How The Venezuela Political Crisis Impacts The Oil Market

Oil prices remained mostly flat Thursday morning as investors try to figure out how political turmoil in Venezuela could impact the oil market.

What Happened

On Wednesday, U.S. President Donald Trump said the U.S. officially recognizes opposition leader Juan Guaido as the interim president of Venezuela after Guaido proclaimed himself president earlier in the day. As a result, socialist leader Nicolas Maduro, who has been in power in Venezuela since 2013, broke relations with the U.S. and gave American diplomats 72 hours to leave the country.

Why It’s Important

The political chaos in Venezuela could have a major impact on the global oil market. OPEC member Venezuela is one of the world’s largest oil producing countries, but its output has decreased from 2.4 million barrels per day in 2016 to a 70-year low of around 1.2 million bpd as the country has slipped into an economic crisis under Maduro’s leadership.

After Maduro broke off relations with the U.S., the U.S. threatened to impose sanctions on Venezuelan oil. U.S. sanctions on Iran are already pressuring global supply.

“For now, it's not being fully priced in, but I think this does provide a new upside risk for the market,” Petromatrix strategist Olivier Jakob said Thursday.

But while sanctions and instability in Venezuela could drive oil prices higher in the near term, a long-term shift to a more stable leadership regime in Venezuela could ultimately result in a return to historically normalized crude oil output levels from Venezuela.

Potentially bullish near-term news for oil investors was also offset Thursday by news from U.S. Secretary of Commerce Wilbur Ross that the U.S. and China are still “miles and miles” away from a trade deal. China is the world’s second-largest oil-consuming nation behind only the U.S.

What’s Next

Oil investors will be watching to see whether or not Juan Guaido can consolidate his power in Venezuela and potentially settle the political environment there. In the meantime, any official announcement of U.S. oil sanctions on Venezuela would likely be a bullish near-term catalyst for oil prices.

The United States Oil Fund LP USO traded around $11.10 at time of publication, while WTI Crude traded at $52.82.

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