Editor's Note: This is a complimentary research note from Hedgeye Energy Policy analyst Joe McMonigle. Email sales@hedgeye.com for access to his institutional research.
As Venezuela held its inauguration of Nicolas Maduro for a second six-year term as President this week, the Trump Administration, as well as 17 Latin American nations, called the Maduro regime as illegitimate. Vice President Pence called the inauguration a “sham,” and Peru and Paraguay recalled their Ambassadors on Thursday.
We are also keeping a close eye on Venezuela and believe 2019 could see some catalysts for turbulence for oil markets, and more importantly, even potential political changes.
With declining oil production, an economy in ruins and unprecedented humanitarian crisis, it’s hard to see the status quo continuing in Venezuela for another year.
But separately, we think a dispute over oil could lead to the biggest threat to the Maduro regime. In December, Maduro dispatched Venezuelan navy warships to intercept seismic research vessels hired by ExxonMobil in the waters off of the Guyana coast that Venezuela claims as its territory.
The recent incident the potential to spark a major disruption to oil markets with even greater implications in the region.
In December ExxonMobil increased its estimate of recoverable oil in the Stabroek block 120 miles offshore Guyana to 5 billion barrels from the previous 4 billion barrels. ExxonMobil was granted a license from Guyana and expects commercial production to begin in 2020. This is a major new project for ExxonMobil on which the company has pegged future production and reserves. See ExxonMobil’s recent news release and its Guyana project site. Another US E&P company, Hess, is also involved in the Guyana Stabroek block.
Maduro referenced the confrontation with ExxonMobil’s ships in his pre-inauguration comments and praised the Venezuelan Navy for preventing that “one day we would get there and they would be taking oil.”
With production slated to begin in 2020, it’s likely that we will see repeated efforts by the Venezuelan navy. If one of these incidents goes too far, we believe it could easily provoke President Trump to take military action.
As we have previously reported in client notes last year, Trump has openly talked about taking military action in Venezuela comparing it to military intervention taken by President George H.W. Bush in Panama with former President Manuel Noriega. He has commented in a White House press conference that military action is an option in dealing with Maduro.
In the past, Trump has been talked back from a military option in Venezuela by Generals Mattis, McMaster and Kelly - but all of them have left the administration in 2019. Moreover, there are now more Venezuela hawks in the administration under Secretary of State Mike Pompeo and National Security Advisor John Bolton.
The Guyana-Venezuela border dispute is over a century old and Maduro may use it to his advantage to garner some domestic support. But Trump is unlikely to care about these details, especially as commercial production in the Stabroek block is set to begin the same year as Trump’s reelection in 2020.
Venezuela has already had a major impact on oil markets as production had declined by nearly 500,000 barrels per day (b/d) from a year ago and lost more than 1 million b/d over the last three years. Production currently stands at about 1.1 million b/d but is expected further deteriorate as the US Energy Information Administration expects production to dip below 1 million b/d in 2019 and estimates production around 700,000 b/d in 2020.
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**Email sales@hedgeye.com for access to Energy Policy analyst Joe McMonigle's institutional research.
