By Nick Cunningham
Venezuela’s oil production could be disrupted to a greater degree than most analysts first thought, as the U.S. government seeks essentially shut in the country’s oil sector.
When the Trump administration first announced sanctions on Venezuela’s oil sector a little over a week ago, it sounded as if they would simply bar U.S. companies from buying oil. That would still mean that Venezuela could ship the oil elsewhere, albeit at a painful discount.
However, the U.S. Treasury issued some more details on February 1, sketching out a harsher sanctions regime. The sanctions on Venezuela will actually resemble the measures targeting Iran in that it will bar companies from using the U.S. financial system to do business with PDVSA. As such, the reach of the sanctions will extend well beyond the shores of the United States.
Reuters reported that even prior to last Friday’s clarification from the U.S. Treasury, European buyers were already slashing purchases because of concerns over payments. Reuters reported that two of the world’s largest oil traders, Vitol and Trafigura, said that they would comply with all U.S. sanctions.
As a result, PDVSA and Maduro’s government could have a much harder time finding destinations for Venezuelan oil than first thought. The Wall Street Journal reported oil storage is “filling up” in Venezuela because of a lack of buyers.
Moreover, not only are the effects of the sanctions more far-reaching, but also more immediate than first thought. At first, the U.S. seemed to exempt shipments that were underway, outlining a sort of phased approach that would allow a handful of American refiners to gradually unwind their oil purchase from Venezuela. The phased approach, which was supposed to be extended into April, would help “to minimize any immediate disruptions,” U.S. Secretary of Treasury Steven Mnuchin said in late January.
But that now does not appear to be what is unfolding. PDVSA has demanded upfront payment, likely because it fears not being paid at all or having the revenues steered to the opposition. Indeed, the U.S. effort to steer PDVSA and its revenues into the hands of the U.S.-backed opposition leader Juan Gauidó appears to be a decisive turning point.
Oil tankers linked to Chevron, Lukoil and Respsol are delayed, redirected or sitting offshore because of lack of payment. The WSJ says that several of those tankers had recently sent oil to Corpus Christi, Texas, but are now anchored off the coast of Maracaibo sitting idle. “This is an absolute disaster,” Luis Hernández, a Venezuelan oil union leader, told the WSJ. “There’s almost no way to move the oil.”
Unable to sell any oil, Maduro’s regime could quickly run out of cash. The result could be a humanitarian catastrophe, a merciless and destructive objective that the Trump administration seems to have in mind. The U.S. government is essentially betting that by driving the country into the ground, the military and the people will turn on Maduro. It could yet turn out that way, but it could also deepen the misery and exact an unspeakable toll on the Venezuelan population, the very people the Trump administration says it is trying to help.
In the meantime, oil exports are likely heading into a freefall. The WSJ says that labor problems, including “mass defections of workers” are accelerating declines. PDVSA could soon run out of refined fuel.
Officials with knowledge of the situation told the WSJ that Venezuela’s oil production has likely already fallen well below 1 million barrels per day (mb/d), down more than 10 percent – at least – from December levels.
Wood Mackenzie estimates that production probably stands a little bit higher at about 1.1 mb/d, but that it could soon fall to 900,000 bpd.
It’s hard to imagine how Maduro can hang on if oil exports fall precipitously from here. But even if he does manage to stay in power, the U.S. may escalate the situation. Last month, U.S. national security adviser John Bolton had “5,000 troops to Colombia” written on his legal pad. President Trump himself said that a military intervention is an option.
For the oil market, the crisis presents a series of problems. If Maduro hangs on and the U.S. continues to heap more pressure on his government, Venezuelan oil production and exports will continue to fall. Alternatively, the U.S. is hoping for a quick regime change, after which it would lift sanctions, which it believes will lead to a reversal in output losses.
The next round of Iran sanctions is nearing, with U.S. sanctions waivers expiring in May. As such, the window of opportunity for the Trump administration “is open only a crack, necessitating a quick political change,” Barclays wrote in a note. By the third quarter, the loss of Venezuelan output, Iran sanctions, and the looming regulations from the International Maritime Organization will put an increasing premium on medium and heavy oils.
That would push up oil prices significantly. But the U.S. government has blown past the point of no return, leaving it with no other options except to escalate. That means that Venezuela is set to lose a lot more oil than analysts thought only two weeks ago.
By Nick Cunningham of Oilprice.com