Moron Risk

39 stories up on One Liberty Plaza (foreground on the right)

39 stories up on 1 Liberty Plaza (foreground on the right)

It’s hard to pick out which is the more munificent of the money quotes in Katia Porzecanski’s Bloomberg piece about Wall Street investment banker types mobbing the Manhattan law offices of Cleary Gottlieb Steen & Hamilton LLP to grill the lawyers with “what ifs” about the Venezuela default they all expect.

Is the most surprising detail that such a fancy Wall Street Law firm didn’t have enough chairs around to handle the overflow crowd?

The room at 1 Liberty Plaza, in the heart of New York’s financial district, was so packed that some people were compelled to stand in the back, one attendee said.

Is it that the vultures are out in force trying to figure out their angle for the day after?

People are obviously asking themselves not just whether the government is going to pay, but if you end up in a restructuring scenario, what sort of recovery valuations you’re going to be getting,” Patrick Esteruelas, an analyst at hedge fund Emso Partners, which oversees about $2 billion in debt, said in a telephone interview from New York.

Is it that even Lazard – Lazard, of just-relax-and-we’ll-sell-Citgo-for-you fame – has gone distinctly wishy-washy on whether Venezuela will pay?

Venezuela has always proven they’d move heaven and earth to pay their debt,” Arif Joshi, who helps oversee $14 billion at Lazard Asset Management, said in a telephone interview from New York. “They’ve waited so long to adjust their policies that it’s starting to fall out of their control.”

Is it that the Credit Default Swap magic eight-ball now says there is a 3-in-4 chance of default by 2016?

The likelihood that Venezuela will repudiate its bond obligations over the next two years is 73 percent, based on trading in credit-default swaps and CMA data.

No. In fact, the moment you understand why default has completed its journey from the speculative to the imaginable to the possible to the probable and now the likely isn’t in that Bloomberg piece.

It’s in this El Nacional piece, in this quote by Nicolás Maduro himself:

Las empresas calificadoras han puesto el riesgo país Venezuela el más alto prácticamente del mundo, tenemos más riesgo país que naciones que están en guerra (…) o donde está el ébola haciendo estragos”, dijo Maduro durante una jornada de gobierno en Caracas.”

In English, “Credit rating agencies have placed Venezuela’s risk as the highest in the world. We are riskier than nations at war, or where ebola is causing heaps of trouble, Maduro said in Caracas.”

Did you catch that? It’s the ratings agencies that make Venezuela debt risky! Y’know, just like smoke is what causes fire.

It’s not the gobs of debt monetization, the billions of make-believe-bolivars the Central Bank loans PDVSA leading to an uncontrolled monetary expansion and the collapse of demand for real money balances.

It’s not the opacity in public accounts, the drop in reserves, the commercial default, the implosion in the goods markets, or the fact that you need your kid’s birth certificate to buy her diapers.

It’s not the fiscal deficit at 17% of GDP, or oil at $58 per barrel, or the tapped-out Fonden “sovereign wealth fund,” or the fact that the Finance Minister gives every possible public sign that he’s an idiot.

It’s not that the one regime official who announced a semi-reasonable reform that might have stanched the flow got shifted sideways to a non-economic job.

It’s not the Central Bank’s scandalous subservience to the Executive branch, or the fact that it won’t even dare publish basic inflation statistics.

It’s not that PDVSA has missed every production increase target it’s set for itself since 2003, it’s not that its refineries are badly maintained and barely functional, much less profitable.

It’s not that labour laws make it insane for a worker to waste his time working, and unreasonable as well as that is time he needs to spend queueing for basic consumption goods.

It’s not that the investment climate has been so shitty for so long, and the profit repatriation picture so bleak, no one sane even considers putting money into Venezuela.

Nope. It’s none of that. According to Maduro, it’s all a conspiracy, led by some flunkie sitting at a cubicle at Moody’s, someone who for some weird reason has decided to mess with his revolution. That’s why it’s expensive for Venezuela to borrow.

In a weird way, Maduro’s right about one aspect of it: there really is a freakishly wide gap between Venezuela’s ability to pay, its fundamentals (in terms of oil reserves, basic capacity-to-earn-dollars long term) and the risk premiums the country faces. That gap is undeniable.

What Maduro has zero insight into is his role in generating that gap.

