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Takeaway: Delivering aid into Venezuela over Maduro’s objections forces military to choose sides. Oil production could go to zero without fast change.

It’s D-Day in Venezuela on Saturday as the opposition government of interim President Juan Guiado, with help from the US government, will attempt to deliver food and medical supplies across the border with Colombia and Brazil.  

It’s not only delivery-day but also decision-day in Venezuela, and all signs point to a confrontation on Saturday.

Maduro has responded by blocking highways and tunnels near border crossings with trucks, and ordered the military to close the entire border with Brazil as of Thursday night.

On Tuesday, President Trump delivered a speech at a Miami rally and warned the Venezuela military that if they continue to support Maduro “you will lose everything.”

Admiral Craig Faller, head of US SOUTHCOM, reinforced Trump’s message in a press conference the next morning with his Colombian counterparts telling the Venezuela military not to interfere with the delivery of aid into the country: “This message is for the Venezuelan military, you will ultimately be responsible for your actions. Do the right thing. Save your people and your country.” Click here to see the video.

D-Day in Venezuela: Delivery Day & Decision Day - Southcom 

It is highly unusual for the head of SOUTHCOM to make such a statement but we think it only underscores that the US is prepared to force the aid into Venezuela and also force the Venezuela military to choose sides between Maduro and the opposition. It's also not a coincidence that the Colombian Defense Chief visited SOUTHCOM headquarters in Miami this past week.

As my Hedgeye colleague General Dan Christman wrote in his February 11  “Take the ‘Under’ Bets on Maduro” note: “there’s a better than even chance, no later than this spring, that one or two Venezuelan army garrisons rebel; at that point, it’s over for Nicolas.”

The Associated Press reported Thursday that over 800,000 Venezuelans have signed up as volunteers to distribute aid inside the country. There have already been reports of confrontations between volunteers making their way to the border and the military at roadblocks.  The military appears to be going through the motions but ultimately relenting and allowing convoys to proceed.

Richard Branson has organized a concert Saturday on the Colombian side of the border with Latin artists expected to attract about 250,000 people. Branson hopes to raise money for aid efforts and embarrass Maduro’s efforts to block the aid.

Vice President Pence will travel to Colombia on Monday to call on Maduro to step down, and Secretary of State Pompeo will be on the Sunday television shows.  

In discussions with senior Trump administration officials on energy issues over the last ten days, we’ve seen a supreme confidence in their view about an imminent change in Venezuela. We are just reading signals but it is certainly more than a gut feeling or optimistic hope that change will occur.  In our experience, this confidence may be the result of US intelligence gathering and possible intercepts of communications between Venezuelan military officials. 

We believe Saturday’s events may result in a catalyst for major change in Venezuela this weekend or in the days that follow.  

For oil markets, political change can’t come soon enough as the longer the standoff continues, the risk increases that oil production in Venezuela will go to zero.  US sanctions on Venezuela oil imports to the US have cut off Maduro’s cash machine and made nearly all global oil transactions with Venezuela radioactive. 

Venezuela oil storage is near full capacity.  In recent days, Chevron has resorted to putting oil into floating storage in order to avoid closing its production and preventing damage to production facilities if shut down.

Moreover, the US ban on diluent to Venezuela has made it extremely difficult for oil to be refined for export.  We’ve heard of reports that PDVSA has resorted to using gasoline as a diluent substitute in order to keep operations going but that only exacerbates the gasoline shortage in the country.

India and China have accepted some exports but there is increasing pressure on them to discontinue the transactions. There are some indications already that both countries have slowed imports from Venezuela.

But soon it will not matter. If Venezuela runs out of storage and diluent, there won’t be any oil available for export and production could go to zero very quickly.  It’s important to note here that even the opposition does not want that to happen because it will cause some permanent damage to production and refining facilities and make it difficult to ramp up the country’s main source of revenue.

Certainly, the humanitarian crisis and starvation in Venezuela is the main reason the opposition and US are pushing for a quick resolution to the standoff.  But even the opposition leaders realize that quick action is needed to prevent production capabilities from being damaged. We think this is why Saturday’s events are so important and could be a major catalyst for change and soon.