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

Editor's Note: Below is an abridged research note by Hedgeye Energy Policy analyst Joe McMonigle. If you would like access to his institutional research email sales@hedgeye.com.

D-Day in Venezuela: Delivery Day & Decision Day - z va

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 from 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. 

President Trump warned the Venezuela military on Tuesday 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 Wednesday 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.” 

The highly unusual statement from the SOUTHCOM chief underscores that the US is prepared to force the aid into Venezuela but also force the Venezuela military to choose sides between Maduro and the opposition. 

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.” 

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.  

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 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 turned to putting oil into floating storage in order to avoid closing its production and preventing damage to production facilities. 

Moreover, the US ban on diluent sales 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 extreme gasoline shortage in the country. 

While India and China have accepted some exports, there is increasing pressure on them to discontinue the transactions. 

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 in Venezuela is the main reason that the opposition and US are pushing for an urgent resolution to the standoff.  But even 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.