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Oil Rout Ripples Through Latin America as Projects Slow

Oil Rout Ripples Through Latin America as Projects Slow

Posted by Juan Gavasa on November 29, 2014

From Venezuela to Argentina, oil’s steepest plunge in three years is reverberating through a region that accounts for the largest crude reserves outside of the Middle East.

Venezuelan oil bond yields jumped, American depositary receipts of Petroleo Brasileiro SA (PETR4), 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 Nov. 27. Brent is down 13 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 yesterday 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 yesterday. 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 3.4 percent to $70.15 a barrel on the London-based ICE Futures Europe exchange.

Petrobras ADRs fell 8.3 percent to $9.72, 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 5.3 percent while Colombia’s Ecopetrol SA (EC) fell a record 15 percent in New York.

Steel-pipe supplier Tenaris SA lost 3.8 percent in Buenos Aires yesterday.

“They depend on oil companies’ projects and any cancellations will hit them,” Raymond James analyst Santiago Wesenack said in a phone interview. “I expect further loses.” 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

The currency in Mexico, which is ending a 76-year state oil monopoly, approached 14 pesos per dollar, falling 2.3 percent this week, the largest weekly drop since August 2013.

“Market optimism on the peso has always been based on the expectation that we will have large FDI flows derived from the energy reform,” Juan Carlos Alderete, a strategist at Grupo Financiero Banorte, said by phone from Mexico City. “Now the internal rate of return for energy projects has to be revised down due to falling oil prices.”

OPEC kept its oil output target unchanged, 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.”

Worst Performer

Venezuela, whose overseas debt is the worst performing in emerging markets this year, had asked OPEC countries during a meeting in Vienna this week 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 drop to $22.2 billion, according to central bank data.

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 in Peru,” she said.

Budget Review

Chile’s benchmark stock index, the IPSA Index, rose 0.3 percent, the 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.

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.

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