How Regime Change In Venezuela Could Affect The Global Oil Market

Last week the U.S. recognized the opposition in Venezuela as the rightful ruler of the country. Here’s how that might impact the global oil industry.

Two weeks ago a colleague walked into my office and said “I have it on good authority that the Trump Administration is about to take action toward pushing regime change in Venezuela this year.”

I wasn’t sure whether to treat this as highly credible, but then a week later the same person came into my office and said “It has started. Turn on the news.”

I learned that the Trump Administration had announced it recognizes Venezuelan National Assembly leader Juan Guaido as Venezuela’s rightful president. Guaido had declared himself the country’s interim president earlier in the day.

In response to the announcement by the Trump Administration, Venezuelan President Nicolas Maduro severed relations with the U.S. and gave U.S. diplomatic personnel 72 hours to vacate the country.

I immediately checked oil prices, expecting that they would be headed higher. But the early response was mild to say the least. It seems like the markets are discounting the prospects of regime change in Venezuela on the global oil markets.

How might this play out? The status quo for Venezuela’s oil industry has been sharply declining production in recent years as the country as the country has failed to adequately invest in its oil industry. Oil exports from Venezuela have plummeted. RBC Capital Markets has forecast another drop of 300,000 to 500,00 barrels a day from Venezuela in 2019. Further, the Trump Administration is also threatening sanctions on Venezuela’s oil.

Regime change could turn around Venezuela’s oil industry, but it would depend upon how that regime change is accomplished. If it’s violent, Venezuela’s oil industry could grind to a halt. But even in the most optimistic (but unlikely) case that Maduro steps down, it will take years to rebuild the country’s oil industry. Either case will put additional strain on global oil markets in the short term, while a peaceful regime change should enable Venezuela to once again start to substantially grow its oil exports in three to five years.

This development isn’t the most important situation that can impact oil prices in 2019, but it’s in the Top 5. More significant factors that will impact oil prices in 2019 are OPEC’s production cuts, the expiration (or not) of waivers on Iran’s oil exports, and the continued growth of U.S. shale oil production.

Venezuela continues to produce about a million barrels per day, but if the RBC Capital Markets projection is right, the country’s oil exports could dry up to zero this year. OPEC and U.S. shale growth may be able to make up the difference, but it will push Venezuela further into economic ruin.

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