He has no clue that every time he talks, the tsunami of non-sequiturs, trite rantings, and nada-que-ver conspiracy theories that spew out makes it painfully evident to bondholders that the Venezuelan economy is run by a moron who’ll never understand what’s happening around him, let alone be able to piece together a semi-workable stabilization plan.

That’s the fear that brought those 170 Wall Street types to that fancy Wall Street law office last week. That’s why they’re on edge.

The one type of risk they don’t teach you how to price in Business School is Moron Risk.

55 thoughts on “Moron Risk

  1. Does Nicholas mention why the clever, oh-so-clever, capitalists believe the ratings agencies? Because you know, they could make money by ignoring those agencies and betting on the safe Bolivar?

    Liked by 1 person

  2. When the upcoming default occurs, not if, the event which will be looked back upon as the seminal moment in this on-going economic crises, and the point at which the Maduro government could be categorized as a bunch of certifiable loons/morons, is the decision to make THAT bond payment in October of 2014. Did they really do that? Really? Was there any discussion such as, “Hey, will there be any money left over after we transfer 5.5 billion in real currency to those despicable thugs on Wall Street?” I’ll bet nobody sat around a table and really looked at the numbers. It was complete insanity to do that at that point in this economic drama. Morons indeed.


    • You can’t blame Maduro for this. I mean, if you give a gun to a young child, you can’t call that child a murderer!


  3. Some interesting points seldom made : They were talking about a default of the govt as separate from a default of Pdvsa ,( assumming there are no cross default provisions ) they were talking about a default of the govt not easily affecting Citgo ( because legally Citgo doesnt belong to the govt but to Pdvsa so that even if Pdvsa belongs to the govt under US law they are seen as separate entities) . Not mentioned is that Cleary Gottlieb was for 20 years one of Pdvsa’s most used NY Law Firms until booted out by the Pdvsa administration that took over after Chavez rise to Power.


  4. I was at the meeting. Here are the “insights” and one other point:

    1. Faced with the choice of the sovereign defaulting or PDVSA defaulting, the government would likely miss payments with the Sovereign. The reason? If a non-market friendly restructuring of the debt takes place and legal battles follow, defaulted bondholders will have a much harder time seizing PDVSA assets in a sovereign default. In order to touch PDVSA assets, bondholders holding defaulted sovereign paper will have to “pierce the corporate veil” and prove that PDVSA is the sovereign’s “ater-ego” in the courts. This sounds easy but is quite complicated in practice. PDVSA has a complex corporate structure that spans all sorts of jurisdictions.

    2. Still, the better part of the bond payments and upcoming maturities are for PDVSA, not the sovereign. So the government will likely have to restructure PDVSA and the sovereign if it runs out of cash.

    3. According to the panelists, in the event of a default, recovery values for defaulted bonds will be high (which more or less means that bondholders will get a good part of their money back). They argue that because of Venezuela’s natural resource wealth, defaulted bondholders will not accept a crappy restructuring deal, like a 70% haircut (reduction in the nominal debt outstanding from 100 to 30).

    4. The meeting was not packed. Not even close. People were standing in the back because they were late and didn’t want to pass their ass/crotch <30 centimeters from the faces of the audience to find a seat in the middle of a row. Katia Porzecansky exaggerated. She was also late to the meeting.

    Liked by 3 people

  5. Natural resource wealth isnt what it used to be , Extra Heavy Crude which is increasingly what Venezuela has left is difficult and costly to extract, transport and prepare to transform into marketeable condition , there are other creditors ( has anyone forgotten the Chinese) who will play their own game and have as many legal protections as the rest. Just putting the oil industry back on track is going to take billions upon billions , much of the new reservoirs belong not to Pdvsa but to independent international oil companies , The tax structure for oil taxpayer in Venezuela is burdensome as hell and it doesnt get abrogated because there is a default . In every country the taxman gets paid first .By law crude deposits and other oil industry assets are inalianable and cannot be seized, As usual bondholders are overly optimistic and underestimate the difficulties of recovery .

    Liked by 1 person

    • The heavy oil in Venezuela is easy to extract. According to my son, a petroleum engineer who used to work on the Orinoco Belt, you simply punch a hole in the ground and the oil comes up!


