The Strategist

How will Venezuela's situation affect oil prices?

01/28/2019 - 09:37

The attempted coup in Venezuela could have unexpected consequences for the oil market. On the one hand, a part of the Venezuelan oil may leave the market in the event of new sanctions from the United States. On the other, in the event of a regime change, the Bolivarian Republic may significantly increase production, which will lead to an excess of supply.

The political crisis in Venezuela made the world oil market stand still. Investors and speculators took a pause: the first reaction of the oil quotes was rather restrained. The prices went down for a short time, after which a correction followed. No one knows how the revolutionary situation in the largest oil exporting state, Venezuela, will affect the country's oil production.

Venezuela still accounts for about 7% of all crude oil imports to the United States, and its importance to the refineries of the United States is even greater, since domestically, particularly in the Permian Basin, mainly light oil is produced, which is already surplus, Bloomberg writes. Refineries along the coast of the Gulf of America require heavier feedstock for the production of diesel fuel and other middle distillates, which are particularly in demand due to changing emissions standards for vehicles.

In 2018, the United States remained the largest buyers of Venezuelan heavy oil and imported an average of more than 500 thousand bpd. Venezuelan oil, in addition to the United States and India, was also supplied to Asia, including China, and Russia.

The days when events in Venezuela could have affected the world oil market seem far in the past, but the “crippled giant” may still lash out, warns Bloomberg. It would be better not to relax too much.

Earlier, Reuters reported that the administration of US President Donald Trump warned American oil companies of their intention to impose oil sanctions on Venezuela if the political situation in the country continues to deteriorate. According to the agency, as one of the options for pressure, Trump considers tougher sanctions before a full embargo on oil supplies from this country. However, the market is still reacting with restraint to these rumors.

The possible negative impact of the domestic political crisis on production levels in the country has already been partially accounted for in oil prices. Plus, in the event of a significant drop in production in Venezuela, the OPEC + agreement may come into play, under which quotas for countries participating in the agreement may be increased to stabilize the market, which compensates for a decrease in supplies from Venezuela.