On July 30, Venezuela’s government moved forward with an internationally-criticized special assembly that will rewrite the constitution, a move widely seen as an attempt to neuter the opposition and consolidate power. As many as 12 people died in street protests and clashes with police. The vote was called a “sham” and a “step toward dictatorship” by the U.S., and it has deepened an already acute political and economic crisis for the South American nation.
The U.S. had threatened to levy penalties against the Venezuelan government in the lead up to the vote, and last week it slapped sanctions on 13 top Venezuelan officials, a move seen as a more mild option since it did not target Venezuela’s oil industry.
But after proceeding with the vote, the U.S. has decided to step up the pressure. The Trump administration pushed off potentially catastrophic measures targeting Venezuela’s oil sector, but only for now. The U.S. imports about 800,000 barrels per day (bpd) of Venezuelan heavy crude; cutting that off could potentially lead to full-on collapse in Venezuela and would likely also deepen the already terrible humanitarian crisis.
Venezuela produces a little under 2 mb/d, but aside from the exports to the U.S., the bulk of the remaining production is earmarked for a handful of countries for little cash or below-market prices. Venezuela has to send large volumes to China as repayment for past loans, and it also sells oil on the cheap to Cuba and other Caribbean countries as part of the increasingly irrelevant Petrocaribe program.
In other words, selling oil to the U.S. is where the Venezuelan government makes most of its money. So, putting an embargo on Venezuelan oil into the U.S. could push the country into default. The U.S. Treasury Department has considered this option, but so far it has opted not to take this route Related: Goldman: $50 Oil More Profitable Than $100 Oil
Another option under consideration would have a similar effect. The Trump administration, the WSJ reports, has been pressured by some members of Congress to bar the use of the U.S. financial system and U.S. dollars by Venezuela’s state-owned oil company PDVSA. The move would be similar to what the U.S. and the international community did to pressure Iran to negotiate over its nuclear program, a campaign that led to a severe decline in Iranian oil exports. But this would also push Venezuela over the brink.
Either of these measures would also inflict damage on U.S. refiners that use heavy oil from Venezuela, and as such, it has received pushback from companies like Valero Energy, Chevron and Phillips 66, according to the WSJ. The American Fuel & Petrochemical Manufacturers sent a letter to the Trump administration warning of higher prices if sanctions targeted Venezuelan oil imports. “Sanctions on Venezuela’s energy sector will likely harm U.S. businesses and consumers, while failing to address the very real issues in Venezuela,” the trade group wrote.
A less severe option would be to stop the sale of U.S. light oil and diluents to Venezuela. PDVSA needs lighter forms of oil to blend with its heavy crude, and has averaged 87,000 bpd of refined product imports from the U.S. this year. Reuters estimates that half of that has been naptha, which PDVSA uses to blend with its heavier oil.
Blocking U.S. refined product sales to Venezuela would force PDVSA to turn elsewhere on the international market, where prices would be higher. With limited cash, PDVSA probably would not be able to import in the same volume, which, in turn, would likely accelerate the decline of Venezuela’s oil production, according to Francisco Monaldi of Rice University.
“Even limited new US-imposed sanctions or discussions of broader sanctions could be a catalyst for Venezuela defaulting on its upcoming debt payments,” Barclays said in a note to clients.
Due to fears of pushing Venezuela over the edge and exacerbating the humanitarian crisis, the Trump administration took a more measured approach on July 31, declining to sanction Venezuela’s oil sector. Instead the U.S. Treasury department announced sanctions specifically targeting President Nicolas Maduro, freezing any assets under U.S. jurisdiction. For now, the effect is unclear, although any reasonable observer would assume that the move won’t do a bit to alter Maduro’s behavior.
At the same time, U.S. officials have said that the more severe punishment of oil-related sanctions are still on the table. Related: Russian Energy Minister: No Additional Output Cuts Are Needed
Of course, as has historically been the case, U.S. action in Latin America tends to play into the hands of strongmen, and U.S. sanctions could provide Venezuelan President Nicolas Maduro with a convenient enemy upon which he can lay blame. But while that could bolster Maduro’s political standing, albeit only modestly, it won’t solve his acute financial challenges.
While the U.S. could accelerate this crisis, a major default could be coming one way or another, even without a push from Washington.
Helima Croft of RBC said that Venezuela could become the first major oil producer to “fully fail.” She argues that oil prices could shoot up to $70-$80 per barrel within months, as the prospect of a PDVSA default looks increasingly likely. "The national oil company owes $3.5 billion due in October-November. They are unlikely to make those payments," Croft told CNBC. "Venezuela has less than $10 billion now in reserves, and then have $5 billion in debt payments coming due this year. ... We really do think a disorderly default is on the cards for Venezuela."
By Nick Cunningham of Oilprice.com
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