      • There are different extra heavy crude deposits , each with its own features , the low hanging fruit was the first to begun exploitation , there are others which are quite more difficult , sometimes you use super pumps , sometimes other extraordinary inducement techniques , Venezuelan super heavy crude deposits have one thing going for them , they are shallow not deep , still its very viscous , much more that ordinary crudes , like the botton of a bl of molasses, its very sluggish to move , to pump it you have to mix it with diluents to send it where its viscosity can be reduced by taking the carbon out , thats a process which requires the building of upgrading facilities , these cost a lot of money , 12 to 18 billion USD to upgrade 200 kbd , you have to get rid of the petcoke which mounts up which not so easy because its not always commercially disposable. the other way of making it less viscous and easy to handle is to mix it with with refined diesel , thats expensive , about 10 bls of diluents per 90 of EHCO , if you dont produce enough of these in your refineries because you ve let them run down then you have to import it from abroad at prices which are never cheap, if you cant have access to refined diluents ( as is the case in Venezuela now) you have to mix it with light crudes , depending on the light crude this requires about a 20% or plus mix , mixing the light crude with the HECO is not helped if your own production of light crudes is falling precipitously so the next step is importing it from abroad , light crude of course is not inexpensive, the freigh payable for carrying it over long distances isnt either , on top of the freight you have to pay for the logistics of storing it in a storage tank and then mixing it with EHCO which also takes money and of course time . If you dont do any of these things then you cant sell EHCO because of its high viscosity makes it so difficult to transport and handle . So in the end the problem is not just in extracting it but in the costs of transporting and treating it so that it can be sold commercially and how that eats into your profit margins . Sometimes the HECO deposits lie below water mantles , thats also a headache. The economics of producing transporting treating and marketing EHCO are not nearly as attractive as those of selling ordinary crudes .


        • Do take note that heavy crude isnt the problem , its the extra heavy crude oil thats the problem , the above comments refer to the latter.


          • I believe, too, that there’s a difference in the refining process, heavy crude being the most costly. Please correct me if I’m wrong.


            • Extra heavy crude upgrading basically converts it into a crude similar to conventional crudes without producing any refined products (naphta, gas oil etc) , in Venezuela the upgraded product is known as a synthetic crude , after the upgraded crude is converted into an ordinary crude then it can be refined just like any other crude and transformed into refined products. Extra heavy crude basically is defined as crude whose API falls below 10 , synthetic crude has an API (if I remember correctly) of 19 or 20. The high viscosity , density and metal contents of Extra Heavy Crude make it very difficult and costly to produce and market . this is the reason why the Orinoco Faja Joint Ventures were given some temporary tax breaks to make their exploitation commercial .


            • Heavy oil reservoirs like Maracaibo have a very high compaction drive, aka the reservoir is collapsible and the weight of the rock above can squeeze the oil out of the pores into a borehole. So that oil can be extracted fairly easily at high level of recovery. It’s also why you can see amazing levels of ground subsidence in the area.

              But it’s not the case in the Faja, as far as I know.

              Orinoco oil is less viscous than Canadian equivalent and easier to flow : 1,000 to 5,000 cP at reservoir conditions vs. 100,000 cP in most places in Alberta. And the reservoirs’ permeability is acceptable in most places. So yes, you get a bit of free-flowing oil on a new bore.

              But the reservoirs strata themselves are over-compacted – the grains are already in close contact – and the mineralogy is highly competent quartz sand capable of sustaining the geostatic pressure without yielding.

              So there is very little compaction drive to squeeze the oil out. You need to either use displacement or thermal methods (or CHOPS on higher strata that don’t have a water interface) if you want to recover more than the few percent of oil value you get out the dissolved gas drive present in the reservoir.


              • Interesting, Fifi. I didn’t quite understand 100% of what you wrote. But I got the gist. And I thank you for your obvious knowledge base about a complex issue.


