Oil Market Update: Checking in on Venezuela
In recent days, while oil markets have reacted to fast moving developments in Algeria, Sudan, and Libya, the governance stalemate in Venezuela has continued. The country’s humanitarian crisis continues to devolve, and neighboring nations are feeling the impact of increasing numbers of refugees. Given our previous reporting on the state of play in Venezuela, we thought it useful to update our assessment of market impacts as we move into spring post-maintenance season and examine the implications of recent crude oil and product shipments.
It’s been almost three months since Juan Guaido, the then-newly elected leader of the National Assembly, invoked Article 233 of the country’s constitution and assumed Venezuela’s presidency, pending new elections. On February 11, we published a commentary assessing potential impacts on the global oil market and outlining a series of scenarios for what the coming months were likely to bring in Caracas.
In the intervening weeks, oil markets have tightened, U.S. sanctions targeting the Maduro regime have intensified, Venezuelan oil production has plummeted, and U.S. Gulf Coast and global refiners have scrambled to find replacement barrels to meet feedstock needs. And while substantial numbers of the international community (over 50 nations) now recognize Guaido as Venezuela’s legitimate president, with the backing of Russia, China, and Cuba and the continued support of the country’s military, Nicolas Maduro refuses to relinquish his claim to power.
Maduro’s durability in the face of growing opposition has proven to be formidable. And while the continued stalemate has stemmed some of Guaido’s initial momentum, the impact of continued and augmented sanctions has severely reduced Maduro’s access to cash.
Our February commentary identified four likely scenarios for how things might play out over the coming months. Collectively, however, they could be viewed as sequential phases which the nation is likely to pass through before any final resolution is reached. For example, Scenario 3 assumed that failed efforts to dislodge Maduro would provoke more targeted efforts by the regime to repress the opposition forces. True to form, in the past two weeks Maduro’s forces have detained Roberto Marrero, Guaido’s chief of staff, and Maduro’s Constituent Assembly has stripped Guaido of immunity to prosecution. Emboldened by the failure of the international community to take more definitive action and the recent arrival of the Russian military, it is unclear what further action Maduro may be contemplating and how the United States in particular might respond beyond the imposition of additional sanctions (likely targeting foreign companies and shipments of fuel products into Venezuela).
Our Scenario 1 envisioned a successful military coup or a negotiated transition of power (Guaido forces have been actively courting the military with promises of amnesty but with only limited success to date) that inevitably led to the establishment of a transitional government tasked with overseeing new elections (Scenario 2). Our fourth and final scenario contemplated foreign military intervention (described as low probability) conditioned on Maduro’s use of excessive military force to curb dissent.
So where does all of this leave us? Well, citing OPEC’s most recent monthly Oil Market Report, Venezuela’s oil production, already in severe retrenchment, plummeted last month by several hundred thousand barrel per day—mainly due to the lack of electricity caused by the country’s massive and sustained power outage. January output had been hovering just above 1.1 million barrels per day, but the onset of onerous sanctions, equipment and labor shortages, and loss of power to production facilities, upgraders, and transport/export venues reduced volumes by an additional 30-40 percent. Official country submissions to OPEC appear to downplay the reductions, but several secondary reporting sources suggest the losses exceeded 50 percent before power was restored, so average monthly figures may not be indicative of the current state of disrepair. Coupled with limited buyers (the consequence of aggressive U.S. sanctions), lower volumes especially for cash-related sales have severely limited export revenues—which historically have disproportionately funded government operations.
For U.S. refiners, imports of Venezuelan crude have fallen from over 600,000 barrels per day last summer to zero last month. Recent reports suggest that Chevron, CITGO, and PBF landed limited cargoes this month, possibly related to delivery and contract issues. To replace the lost Venezuelan barrels, Gulf Coast refiners have been scrambling to secure feedstock sources of similar quality. And to date, they have had considerable success, securing increased supplies from such diverse sources as Colombia, Ecuador, Brazil, Canada, Mexico, Angola, the Middle East, and not surprisingly, the US. offshore (especially the mid-heavier Mars, Green Canyon, and Thunder Horse grades). Interestingly, while the extended Gulf Coast maintenance season has reduced crude throughput requirements over the past several weeks, the increased uptake following turnarounds could well result in a reduction of U.S. crude oil exports as Gulf of Mexico production grades now comprise almost 20 percent of export volumes.
Looking forward, the confluence of a projected upturn in seasonal (gasoline) demand, OPEC adherence to its production cut pledge, prospects for a trade agreement between the United States and China, continued deterioration in Venezuela, and growing geopolitical risk in Algeria and Libya all point to more bullish market sentiment and increasing prospects for higher prices. That said, as indicated in our previous oil market commentary, lingering concerns remain relative to the strength of sustained growth in global oil demand, complicate the calculus for the administration’s issuance of the next round of Iran sanctions waivers in the weeks ahead.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Guy Caruso is a senior adviser with the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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