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Oil needs more than a Venezuelan default
Oil needs more than a Venezuelan default Judging by CDS spreads, the market fears Venezuela is approaching default (at a 25% recovery, the market is pricing in a 98% probability of default!).
(Click to enlarge) Source: Bloomberg, ETF Securities
Surprisingly, despite the fact that Venezuela has not let the IMF in to the country to perform its annual assessment (Article IV consultation) since 2004, the Venezuelan government has managed to access the bond markets, with approximately US$100bn of debts outstanding. Worryingly, about a fifth of the government debt (US$21bn) is due within the next three years.
(Click to enlarge) Source: Bloomberg, ETF Securities
Venezuela controls the largest proved reserves of oil in the world (around 18%), and produces around 3% of global supplies (similar scale to Mexico). Petróleos de Venezuela (PDVSA), the state oil company is fully controlled by the government. They have a symbiotic relationship: the government relies on PDVSA for more than half of formal budget revenues and PDVSA is reliant on the government for access to the oil reserves and its relationships with creditor countries such as China. PDVSA has also issued bonds of its own, with total outstanding debts of US$50bn adding to the contingent obligations of the government.
Even though PDVSA and the government are two separate issuers and so PDVSA’s assets cannot be considered collateral by sovereign bondholders, PDVSA will likely face funding difficulties. Any attempt by the government to access more of the PDVSA’s revenues, will leave less resources for PDVSA’s bondholders and market access is likely to close very quickly.
A disruption to Venezuelan supply could tighten global oil markets. However, current global oversupply is around 2.3 million barrels per day according to International Energy Agency data. It is unlikely that all 2.6 million barrels per day of Venezuelan supply will be wiped out overnight. When Mexico defaulted in 1982, its oil production fell by only 8% and that took four years. In the initial phases of a default the Venezuelan government would likely want to work its oil assets even harder to finance itself. Therefore, we believe that to bring the global oil market into balance broader production cuts will be required by both OPEC and non-OPEC members.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E infoUK@etfsecurities.com
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
When being made within Switzerland, this communication is for the exclusive use by ”Qualified Investors” (within the meaning of Article 10 of Section 3 of the Swiss Collective Investment Schemes Act (”CISA”)) and its circulation among the public is prohibited.
• Global crypto asset adoption rates are significantly higher than previously estimated.
• The data generally suggest that both the US and Europe may be at the cusp of mass retail adoption – a situation often referred to as “Hyperbitcoinization” in the context of Bitcoin.
• Chances are that the growth of adoption will surprise to the upside due to the fact that we are most likely at the inflection point from ”Early Adopters” to ”Early Majority”.
Trump recently made a public statement implying that 50 million Americans already held ”crypto”. The most recent surveys among US consumers seem to support this number.
It is no surprise that cryptoassets have become a major topic during the US presidential election as the parties have become increasingly aware that cryptoasset users could play a significant role at the ballot.
Both Trump and Robert Kennedy Jr. are scheduled to deliver a pro-Bitcoin speech at the upcoming Bitcoin conference in Nashville over the weekend.
It seems as if cryptoasset users are not a small minority anymore that can be ignored.
Here are some recent US bitcoin and crypto adoption surveys for comparison (% of total population in brackets):
• Security.org: 93 mn (28%)
• Unchained: 86 mn (26%)
• Statista: 53.6 mn (16%)
• Morning Consult: 44.2 mn (13%)
• Finder: 38.4 mn (11%)
In general, cryptoasset adoption has been on the rise globally.
A recent global survey among institutional investors conducted by Fidelity even implies that 51% of surveyed institutional investors have already invested into cryptoassets such as Bitcoin.
Another recent consumer survey by Statista implies that approximately every 5th person (21%) worldwide has already invested into cryptoassets.
However, it’s important to highlight that among the top 10 regions with the highest adoption rates, 8 regions are developing countries.
So, cryptoasset adoption rates are even significantly higher among developing countries than in developed countries that often suffer from chronically high inflation rates and weak domestic currencies.
That being said, the data generally suggest that both the US and Europe may be at the cusp of mass retail adoption – a situation often referred to as “Hyperbitcoinization” in the context of Bitcoin.
The reason is that technological adoption in general tends to accelerate at the threshold from the so-called “early adopters” to the “early majority” which is around 16% adoption rate based on the model of technological adoption famously put forth by Rogers (1962).
Global adoption rates are already at 21% while adoption rates in the US and Europe are at around 16% and 14%, respectively. So, there is a strong case for an acceleration of adoption rates in these regions and globally over the coming years.
Recent political developments in the US also imply that Bitcoin and cryptoassets are gradually becoming mainstream.
Trump has recently endorsed domestic Bitcoin mining in the US and both Democrats and Republicans have started accepting crypto payments for campaign financing.
The big success of the spot Bitcoin ETFs this year and the fact that additional types of spot crypto ETFs are being launched marks a significant shift in sentiment among US regulators in this regard.
In short, chances are that the growth of adoption will surprise to the upside due to the fact that we are most-likely at the inflection point from ”Early Adopters” to ”Early Majority”.
Bottom Line
• Global crypto asset adoption rates are significantly higher than previously estimated.
• The data generally suggest that both the US and Europe may be at the cusp of mass retail adoption – a situation often referred to as “Hyperbitcoinization” in the context of Bitcoin.
• Chances are that the growth of adoption will surprise to the upside due to the fact that we are most likely at the inflection point from ”Early Adopters” to ”Early Majority”.
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