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On July 17 we wrote a client note with our view that US energy sanctions on Venezuela are likely to be imposed in the wake of Maduro’s power-grab election on July 30 of a new Constituent Assembly. Nothing since then has discouraged us from that view.
Today the Treasury Department announced individual sanctions on 13 senior Venezuela Government officials. The conventional wisdom in Washington has been that the US would not go the nuclear option of energy sanctions and would instead only impose individual sanctions in response to the election. However, Treasury announced them today in an attempt to deter Maduro.
In our view, these individual sanctions will have no impact on Maduro and only increase the odds that US sanctions are coming if Maduro follows through on his power-grab. Sunday’s election is a major catalyst for energy and sovereign debt investors.
Maduro’s July 30 election of a new Constituent Assembly that would likely dissolve the current opposition-controlled National Assembly and rewrite the constitution is a game-changer for key parties in Venezuela and also the Trump Administration.
We view the July 17 White House statement as Trump’s red line:
“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 sanctions, we believe the “strong and swift economic actions” will 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. In recent days the NSC has been driving a policy announcement of US energy sanctions to be triggered by the Constituent Assembly election on July 30.
The energy sanctions we believe may at least ban imports of Venezuelan crude to the US as well as US exports of light oil and products to Venezuela. US refiners, who oppose the sanctions, will suffer a “significant negative impact” as it would force Gulf refiners to pay higher spot prices for replacement crude and likely cut refinery runs. 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.
According to EIA, US refiners who are top buyers of Venezuelan crude include (in million barrels): CITGO (66.2), Valero (57.5), Phillips 66 (46.2), Chevron (33.8) and PBF (17.5).
PDVSA would be forced to divert exports to the US elsewhere - likely to China and Asia but at a potential discount and with higher transportation costs.
Refiners believe US crude prices could rise $10 per barrel and gasoline prices are likely to rise by 10 cents. As a result, crude sales from the Strategic Petroleum Reserve (SPR) are being discussed as a potential option to provide assistance and mitigate any rise in oil prices.
Venezuela produces about 1.93 million b/d down from 2.5 million b/d in 2014. The US energy sanctions could force a total collapse in Venezuela and for state-owned PDVSA removing Venezuela crude from the market. The result could boost oil prices to $70 per barrel.
We discussed the Venezuela political situation and outlook for energy sanctions Wednesday afternoon in a Energy Policy Blackbook. Click below for the replay and associated slides.
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