NOTE: This note by Senior Energy Policy Analyst Joe McMonigle was published for Hedgeye subscribers at 3:19 pm ET on January 14.
Nicholas Maduro’s inauguration to a second term as Venezuela’s President last week has prompted the Trump administration to begin considering tougher action to deal with what it considers a growing problem.
Vice President Mike Pence, Secretary of State Mike Pompeo and National Security Advisor John Bolton are all said to be advocating stronger measures to confront Maduro, and all options are the table - including naming Maduro’s regime as a state sponsor of terrorism and potential sanctions on Venezuela crude sales. Internal administration discussions about various options have already begun but a final decision by Trump or timing is unclear.
Pence called Maduro’s inauguration a “sham.” Bolton issued a statement last Friday that praised “the courageous decision of the National assembly President Juan Guaido, to invoke protections under Venezuela’s constitution and declare that Maduro does not legitimately hold the country’s presidency.” Pompeo called Guaido to offer support and said in a statement over the weekend that the administration “will continue to use the full weight of U.S. economic and diplomatic power to press for the restoration of democracy to Venezuela.”
The administration’s Venezuela hawks also have a friend in the oval office. Trump has publicly said in a White House press event and in private discussions with staff that military action is also an option.
As we have reported in previous client notes, Trump has several times asked his national security staff about potential military action in Venezuela comparing it to military intervention taken by President George H.W. Bush in Panama with former President Manuel Noriega.
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.
While we believed a military option was unlikely at the time, a dispute over oil may change this course. 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.
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.
Maduro referenced the confrontation with ExxonMobil’s ships last week praising 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 believer it could easily provoke President Trump to push the military option. We think his new Venezuela hawks will agree with him.
Likewise, the administration has avoided energy sanctions to date out of concern for oil prices in the wake of Iran sanctions and the potential impact on US refiners on the Gulf coast dependent on Venezuela heavy crude. In our view, naming the Maduro regime as a state sponsor of terrorism would in effect also result in oil sanctions.
But growing concerns in the Administration are beginning to outweigh these economic concerns. We think Venezuela may have just moved from the back burner to the front of administration priorities.
Venezuela was a risk to oil markets in 2018 and we believe that risk is rising higher in 2019. 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. Venezuela production currently stands at about 1.1 million b/d but is expected further deteriorate in 2019 as the US Energy Information Administration expects production to dip below 1 million b/d and estimates production around 700,000 b/d in 2020.