US Courts Set to Unleash Tornado on Venezuela

US Courts Set to Unleash Tornado on Venezuela

The Aussie dollar is taking a pounding right now. It’s now back below 73 cents.

The best that can be said for the Aussie is that it’s not alone.

In fact, the euro has a black eye, too. But it’s the Turkish lira that looks like Mike Tyson has let loose with bare knuckles.

This is rattling markets worldwide.

Whether or not the Turkish economy is actually important enough to really matter is the question. I suspect not.

But there’s a suggestion that the European banks hold a lot of Turkish debt, which could prove to be problematic. In any case, it’s worth watching for now.

Regardless, we’re going to have to get used to this type of headline over the next 18 months. Rising interest rates and strong growth in the US are sucking capital back home and leaving a trail of weak currencies the world over.

The problem with this is the high US dollar-denominated debts that need to be repaid. Those debts have to be paid off in ever more expensive greenbacks.

There’s one point I keep coming back to as the fear of emerging market debt keeps snowballing.

The Asian Financial Crisis hit in 1998 and wiped out a couple of countries. Yet US stocks didn’t peak until 2000.

We could be setting up for something similar. This is going to make for volatile times.

As far as emerging market debt goes, Venezuela is more important on this front than anywhere else.

That’s because it could be about to lose a major source of US dollar revenue. An outcome that has important implications for the oil market.

Venezuelan assets — fair game

The national oil company of Venezuela is known as the PDVSA. It has huge debts and falling revenues.

It also has a US subsidiary called Citgo Petroleum. Citgo has a large refining operation. It also imports Venezuelan oil.

Last week, a US judge authorised one of PDVSA’s creditors to seize Citgo.

This has major implications for PDVSA bonds that are due to be paid back in 2020. That’s because Citgo is pledged as collateral for these.

If Citgo is seized, those bonds begin to look a lot more like worthless paper. Already, they trade at 85 cents to the dollar.

But Citgo is also more than a simple asset for Venezuela. It’s a major source of US dollars in a country with a worthless currency.

There is a humanitarian crisis unfolding in Venezuela, but we’ll stick to the market implication.

The seizure could further drive the country’s oil production down. In fact, it’s already declining at a rapid rate.

CNBC reported last week on the latest monthly report from the International Energy Agency. It’s sounding the warning that oil supply is tight and that global markets run the risk of higher prices.

What’s more, the crisis in Venezuela is happening at the same as US President Trump is seemingly determined to knock Iranian oil supply out of the global market in November.

The world will be left with little spare capacity should any other major oil producer run into trouble.

And if any of that wasn’t enough, there’s a big problem developing in the US shale industry.

US oil producers hit cash trouble

American shale oil companies are being weighed down by rising costs.

The Wall Street Journal recently reported that, collectively, 50 major US oil companies spent $2 billion more than they took in during the last quarter. This is despite the fact that production is staying relatively flat.

Negative cash flow is not unusual for companies fracking shale oil. But higher oil prices were supposed to have freed up more cash across the industry by now.

It could potentially mean lower oil production from the US than previously forecast. This is because the financiers of these shale companies are pressuring them to turn a profit.

What’s more, unless we get a big move up in the oil price, it may mean that these companies begin focusing on their most productive Tier 1 wells, leaving their more marginal leases idle.

Of course, with the economic boom taking place in the US, that’s assuming they can even source the materials and staff they need. There are also capacity constraints around transportation in the major Permian Basin in Texas.

Major oil company Shell is even saying that deepwater projects are likely to return more cash than shale.

The Financial Times reports that they’re saying the breakeven price for these projects is now US$30. This is a staggering reduction in costs since the oil price collapse of 2014.

Yet it’s also a blessing.

The world needs the big oil majors to invest in future production to meet global demand.

However, the key takeaway is that Venezuela’s collapse matters more to the world than the decline in the Turkish lira.

Somehow Venezuela is still exporting over a million barrels of oil a day.

It’s no exaggeration to say this number could collapse completely within the next 12 months.

So you have shale oil troubles, Venezuela’s woes, and Trump pushing to kick Iranian oil to the sidelines.

What does it point to?

Only one thing.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia