By Gregory Brew
In response to Venezuela’s controversial vote on Sunday, a move which could dramatically increase the power of President Nicolas Maduro and grant his government the ability to re-write the constitution, the United States is seriously considering placing sanctions on the Venezuelan oil industry, according to officials within the Trump Administration.
The Venezuelan president won the vote, with 8 million voting in the special election according to government sources, though third-parties estimate that fewer than 4 million Venezuelans participated. For months violence and instability has rocked the country, which was hit hard by falling oil prices in 2015 and 2016. The vote granting Maduro’s government greater powers is expected to generate more dissent and opposition from groups within the country’s capital, and may do little to allay the shortages of food, medicine and other items plaguing the country.
The vote, which was roundly condemned by the international community before Sunday, went unrecognized by many Western Hemisphere nations, including the United States, Argentina, Canada, Colombia and Panama. It is largely seen as a power-grab by Maduro’s government, which clings to its position amidst Venezuela’s deteriorating economy and fragmenting social system. A win at the polls, no matter how controversial, will allow Maduro to seize potentially dictatorial powers for himself and his ruling party.
The U.S., which has been discussing the possibility of sanctions on Venezuela for the last several weeks, now looks ready to impose such measures in response to Maduro’s controversial victory.
The policies would most likely not include a blanket ban on Venezuelan oil imports, but would instead target imports of light crude from the U.S. into Venezuela, which are used to mix the country’s notoriously heavy crude. The United States is Venezuela’s biggest customer and imports around 750,000 bpd according to EIA data, which is about 8 percent of total U.S. imports. Venezuela imports about 75,000 bpd of U.S. refined products, while the state-run company PDVSA imports light U.S. crude for its refineries in Curacao.
On Wednesday, the U.S. government placed sanctions on a number of individuals in Venezuela’s military and civil service, in order to “ratchet up” pressure on Maduro before Sunday’s vote. Other measures directed against PDVSA are also being considered, as President Trump has promised “strong and swift economic actions.”
The impact of U.S. sanctions could be far-reaching. If Venezuelan exports are affected and the country is forced to cut the price of its crude, large customers of Venezuela like China and India could profit from lower prices, as the country discounts its exports in order not to lose market share.
A blanket ban on Venezuelan crude has been considered by U.S. officials, but could carry some significant consequences. U.S. refiners losing access to a steady customer could see their profit margins slip. The lack of Venezuelan heavy crudes, which Gulf of Mexico refiners are particularly well-suited to manage, would have U.S. refineries looking elsewhere at a time when access to heavy blends is already problematic. There’s a good chance sanctions on Venezuela, while worsening that country’s economic woes, would bite into the U.S. energy sector.
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While depriving the Maduro government of revenue, the move would also give his regime (which is already stridently anti-American) reason to blame the U.S. for Venezuela’s economic condition, with some degree of legitimacy. As a tool of diplomacy, U.S. sanctions could potentially be self-defeating.
Then again, crisis in Venezuela and falling oil production tied to U.S. sanctions could lead to a rise in prices, which will benefit other produces as well as US shale.
Barclays estimated that U.S. sanctions on Venezuela could raise prices by as much as $7. A collapse in the country’s oil sector, both as a result of sanctions and spiraling economic conditions, could jump-start prices in a more immediate, effective manner than the months-long OPEC strategy of organized production caps and allow the current rally to continue.
Oil rose Monday morning as news of possible U.S. sanctions began to spread, encouraging market bulls to hope for prices rising back into the mid-$50s for the first time since early 2017.
Venezuela has attempted to talk its OPEC partners into steeper production cuts in order to raise prices faster. The country has arguably suffered more than any other OPEC member in the last several years, as cratering prices led to severe balance of payments problems, food and supply shortages and aggressive inflation. Yet deeper cuts are unlikely, particularly if a Venezuelan collapse begins to look more and more imminent. OPEC members will most likely sacrifice their weakest members to see a boost in price, particularly now that Maduro’s government is making more vigorous moves towards instituting a full dictatorship.
By Gregory Brew for Oilprice.com