Oil Prices Can Withstand Trump’s Venezuela Pressure, Even if Maduro Can’t

An oil pumpjack on Lake Maracaibo in Venezuela. (Gaby Oraa/Bloomberg)

The Trump administration’s decision to blockade sanctioned oil tankers and designate the Maduro government a terrorist organization is a step closer to U.S.-driven regime change in Venezuela. Analysts worry that such a step could be disruptive for oil markets, though in the long run it may help lower oil prices.

President Donald Trump said in a social media post Tuesday Venezuela was “completely surrounded” by a U.S. armada.

Trump will speak to Americans Wednesday evening in an nationwide address.

The president has declined to spell out his goals in Venezuela, but many analysts believe U.S. military pressure is intended to force out President Nicolás Maduro.

The U.S. seized a sanctioned tanker last week and may take more following Trump’s announcement. Oil is a potent weapon against Caracas. By directly interfering with Venezuela’s ability to export oil, the U.S. is targeting what amounts to more than half the revenue of the Maduro government.

“It makes sense to go after the Venezuelan’s regime’s purse strings,” said Christopher Hernandez-Roy, deputy director of the Americas Program and at the Center for Strategic and International Studies, a Washington think tank.

It will also affect average Venezuelans, who rely heavily on government subsidies for food, he said.

Venezuela’s oil sector has severely declined through lack of investment over the past two decades during the Maduro regime and that of his predecessor Hugo Chávez. Once capable of producing about three million barrels a day, Venezuela is at most producing about a third of that.

Venezuela’s oil exports averaged 750,000 barrels a day this year, with most of that heading to China, according to energy consultancy Kpler. The firm estimates there are 18 sanctioned tankers in the Caribbean that have had business with Venezuela in the past year.

“About half of those tankers are loaded with crude and are sitting in Venezuelan waters,” said Matt Smith, an analyst with Kpler.

Some analysts believe the U.S. will attempt to oust Maduro. That could come by the end of March, former CIA analyst Helima Croft, now head of global commodities strategy at RBC, wrote in a recent client note.

The oil market is oversupplied. Blocking Venezuela’s exports probably wouldn’t drive up prices for the long run, though it could cause short-term disruptions. Eventually, a Venezuela without Maduro would likely produce more oil, potentially pushing down prices.

If Maduro is removed, whoever replaces him will ramp up oil production as quickly as possible to support the economy, said John Kilduff, partner with Again Capital.

Venezuela can produce several hundred thousands of barrels more a day if sanctions are removed, said Croft. More would require large investments and political stability.

“I still think markets are underestimating a chaotic change of power scenario,” she said in an email Wednesday.

Trump, in his post, said the Maduro regime has been “using Oil from these stolen Oil Fields to finance themselves, Drug Terrorism, Human Trafficking, Murder, and Kidnapping.”

Under Chávez, Venezuela expropriated oil projects operated by Exxon and ConocoPhillips.

Chevron is the only U.S. company operating in Venezuela. Analysts expect it will continue to export from Venezuela, even with the blockade, since it was given special permission by the U.S. government.

Chevron said Wednesday its Venezuela operations “continue without disruption and in full compliance with laws and regulations applicable to its business, as well as the sanctions frameworks provided for by the U.S. government.”

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