How the chaos in Venezuela will impact oil prices.



The United States is Venezuela's largest and most important oil customer, accounting for 39% of deliveries from the OPEC nation last year, according to ClipperData. And Venezuela was the fourth source of foreign oil that flowed to the United States last October.

More importantly for the oil market, President Donald Trump is considering taking a series of actions to punish Maduro, including possible oil sanctions, the sources told CNN.

The sanctions on the Venezuelan oil industry would give an amazing blow to the economy in crisis in the country, but would also have important implications for the United States. The loss of Venezuelan barrels could raise oil prices and squeeze US refineries that consume hundreds of thousands of barrels of Venezuelan oil each day.

"The United States will be harming itself if it imposes these sanctions on Venezuela," said Matt Smith, director of commodity research at ClipperData.

Oil is the & # 39; soul & # 39; of the Venezuelan economy.

Venezuela's oil production had already fallen to a minimum of 30 years due to the rapid decline of its energy industry. RBC Capital Markets demanded that Venezuela's production fall to half a million barrels per day in 2019. But RBC warned that US sanctions would be in place. UU They could make that number increase by several hundred thousand additional barrels.

Oil sanctions would deepen the economic chaos in Venezuela, which depends on oil exports for 90% of its revenues.

"The rapid evolution of the situation in Venezuela seems to be approaching some kind of turning point," Helima Croft, RBC's global commodity strategy chief, wrote to clients on Wednesday.

Venezuela's other major oil clients are China and India. But Venezuela does not receive cash for these oil shipments. Deliveries are made in exchange for payments for Venezuela's huge debt.

"The sanctions would cut the life of the Venezuelan economy," said Smith.

The country is already facing a humanitarian disaster. Venezuela's GDP has plummeted by 37% between 2012 and 2017, according to the IMF. It is projected that inflation will reach an impressive 10 million percent in 2019.

Will Trump take a tough stance?

The oil markets have had a silent reaction so far this week to the chaos in Venezuela. That is probable because what happens next is very uncertain.

Trump has been a wild card for the oil market for the past year. Fearing $ 100 oil, Trump took a softer than expected stance on Iran's sanctions. That soft approach left the oil market with an oversupply, which helped prices fall.

"There are many doubts in the market that Trump will pull the trigger on oil sanctions" directed at Venezuela, said Joe McMonigle, a former official of the Department of Energy of President George W. Bush.

But McMonigle, now a senior energy policy badyst at Hedgeye Potomac Research, believes it is very likely that Trump will impose sanctions.

Next year, the United States will export more energy than it imports. That has not happened since 1953.

He warned that sanctions increase the risk of a major crisis, such as a civil war or the cessation of the operations of the Venezuelan state oil company.

"It could lead to all of its oil production disconnecting and chaos in the country," said McMonigle.

US refiners trust Venezuela's crude

Analysts said harsh US sanctions on Venezuela's oil industry would be price optimistic.

The problem is that despite the fact that US oil production UU It has shot up to record levels, the United States is not self-sufficient. Gulf Coast refineries can not operate with US shale oil To produce gasoline, jet fuel and other products, refiners require a good dose of heavy crude. They have come to trust the cheap and extra heavy crude that is found in Venezuela.

It is revealing that, although Venezuela's oil production has declined significantly, the country still shipped 506,000 barrels per day to the United States in October, according to the latest statistics from the Energy Information Administration. The only countries that sent more crude to the United States were Canada, Saudi Arabia and Mexico.

US sanctions on Venezuela could increase the cost of heavy crude, which represents a setback for US refineries, badysts warned. They will have to find heavy oil elsewhere.

Venezuelan Defense Minister promises loyalty to beleaguered President Maduro
The largest US importers of Venezuelan crude last year were Citgo, Valero (VLO) Y Chevron (CLC), according to Rystad Energy. (Citgo is majority owned by PDVSA, Venezuela's state oil company).

"The sanctions would convert the refiners of the US Gulf Coast into the biggest loser," wrote Rystad Energy badyst Paola Rodriguez-Masiu in a report published on Thursday.

Chevron, which has operations in Venezuela, declined to comment on the situation there.

"Chevron's operations in Venezuela continue and the company is committed to the country's energy development in compliance with all applicable laws and regulations," Chevron said in a statement.

There is no quick recovery even if Maduro comes out.

And Venezuela relies on American products to keep its oil industry afloat. Venezuelan crude is so heavy that it must be mixed with naphtha, a mixture of liquid hydrocarbons that is used to dilute the oil and transport it.

US sanctions could block the sale of American diluents to Venezuela. While Venezuela could find a substitute elsewhere, it would probably be more expensive and would be further away.

It is not clear if the external pressure on Maduro will cause him to lose control of his power. Senior military leaders in Venezuela have continued to support him and have also received support from Turkey, Russia and China.

Croft, of RBC, warned that Venezuela's oil production could remain on the sidelines for a long time, even if the Maduro regime collapses.

"The way back to Venezuela will be extremely difficult given the depth of the economic and humanitarian disaster," he said.


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