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In what has been a tumultuous start to the new year, the crude oil market, which arguably was the biggest story for 2014, continues to dominate the investment community’s focus, with Venezuela leading the dubious bid to potentially become the first international victim of the black-gold collapse. Should Brent crude, the international benchmark for oil prices, languish under the 50-dollar per barrel mark, many oil producers will be threatened with unprofitable margins, leaving countries who are dependent on commodity exports in an extremely unenviable position. As Dimitra DeFotis reports for Barrons.com, Venezuela is particularly vulnerable to the sustained wave of volatility.
According to, Siobhan Morden, head of “Latin America Strategy” at investment banking firm Jeffries, Venezuela’s economy will suffer pain at 56-dollars per barrel, and that serious financial stress will occur at 45-dollars, with the country’s break-even point estimated at a lofty 85-dollars per barrel, which includes tapping non-recurring resources such as a Citgo-sale, gold securitization, non-reserve assets and resale of oil loans. The over-riding bearishness in the oil sector also threatens the stability of Venezuela’s bond market, in particular because the unpopular administration of President Nicolas Maduro is more interested in financing the balance of payments deficit as opposed to overhauling the structural imbalances that would reduce import dependence and grow the non-oil economy, as quoted by Ms. Morden.
An effort was made to alleviate some of the fiscal pressures this past Wednesday, when Fox News Latino reported that President Maduro and Chinese leader Xi Jinping met in Beijing, with one of the key talking points centering on the extension of further loans to the embattled South American country. Although Xi emphasized the importance of relations between the two nations, referring to it as a “cooperative strategic partnership,” the main challenge for Venezuela is that it is already deep in debt to the Asian powerhouse, to the tune of 23 billion dollars.
The other critical factor is Venezuela’s destruction of its fiat currency, which has the world’s highest inflation rate at 64-percent. Essentially, the country suffers from the worst of two worlds: deflation in their key exporting commodity and inflation in costs of living. With a major repayment of debt looming in the bond market, Venezuela has few realistic options given that this is an election year for Maduro. However, it is conceivable that the country can attempt to pressure OPEC member states to artificially constrain crude oil supply, thus introducing entropy to an already chaotic scenario.
In financial news, the U.S. equities sector on Thursday regained confidence as employment statistics trended positively, with the Dow Jones adding 323 points to close just under 17,908, while the broader S&P 500 finished the session up 1.79-percent. The much maligned precious metals complex has actually started off the year on a strong note, although gold was slightly down from the prior session, closing at 1208, while silver took a heavier loss, finishing at 16.38. The best performing precious metal over the past two years, palladium, started 2015 with a mixed bag performance, closing Thursday at 795 on the ask. In the digital currency front, bitcoin has languished under severe selling pressure, trading hands just under 280 dollars at last count.
And that will do it for this edition. Thanks for watching and we’ll see you next week!