In the aftermath of OPEC's failure to cut oil production, Russia has been acting surprisingly sanguine, perhaps as a result of less leverage in its system as compared to America's own high yield-funded shale complex – now that it is a race to who will default first and be forced to take production offline – with Putin today saying "Russia will cope with the rout in crude oil", and adding that “we are satisfied overall with the situation and do not see anything so extraordinary in what is happening. Winter is coming and I am sure that the market will come into balance again in the first quarter or toward the middle of next year." Maybe it will, or maybe not, if indeed as those with a working frontal cortex suggest the plunge in crude prices is merely a function of a collapse in global demand now that the worldwide slowdown which has gripped Japan, Europe and China. In that case, the race to the bottom between Russia with its higher cash costs, and the US shale sector, loaded to the gills with billions in junk bonds, will be an epic one to watch.
But one country whose fate is now virtually assured – with a happy ending now sadly out of the picture – is the same one that stormed out furious at yesterday's failure by OPEC's cartel members to carve out a consensus leading to higher oil prices: Venezuela.
Here pretty much everything is about to go unhinged, with what now looks like an almost inevitable sovereign default as the endgame, coupled with the removal of a few million barrels of oil from the global supply chain, something which all the other OPEC members will be delighted by.
For confirmation one can merely look at the Venezuela bolivar, which earlier today feel to a record low of 150.76 VEF/USD on the black market according to dolartoday.com, which tracks rate at Colombian border, and as reported by Bloomberg moments ago. Indicatively, the official rate is 6.3 VEF/USD; the first unofficial rate that based on Sicad I, is 12 VEF/USD, while the second unofficial rate, per Sicad II is 50 VEF/USD.
But what best shows that for Venezuela it is essentially game over, is that as the chart below shows, Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transfered $4 billion of Chinese loans to the central bank. In other words, the scrambling oil exporter was forced to burn one third of its Chinese bail-out loan to keep itself solvent. The country’s reserves dropped to $22.2 billion today, according to central bank data.
As Bloomberg also notes, Maduro on Nov. 18 ordered the Chinese loan proceeds to be moved from an off-budget fund, so that they would show up in reserves and help boost investor confidence in an economy beset by the world’s highest inflation and widest budget deficit. The following day, Venezuelan bonds rose the most in six years in intraday trading.
“If the plan was to calm the bondholders, then burning through a third of that money in five working days doesn’t do it in any way,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said in a telephone interview. But while Venezuela's bondholders will be livid, Venezuela's "friends" from the OPEC cartel will be delighted: after all its default means one less producer on line, and a natural increase in the price of oil.
Trading in Venezuela’s dollar bonds was closed today for a U.S. holiday. It will reopen on Monday at which point we expect the market to be as close to "offer-only" as possible, because burning through over $1 billion in reserves in 1 week with crude plunging to under $70 means that Venezuela now may have about 6 months of liquidity left at best, since one thing is certain: China will not throw more good money, as in Venezuela bailout loans, after bad.
The only thing that is uncertain is how long until some army general figures out what is going on and decides to go "Kiev" on that paragon of best efforts socialism, Venezuela's soon to be ex-president Nicolas Maduro.