Editor's Note: Below is an excerpt from a research note published on 7/17 by Hedgeye Senior Energy Policy analyst Joseph McMonigle. To read this entire note email sales@hedgeye.com.
Source: Jonathan Alvarez C
Pledging “strong and swift economic actions” in response to Maduro’s July 30 Constituent Assembly election. Potential big impacts on Citgo, US oil companies & refiners.
On Monday night the White House issued a stark warning to President Maduro of Venezuela promising “strong and swift economic actions” if he holds the July 30 election of a new Constituent Assembly that would likely dissolve the current National Assembly and rewrite the constitution.
Nearly 7.6 million people protested on Sunday in the streets of Caracas against Maduro’s move to establish the Constituent Assembly and held an unofficial vote that opposed the plan.
The White House released the following statement from President Trump:
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“The United States will not stand by as Venezuela crumbles. If the Maduro regime imposes its Constituent Assembly on July 30, the United States will take strong and swift economic actions. The United States once again calls for free and fair elections and stands with the people of Venezuela in their quest to restore their country to a full and prosperous democracy.” |
While the White House statement does not mention energy, we believe the “strong and swift economic actions” may include US energy sanctions.
The US National Security Council (NSC) has been developing various policy options including US energy sanctions against Venezuela and state-owned energy company PDVSA for several months in case it would be needed.
We believe the threat of US energy sanctions will soon be used to force Maduro to reconsider and drop the July 30 election plan for a new assembly.
However, we note that there is dissent within the Administration regarding energy sanctions with the State Department and DOE siding against the plan. If sanctions get imposed, the State Department is concerned about a severe economic collapse and humanitarian crisis while DOE is concerned about the potential big impact on gasoline markets. All views have been presented to the President who will make the final decision.
It is unclear what form the energy sanctions will take but we believe new sanctions may at least ban imports of Venezuelan crude to the US. The move will likely cripple PDVSA-owned CITGO, which would be forced to buy higher-priced crude on the spot market for its refineries.
But US refiners, who oppose the sanctions, would also be impacted as it would force Gulf refiners to find replacements for heavier grades of Venezuelan crude. According to the Energy Information Administration (EIA), the US in 2016 imported 761,000 barrels a day (b/d) of Venezuelan crude - which is nearly 40 percent of total Venezuela production.
PDVSA would try to divert exports to the US elsewhere - likely to China and Asia but at a potential discount and with higher transportation costs.
Strategic Petroleum Reserve (SPR) crude sales are being discussed as a potential option to provide assistance to US refiners impacted by any sanctions. Refiners have mixed views on SPR crude sales due to the crude grades available. However, additional SPR crude sales would likely impact oil markets by putting additional crude on the global market and causing further draws in weekly EIA US crude inventory data.
Venezuela produces about 1.93 million b/d down from 2.5 million b/d in 2014.
