Venezuela’s political chaos can spark oil price increase

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Deepening turmoil in Venezuela could fuel a rise in oil prices, a feat the Organisation of the Petroleum Exporting Countries (OPEC) has been striving to achieve through oil production cuts.

According to MarketWatch report, the South American nation, home to the world’s largest oil reserves, voted to give President Nicolás Maduro’s government powers to redraft the constitution, sparking clashes between protesters and state security forces. The opposition charges the vote could mark the end of democracy in Venezuela.

What the chaos portends for the oil industry, the report said: “The “possibility of chaos” in the country is the “only true element that would change the dynamic for crude,” Tom Kloza, global head of energy analysis at Oil Price Information Service, said.

“If “Vendemonium,” as he dubbed it, comes to pass, it could lift West Texas Intermediate crude-oil prices up from their current trading range of roughly $42 to $53 a barrel, said Kloza.

WTI crude, the U.S. benchmark, traded just below $50 a barrel last week, contributing to a 8.7 per cent weekly gain fueled in part by data showing a fourth-straight weekly decline in U.S. crude inventories, as well as pledges by some OPEC members to curb exports.

But WTI crude and Brent, the global benchmark, still trade about eight per centlower year to date, even as a production-cut agreement by OPEC members and other major non-cartel nations such as Russia, that began at the start of the year, has seen historically high compliance and has been extended through March of next year.

“For oil, there is “ongoing concern about stability as the opposition gains strength and the chance that the U.S. will ratchet up pressure by halting imports,” James Williams, energy economist at WTRG Economics told MarketWatch. Venezuela is among the top suppliers of crude to the U.S., though its production has declined since last year on the heels of civil unrest.

“Venezuela’s oil output has dropped over the last year. A long strike by Venezuelan national oil firm’s workers was to blame for the huge drop in 2003. The chaos intensified last week with the U.S. State Department ordering family members of U.S. embassy employees in Caracas to leave the country.

“If we are removing diplomats, it is certainly an indicator of the intent to embargo oil from Venezuela,” said Williams. The U.S. had placed sanctions last week on 13 high-ranking Venezuelan officials for alleged corruption, among other offences, according to The Wall Street Journal.

“If Maduro installs puppeteers who more or less make up new constitutional rules, it really puts an already beleaguered (U.S. President Donald Trump) administration in a tough spot,” said Kloza.

Still, if the Trump administration “tries to put financial handcuffs” on Venezuela’s state-owned Petróleos de Venezuela, SA, (PdVSA), “it might provide the catalyst for the oil market and for consumer gasoline prices to rise appreciably,” Kloza said.

And the impact could be far reaching, with “financial handcuffs or penalties” potentially signaling “incredible turbulence for Citgo,” he said.

Citgo Petroleum Corporation, the Venezuela-owned American refiner, employs thousands of U.S. citizens and is “instrumental in ensuring adequate supply of gasoline, diesel fuel and jet fuel,” said Kloza.

In Russia, integrated oil firm Rosneft, which is majority owned by the country’s government,” might ultimately gain a large ownership stake in Citgo should its parent company and country default,” he said.

Rosneft received 49.9 per cent of the equity in PdVSA unit Citgo late last year as collateral for a $1.5 billion loan to PdVSA. Reuters recently reported that Rosneft is in talks with PdVSA for a fuel-supply deal and stakes in Venezuela-based oil and natural-gas fields.

For now, traders can just “hope that Trump only target individuals, not oil” when it comes to sanctions, said Williams.He also warned that the market could see a reaction from the U.S. that is “more complex than a simple halt in imports.

Meanwhile, Kloza said that if Venezuelan crude continues to flow, there is “limited upside” for the oil market “despite the large inventory draws that have happened and will continue to happen for some time.”

“Without ‘Vendemonium,’ we’re destined to remain in a low-price oil environment into 2018 or later,” said Kloza

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