Oil Plunge Ripples Through Latin America as Projects Slow
By Juan Pablo Spinetto, Sebastian Boyd and Andrew Willis Nov 28, 2014 7:36 PM GMT+0100
From Venezuela to Argentina, oil’s steepest plunge in three years is reverberating through a region that accounts for the world’s largest crude reserves outside of the Middle East.
Venezuelan oil bond yields jumped, American depositary receipts of Petroleo Brasileiro SA (PBR), YPF SA and Ecopetrol SA (ECOPETL) plunged and the Colombian peso fell the most in five years after the 12-nation OPEC opted against measures to prop up crude prices yesterday. Oil is down 11 percent this week.
Crude’s accelerating rout, as the U.S. shale boom coincides with slowing demand, is putting pressure on producers to cut spending. Latin America’s largest independent producer Pacific Rubiales Energy Corp. (PRE) said today that it’s battening down for at least a year of lower prices. Some project development and drilling in the region is poised to decelerate, Patricia Mohr, a commodity specialist at Scotiabank Group in Toronto, said.
“If prices remain very low into the second half of next year, it could be a bigger slowdown,” Mohr said in a telephone interview today. The intention of the Saudi-led Organization of Petroleum Exporting Countries decision seeks to “slow developments around the world.”
Petrobras, as Brazil’s state-run oil company is known, is investing $221 billion between 2014 and 2018 to accelerate production at the largest oil discoveries in the Western Hemisphere in almost four decades. The company assumes a Brent crude price of $100 a barrel for 2015-2017 and $95 from 2018-2030 in its 2030 strategic plan.
Petrobras Plunge
Brent for January settlement declined 99 cents to $71.59 a barrel at 12:42 p.m. New York time on the London-based ICE Futures Europe exchange, heading toward its lowest close since July 6, 2010.
Petrobras ADRs fell 9.8 percent to $9.56, the biggest decline since Oct. 27. The company declined to comment when asked how lower oil prices affect its expansion plans. ADRs of YPF, Argentina’s state-run producer, slumped as much as 6.8 percent while Colombia’s Ecopetrol SA (EC) headed for the biggest weekly drop in six years. Steel-pipes supplier Tenaris SA fell as much as 6.7 percent in Buenos Aires.
Petroleos de Venezuela’s dollar bonds due 2017 fell 2.6 cents on the dollar to 69.94 cents pushing up the yield 1.58 percentage point to 23.26 percent.
The currency in Colombia, which depends on oil for more than half of its exports, slid to the weakest since May 2009. Crude’s plunge comes as the government forecasts the nation’s oil output will fall this year for the first time since 2005.
Target Unchanged
OPEC kept its oil output target unchanged yesterday, resisting calls by some members including Venezuela for a cut after the steepest slump in crude prices since the global recession.
Venezuela runs the largest fiscal deficits of any major economy and risks a balance of payments crisis as declining export income leaves it unable to pay for imports.
“It hits them in every conceivable way,” Paul McNamara, a money manager at GAM UK Ltd. in London, who helps oversee $6.3 billion of sovereign debt, said by telephone. “It reduces balance of payments receipts, fiscal receipts and it makes it harder for them to borrow money. There is no silver lining.”
Venezuela, whose overseas debt is the worst performing in emerging markets this year, had asked OPEC countries during a meeting in Vienna yesterday to slow production. President Nicolas Maduro added $4 billion he borrowed from China into reserves last week to help boost investor confidence in the country’s economy. He has already spent $1.3 billion of it as the country’s reserves dropped to $22.2 billion yesterday, according to central bank data.
Oil Fight
Maduro said he will keep fighting to get oil prices back up to about $100 a barrel. He’s also sending Finance Minister Rodolfo Marco Torres to China to strengthen economic ties.
Chile, which imports crude and natural gas, stands to profit from lower crude prices, as will energy-intensive industries, Scotiabank’s Mohr said.
“That’s going to be a benefit for the hard-rock mining industry, particularly in Chile and also inPeru,” she said.
Chile’s benchmark stock index, the IPSA Index, rose 0.4 percent, heading to its highest close since Sept. 22.
Latin America accounts for about 20 percent of the world’s proved oil reserves, according to BP Plc’s Statistical Review of World Energy. That’s the largest after the Middle East with 48 percent.
Budget Review
Lower prices would require a budget review, Bogota-based producer Pacific Rubiales said, adding that the company is constantly evaluating different scenarios.
“We have many forecast models at all price points and we simply adjust our strategy as dictated by our supply and demand,” the company said in an e-mail reply to questions. “We are a low cost producer -- in the low to mid $30 per barrel range -- with a wide and flexible portfolio, and we hedge about 30 percent of production.”
Crude’s plunge will prompt companies to cut costs and prioritize production projects over exploration, reducing Colombia’s capacity to expand reserves, the country’s oil association said in an e-mailed statement today.
To contact the reporters on this story: Juan Pablo Spinetto in Rio de Janeiro atjspinetto@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net; Andrew Willis in Bogota at awillis21@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net James Attwood, Rita Nazareth
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