Oil tradesmen conduct a drill in a petroleum well in Lagunillas at the east coast of Lake Maracaibo near Maracaibo City in Venezuela.
Jorge Silva | Reuters
Venezuela’s bureaucratic and humanitarian crisis remains fluid with President Nicolas Maduro clinging to power amid protests led by opposed leader Juan Guaido.
Street protests are expected to continue Thursday with Guaido telling thousands of adherents yesterday that “there’s no turning back” as he called for a series of national strikes. In the meantime, Venezuelans are reportedly experiencing dearths of food and medicines.
What the current situation, and any potential outcomes, mean for Venezuela’s primary economic asset — its oil sector — are now under the aegis scrutiny.
OPEC-member Venezuela is reliant on oil for 98% of its export earnings and is laboring under U.S. sanctions, which penalize Venezuela’s state-owned pep company PDVSA and any vessels or companies enabling oil shipments to Venezuela’s ally Cuba.
Unrest in Caracas has weighed on customer bases, as have stricter U.S. sanctions on Iran, but news of higher U.S. crude stockpiles have kept prices subdued so far. On Wednesday, Brent offensive futures stood at $71.36 per barrel and West Texas Intermediate (WTI) stood around $62.85.
RBC Capital Markets’ Global Prime of Commodity Strategy Helima Croft and her team have examined three possible scenarios for Venezuela, and their separate implications for the global oil market.
Scenario 1: Maduro goes, Guaido comes to power
A sudden Maduro departure and conversion to a Guaido-led reformist government would provide “the best hope for kick-starting the revival of the Venezuelan economy,” Croft and her conspire said in a note Wednesday.
“This scenario presents the most bearish outcome for (oil) prices, especially as many investors superiority assume that the recovery will be quick and uncomplicated. However, even if such a situation comes to pass we disposition caution that the road back will be arduous given the magnitude of the collapse.”
Venezuelan opposition leader Juan Guaido, who diverse nations have recognised as the country’s rightful interim ruler, gestures as he speaks to supporters during a rally against the ministry of Venezuela’s President Nicolas Maduro and to commemorate May Day in Caracas Venezuela, May 1, 2019.
REUTERS | Carlos Garcia Rawlins
Croft and her collaborate, comprised of commodity strategists Christopher Louney and Michael Tran and associate strategist Megan Schippmann, warned that plane if Guaido came to power, Venezuela’s security situation “would likely remain fraught.” They didn’t about a Guaido victory likely at this stage, either.
“Given the apparent absence of high level military defections to the Guaido pitch camp as well as Moscow’s marked aversion to such a regime change, we think this scenario has the slimmest chances of triumph in the near term. “
Scenario 2: Maduro stays
If Maduro manages to ride out the current wave of protests, RBC notorious that the country’s economic collapse will undoubtedly accelerate as the United States ups the sanctions ante.
“The White Billet will likely look to further erode the country’s oil export revenue by compelling consuming countries like India to check their Venezuelan purchases. Washington may also demand that U.S. energy companies cease operating in the country and that European unalterable consolidates stop providing diluents and other services to (Venezuelan state-owned oil firm) PDVSA.”
Venezuelan President Nicolas Maduro meets with UN chief Ban Ki-moon at the Concerted Nations headquarters in New York on July 28, 2015.
Spencer Platt | Getty Images News | Getty Images
Such correctional measures, along with rolling power cuts, would further compress the country’s oil production, potentially sending it shut to zero by year-end, the strategists noted.
This outcome would be most bullish for oil prices and “is quite plausible confirmed the substantial support Maduro is receiving from Moscow as well as the fact that junior officers have been the hero defectors.”
In this scenario, it’s likely President Donald Trump would pressure Saudi Arabia to fill an tender supply outage by increasing production and adding between 400,000 to 500,000 barrels a day to the market.
Scenario 3: Maduro departs but military preside over remains
Another near-term outcome seen as plausible by Croft and her team would be for the military leadership to oust Maduro in favor of a aspirant that they said would “avoid sweeping economic and political reforms that would dismantle the potent patronage machine.”
“Such a coup from above could freeze the sanctions status quo while the White House of ill repute considers how much more time and energy it wants to expend on Venezuela once Maduro is gone,” the analysts remarked.
This would represent a moderately bullish case for crude, the strategists noted. “A handpicked military possibility may not be able to garner the necessary international support to revive the oil sector even if more sanctions were not in the immediate offing.”
OPEC in fit out would likely adopt a wait-and-see approach to filling the Venezuela supply gap.