              • Great explanation however technical on how each kind of reservoir offers different problems . the problem is not only getting the oil to flow the first day , but keeping it flowing over a long period of years as reservoir conditions change as more and more oil is extracted , that takes a lot of ingenuity and skill , maintaining production as the reservoir changes , also lots of money and resources. If I understood Fifi correctly in Maracaibo as the oil is extracted from below the weight of whats on top presses down on the remaining oil below forcing it outwards towards the surface helpng the extraction process so its easier to keep the oil flowing .In the Faja the type of material present in the reservoir doesnt allow for this effect , so maintaining flow through out the years is much more difficult .Also important is not only to keep the flow going as conditions change but keeping it flowing in a way that allows for maximum recovery of the oil in situ at reasonable costs. If you use the wrong way of keeping extraction going the cost of extraction is going to climb making explotation uncommercial or much less profitable or you may cause the part of the oil in situ to be revored to fall so that instead of recoverting in the end 60% for example you recover only 20% . A we all know its never possible to recover all of the oil under ground , only part of it depending on how you extract the oil inside the reservoir. Im not a technical man myself so perhaps some of the above is botched , but I hope it reflects broadly what fifi is telling us.


        • About a month ago or so, on a post here on this site, there was link to a special conference of a panel of experts discussing the petroleum economic issues in Latin America, including Venezuela. On the panel was a Chevron engineer who clearly testified that the below ground costs for extracting the heavy oil in Venezuela were the lowest in the world… even the extra heavy oil! He said that the technology for extraction was available. He said that the above ground costs were not only the big problem, but they were insurmountable problems due to the deterioration of infrastructure, i.e. roads, and the loss of contractors and skilled workers. I think the conference was on available on a streaming video on Youtube that lasted over an hour. It was quite interesting.

          As I recall, Chevron was ready and able to get the oil out of the ground easily, but once it was above the ground there would need to hire skilled workers from outside Venezuela who are capable of dealing with various logistics and construction projects. I asked my son about this, and he confirmed it. My son currently deals with setting up the rigs, drilling, and then converting them to production. His company deals with heavy oils.


          • I saw the panel , Chevron is the only US company in the good graces of the Regime and probably wants to keep it that way too. so they will avoid saying anything that discomfits the govt, If you listen carefully they are not saying that problems dont exist , in fact quite the opposite , only that compared to other extra heavy crude deposits Venezuela s may be less difficult to extract and that the real problems start after the crude is extracted . Which I suspect is correct , but he doenst say that its just a question of getting the right Chevron people to work on the matter (if only) , its a question of putting the huge investments money and bit extrordinary effort that is required to either build those upgraders at 12 to 18 billion dollars a throw or mix the extracted crude with crude brought from far away algeria or russia or building up the production of diluents from refineries that only produce 25% of what they used to to mix with the crude. Economically and technically these are not simple or easy matters . They take a lot of time . They also have a big impact on the economics of producing and marketing this oil making it much less profitable than producing the oil which was readily available some years ago . Chevron so far has been long on promises and short in putting up the money needed to develop the fields which the govt has allowed them to participate in . This is a challenge for the Venezuelan oil industry and its going to take more than a few experienced engineers to tackle it . Of course oil prices falling 30% isnt helping things . Big problem is that even if other crude deposits exist they are not nearly as plentiful and easy to produce as they used to be in the past . Specially if there is no money and very limited expertise on the part of Pdvsa to carry out the effort . Venezuela is every day more dependent on its production of extra heavy crudes to keep its income producing activities going .

            I congratulate you on your engineering son and his working for a first rate oil company and wish Chevron efforts all the best for all our sakes . I know a bit about ongoing Pdvsa projects ( and where they stand) and because of that I know that some valid efforts are being tried so far with very poor results but from the information available to me Im skeptical that restoring the largely destroyed oil industry is going to be quiet as simple and easy as some people are lead to believe.


  6. Francisco, I thought we had reached an agreement where you would stick to the topics you know about… But well, fine if you want to keep embarrasing yourself and recycling anal-ist opinions.



    • Hi Venny:

      Can you explain this part of it please?

      “In a weird way, Maduro is right about one thing: there really is a freakishly wide gap between Venezuela’s ability to pay, its fundamentals (in terms of oil reserves, basic capacity-to-earn-dollars long term) and the risk premiums the country faces. That gap is undeniable.”

      Why the gap if we supposedly have such fundamentals that the gap could be smaller?


      • Roberto, unfortunately I can’t as I am not Francisco, so perhaps better for you to address that question to him. I can only interpret what he says, but this is not usually what I do. I leave that to Francisco who loves to excel at the topic du jour and extrapolate (el papel, o en este caso blog, aguanta todo)


        • I guess I misunderstood both your NIC and some of your comments over time.

