Venezuela sanctions: WTI oil price rise likely to be contained

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Oil prices hit a two-month high on Monday after reports emerged that the Trump administration was considering additional sanctions against Venezuela following Sunday’s vote to elect members of the new Asamblea Nacional Constituyente (National Constituent Assembly). However, the price of US West Texas Intermediate (WTI) crude oil is expected to remain around the psychological $50-a-barrel mark even if new sanctions are introduced against the Maduro regime.

The new restrictions being considered by the White House could potentially target Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned oil and natural gas company. Should the Trump administration decide to bar the oil producer from banking in the U.S. and from trading with U.S. companies, Venezuela’s oil production could quickly collapse. As a result, PDVSA would likely default on its $3.5 billion debt payments coming due in October and November.

Venezuela currently exports some 700,000 barrels of oil to the U.S. each day. In spite of having the largest oil reserves in the world, around half of the country’s oil production is heavy oil. As a result, Venezuela is forced to import light fuels from the U.S. and other countries in order to dilute its highly-viscous oil. Although alternative light-fuel suppliers could easily be found, import costs could prove prohibitive.

Still, oil prices are expected to remain around the $50-a-barrel mark as the Trump administration could sell oil from the Strategic Petroleum Reserve (SPR) in order to contain price increases. OPEC members could also raise their production to compensate for Venezuela’s declining oil output. U.S. shale production, which becomes profitable with oil at about $50 per barrel, would also ramp up to take advantage of higher crude prices.

Two weeks ago, the White House warned President Nicolás Maduro that “strong and swift” economic sanctions would ensue if his administration went ahead with its plans to set up the new assembly. However, although new sanctions on the country’s energy industry would likely precipitate the fall of the Maduro regime, it could also worsen the humanitarian crisis which has engulfed Venezuela. Washington is therefore likely to continue targeting senior Venezuelan officials, at least initially.

The Trump administration already imposed sanctions on Venezuela’s vice president last February, on several members of the Supreme Court two months ago, and on 13 high-ranking officials last Wednesday.


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