Report outlines impact of Venezuela turmoil on global oil market

By IHS Markit | February 04, 2019

A new report by IHS Markit on Venezuela examines the impact of U.S. sanctions on the country’s oil industry as well as the implications for the global oil market.  

Key implications

Control of Venezuela and its oil industry are at stake in the face-off between the head of the Venezuelan National Assembly, Juan Guaido—backed by a coalition of the United States, Brazil, Canada, Colombia, and nine other Latin American countries—and the present occupant of the Miraflores presidential palace, Nicolas Maduro, supported most notably by Russia and Cuba. No one knows when the struggle will be resolved, but the longer it endures, the greater the likelihood of an acceleration in the already steep decline in Venezuela’s 1.1 MMb/d of crude oil production. A determining factor will be Venezuela’s military—whether it sticks with Maduro or determines that a deal with the opposition holds better prospects than collapse under Maduro.

-US sanctions implemented on January 28 will reduce US imports of Venezuelan crude oil to zero from recent levels of about 500,000 to 600,000 b/d. Also, the sanctions will cut off diluent supply from the United States, which is blended with a portion of extra-heavy crude oil and made into Venezuela’s diluted crude oil (DCO) grade.

-Sanctions combined with limited fungibility of Venezuela’s extra-heavy crude oil and the burden of paying loans with oil shipments to China and Russia point to a sharper decline in overall Venezuelan oil revenue and exports than had been expected before the January 28sanctions.

-Maduro’s previous presidential term expired on January 10, 2019. The 2018 presidential election that Maduro claims gave him a fresh, six-year term was unconstitutional as it was not called nor organized by the appropriate authority as spelled out in Venezuela’s constitution. In this case, the presidency is currently vacant, and the head of the National Assembly assumes the office until legitimate elections install a new president.

-Global power politics, domestic chaos, and insecurity could lead to a range of outcomes. A lengthy and turbulent face-off between the opposing camps could lead to an even more severe breakdown of the oil industry in Venezuela. A reversal of Venezuela’s declining output (it fell 500,000 b/d from January 2018 to December 2018) will require money, expertise, equipment, security—and time. The 20-year brain drain from the oil industry cannot be rapidly overcome.

-The global oil market is currently well supplied with OECD crude oil stocks near the five-year average. So, for now, this is not a global supply shock, although there is a sharper impact on the heavy crude oil market.