          I was under the impression you were a bond trader/ bondholder or some such.

          Also, not for nothing, but if you are going to criticize FT’s article (fine by me), at the very least you could also put your take on things out there to, at the very least, rebut what’s being said.


    • Thank you, VT. It’s really is galling to have to come to this blog and read the “I heart F-Rod” attempts to cover earlier backsides …. with manipulated outrages that clearly show holes in a knowledge base but attempt to sound credible. Q bolas, really.


    • I don’t understand being rude or offensive to the authors of this blog. They don’t get paid for what they do (even if they did, you wouldn’t be the one paying them). If you don’t think they’re qualified to write about an issue then don’t read their articles. Good luck with your Venezuelan bonds!


      • First of all, thank you very much for your good luck wishes Oscar! Luck always plays a part in everything we do in life and it is important to never underestimate randomness in life and more importantly, in financial markets.

        With regard to your comment, I am not being offensive per se Oscar, I am actually being very objective and factual (Francisco’s poor forecasting has been reiterated year after year after year). And contrary to Francisco, I actually have never addressed him using offensive terms such as asshole, etc. which he has used when replying to my posts (which sometimes haven’t even addressed him directly but somehow he’s felt the ñoño urge to insult me) and when replying to many other people. But don’t worry too much, all is well in la-la land where Venny is in the verge of economic meltdown and collapse (sic).

        I was also thinking out loud if someone has given some thought to the latest declarations of our dear friend (and one of the most revered specialist du jours in the streets of Los Palos Grandes), Luis Vicente Leon?

        Watch out for accusations of kool-aid binge drinking coming up in 5, 4, 3, 2, 1…


        • In your second paragraph you certainly are being offensive (the “per se” qualifier is meaningless). By your own words you are giving “tit for tat”, not being “very (!?!) objective and factual”. Even if you were as superior in your own narrow specialism as you imply that you are, I would not be interested in your little tree in the Venezuelan forest which Francisco seeks to portray.


          • Sure UZ. When I provided sounds arguments it didn’t matter anyway, so now the best way is just let time speak for itself. I have 15 years on my side.


        • Venny Trader is, I guess, making some little money off of trading Veny & PDV bonds and hence feeling superior.

          Here is my take on him and how he is making that EASY money — unlike analysts or investors:

          He is most probably working at a broker, not a principal trader like a HF or real money type to actually take the risk long or short.

          He is also most probably seeing the flow of the bonds either direction while executing client orders on which many times crying wolf begging to “work” the order as opposed the make the market. And guess what, while making that market, him being a smart ass, front running that client or that big market he sees day in day out.

          You are only something in that rathole broker desk you are sitting and you know no one, most certainly, ME, would hire you from buyside let alone you yourself probably would not apply knowing you can not make REAL money.

          As to my view on Veny, well, that is for another post

          investor (trader & analyst)


          • You really waste that much time creating a story on your mind? I really don’t have time for you but I usually dedicate at least one reply to a person that addresses me. You must not be very busy.

            I am not a broker, I work for a bank but that is irrelevant. My investments in Venny/PDVSA have always been out of my own pocket and personal account. And actually, Venny Trader is not an accurate depiction of my investment style in these securities as I actually always been a buy and hold investor clipping coupons paid religiously by Venny/PDVSA (despite all the bla bla on the background). Is not EASY money, I have to usually withstand morons as yourself and anal-ist repeating the same broken record story time after time. But anyways, I don’t have to mark-to-market my book so market price is irrelevant as long as there is no default. If a default were to take place, recovery values would probably be very high anyways and after clipping for such a long time, I care little. So please, better to take your “signed investor” trader & analyst bs somewhere else and your lessons on front running that you learned in your on-line compliance course back to your desk.


  7. They are morons, no doubt, but I think this is their plan.

    It makes sense if your only goal is to stay in power forever and you hate venezuelans in general.

    If it has worked for Fidel for 50 something years, why wouldn’t it work for them


    • It has worked for Cuba, because Cuba never had any enforceable sovereign debt. The Castro brothers made Cubans pay their revolution cash. So, there is no one outside of the country with a really strong incentive to bugger the Castro brothers.

