Coverage: The price of oil

As oil prices drop, it’s having different effects on various countries and the global economy. For those who produce oil, the decline in revenue is hurting investors’ willingness to put money into those countries

The Wall Street Journal story Nicole Hong and Kejal Vyas had these details about Venezuela:

A slide in oil prices is hitting Venezuela hard, raising questions among investors about the South American country’s ability to pay its debts and heightening concerns about the health of developing economies around the world.

Venezuelan debt was widely held by emerging-market investors until the summer. Many viewed the bonds as a safe bet because the country brought in ample revenue as a major oil exporter. But a nearly 50% drop in the price of crude since mid-June has left Venezuela’s finances in shambles. The price of credit-default swaps on Venezuela debt, a type of insurance, indicate a 61% chance of default in the next year and a 90% chance in the next five years.

The country is an extreme example of the turmoil that sliding prices for oil and other commodities have had on emerging markets, where stocks, bonds and currencies have recently sold off from Russia to South Africa.

Venezuela and its state-run oil company, Petróleos de Venezuela SA, known as PdVSA, issued more debt than any other emerging market between 2007 and 2011. Venezuela and PdVSA have $66 billion in outstanding debt, analysts say.

Venezuela’s woes show how the boom times that drew investors to certain developing economies can quickly evaporate when commodities prices fall. Investors for years were willing to overlook widening budget gaps and rising inflation as they sought higher returns than they could get in developed countries. But now that lower commodities prices have dimmed economic prospects for many countries, money managers are increasingly cautious about where they invest in emerging markets.

Rania El Gamal and Maha El Dahan reported for Reuters that Saudia Arabia wasn’t going to cut output despite the drop in prices:

Saudi Arabia said on Sunday it would not cut output to prop up oil markets even if non-OPEC nations did so, in one of the toughest signals yet that the world’s top petroleum exporter plans to ride out the market’s biggest slump in years.

Referring to countries outside of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Oil Minister Ali al-Naimi told reporters: “If they want to cut production they are welcome: We are not going to cut, certainly Saudi Arabia is not going to cut.”

He added he was “100 percent not pleased” with prices but they would improve, although it was unclear when.

He blamed the fall in prices to half their levels of six months ago on speculators and what he called a lack of cooperation from non-OPEC producers.

His remarks at a conference in Abu Dhabi marked the second time in three days that the kingdom has signaled that it would not alter output levels, preferring to allow the market to stabilize on its own.

A. Gary Shilling wrote for Bloomberg View that Russia was also suffering as the price (along with their currency) dropped:

Then there’s Russia, another Saudi opponent in Syria, with its dependence on oil exports to finance imports and 42 percent of government outlays. With the ruble collapsing, the Russian central bank let the currency float in November after blowing through $75 billion to support it. Then the central bank tried to stop the free fall by raising interest rates by 6.5 percentage points to 17 percent on Dec. 15.

Still, the Russian currency is floundering, along with the economy. Consumer prices in Russia rose 9.1 percent in November from a year earlier. The economy will be in recession next year, the website of the Russian economy ministry acknowledged for a few hours on Dec. 2, before the posting was deleted.

Venezuela is also suffering. The government needs $125-a-barrel oil to cover its spending, of which 65 percent depends on oil exports. Its crude production is down a third since 2000. With inflation raging, the bolivar officially sells for 6.29 a dollar, but for 180 on the black market.

In Nigeria, where oil and natural gas account for 80 percent of government revenue and almost all its exports, the naira has fallen 11 percent versus the greenback so far this year.

Forbes’ Christopher Helman pointed out that oil and services companies are also having trouble attracting investment given the current prices:

No surprise, as oil prices have plunged, yields on risky oil company debt have surged in recent months to three times their original yields at issuance. In September, the average energy high-yield issue yielded 450 basis points above Treasuries, according to Bloomberg . Now that premium has increased to nearly 950 bps. As a result, high yield funds have taken it on the chin. The Blackrock Corporate High Yield Fund, for instance, is down 8.25% in six months. According to S&P Capital IQ, leveraged oil and gas loans were trading above par as recently as June, but have since plunged to around 92 cents on the dollar on average, with some issues far lower. Analysts at CreditInsights see a jump in defaults from about 4% to around 8% of issues.

Oil companies had little trouble convincing lenders that these great tight oil plays like the Bakken and Eagle Ford and Permian are so vast, with so many thousands of drilling locations, that all they have to do is to keep drilling and drilling and drilling until eventually they will accelerate their oil volumes to enough of an “escape velocity” where they will finally have sufficient free cash flow to pay down debt and fund capex from operations.

While consumers may be rejoicing that holiday travel will cost less, leaders of oil producing countries and the companies that serve them are wringing their hands. Investors are leery of putting more money into the space as astronomical profits seem to be going away, leaving many to wonder just exactly how they’re going to pay for all their spending in the new year.