargoes and request price discounts.

Phillips 66 has increased purchases of other Latin American heavy crudes for Sweeny in recent months, including Colombian, Mexican and Ecuadorian grades, according to Reuters data.