      Venezuela is a bit different, because Chavismo was financed on credit, foreign credit. So the socialists of the 21rst century can’t just say to the rest of the world to shoo, go away. There are all those foreign creditors waiting at the border to get their cash back and they are one pesky, obstinate and vengeful lot to deal with.


  8. Maduro had plenty of gold quotes in that speech.

    Just look at this one:

    “Miren como se comporta el petróleo: hay una inundación por parte del petróleo contaminante de EEUU. Y hoy llegó a 60,55 dólares por barril. Venezuela tiene, hoy por hoy, un bloqueo financiero para impedirnos acceder al financiamiento que necesitamos para superar parte de la merma del ingreso petrolero”

    “Look at how Oil prices are behaving: There is a flood of contaminant U.S oil, and today it reached 60.55 a barrel. Venezuela has, as for today, a financial blockade to impede us access to credit, much needed to patch, at least partly, our oil earnings deficit”

    So, as Maduro said: Our oil DOES NOT POLLUTE. Isn’t that cute?.


    • in fact it is not cute, it is truly grotesque but because of that it is very attractive anyway… All this is simply fascinating… Where can you see a government destroying their own country?… the “show” is horrible and millions are suffereing but it is an economic event that you can’t see in any other place of the world…


      • Again, you are seeing a “government” and taking it at face value;
        thinking it is a government and it makes no sense to have a government destroying their own country!

        this is not a “government’ , but a regime. A regime managed by foreign interests bent on sucking the coffers dry and keeping political and military control, for as long as they can, and as long as the host is worth it!

        …every single spokesperson and figure head in each and every institution is a puppet, and its been controlled by fear and greed.

        ….every single statement is scripted “upstairs” and has a purpose to confuse, to enrage, to sow fear and in the aggregate to promote submission and prevent subversion.

        The poor bastards will all have to hide under a stone if the regime looses power, but as long as they are it, the party will go on!

        Hey!, the official opposition is its best puppet show of all!


    • This whiny and pathetic tirade is about as close as I’ve ever seen a president go “oh we’re fucked” to the press. The purpose must be to tell the public without it going apeshit that they are going to have to tighten their belts and it’s not his fault.


    • “So, as Maduro said: Our oil DOES NOT POLLUTE. Isn’t that cute?.”
      I’m not surprised to see that insult from maburro, the chavista base isn’t called “caras de poceta” for nothing.

      In fact, they’ll insist like a mantra bullshit like “there’s only hoarding in the nearest market, as ~insert time span~ ago I was in ~another place that can’t be checked now~ and it was flawless! There were toilet paper, diapers, hah, even powdered milk! And all of them at fair prices!” or even worse lies like “all the deaths during the guarimbas were the guarimberos themselves blowing their own heads off because they’re all crazy whinny fags!”

      So, no, it doesn’t surprise me to hear that maburro basically said that the most putrid shit in the planet (All kinds of organic matter that’s got like 30-60 million years rotting there) doesn’t pollute because it benefits him.


  9. A question which no one has asked is why should a big shot Wall Street firm like Cleary Gottlieb invite people to this kind of meeting . The reason is clear , same as any other firm they are a business , they figure that if Venezuela does default people will remember their name and expertise on the subject and hire then to represent their interests in any bankrupcy proceedings , in short they smell blood and they want to be in on the banquet . It may take a year or two but they are banking on something happening that will bring them new luchrative business !! When the vultures start gathering you can bet that its because they see an opportunity coming .


  10. I’ve been frequenting this site for eight years. Almost from the beginning it was clear that the economic policies of this regime were unsustainable. I had always expressed my opinion that at some point, the regime would fail. However, I always thought that the leadership would develop an exit strategy of some kind. I always thought that nobody would want to be at the helm of a failing state! I was always worried that the opposition would have to assume the help at the worse time and then would be blamed for the pain and suffering that would ensue under their watch. I was wrong! This regime wants to go down with the ship of state and take all the passengers with it. Once all hits the bottom, I have no idea who will take over, but the opposition will not be in the predicament that I feared, and once the bottom is reached and nothing can get worse, only better things can come and the credit will go to whomever brings better times into fruition.


  11. Bank of America sees $50 oil as Opec dies

    The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.

    Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe.

    Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

    The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

    The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production…..
    It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 – given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

    So the next six months will not be good times for Venezuela’s being able to pay its debts. But that could be foreseen even before reading this Telegraph article.


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