• Bull.




Takeaway: Treasury sanctions on individuals announced Wednesday only raise the odds that US energy sanctions are next.

Editor's Note: Below is an excerpt from an institutional research note published by Hedgeye Senior Energy Policy analyst Joseph McMonigle. To read this entire note or access his Black Book conference call on this Energy market catalyst email sales@hedgeye.com.

Trump’s Red Line: Venezuela Energy Sanctions - Venezuela cartoon

The US Treasury Department on Wednesday announced individual sanctions on 13 senior Venezuela Government officials as the Trump Administration ratchets up the pressure on the Maduro regime. 

We wrote a note for Hedgeye clients on July 17 with our forecast that US energy sanctions would be imposed if Maduro moves forward with his July 30 power-grab election. 

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 these individual sanctions Wednesday in advance of the election 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.

We believe energy sanctions 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. 

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.