August 12, 2019

Part Three: Crisis in Venezuela

Stratas Advisors

This excerpt is from a report that is available to subscribers of Stratas Advisors’ UpstreamStratas Energy Perspective, and Latin America services.

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Part 3. Crisis in Venezuela

In August, the Trump Administration doubled down pressure against the Maduro regime with additional sanctions. This move which was designed to pressure Maduro to begin serious negotiations about power transition with the opposition, turned out to be counter-productive: upon declaration of new sanctions, Maduro pulled out his envoys from talks with the opposition to defy the “serious and brutal aggression” from the US, ending the prospect of reaching a solution through dialogs. Meanwhile, the economy of Venezuela has hit an all-time low with massive GDP contraction and unprecedented hyperinflation. Millions of Venezuelans fled their homes due to severe shortage of food, medicine, and toiletries. 

Source: Stratas Advisors, IMF

The sanctions which banned U.S. companies from conducting business with Venezuelan state oil company PDVSA are taking a deep toll on Venezuela’s oil industry. U.S. refiners which used to purchase around 500,000 b/d of crude from Venezuela quickly turned to other suppliers to avoid penalties. Following the U.S. oil embargo and multiple national power outages, crude exports from Venezuela fell steeply from an average of 1.3 million b/d in 2H18 to 680,000 b/d in March 2019. In recent months, oil exports in Venezuela rebounded slightly and stabilized at around 800,000 b/d. Notably, approximately 400,000 b/d of Venezuela’s crude exports are used for debt payments to China and Russia as well as for crude-for-fuel swaps, leaving less than half to generate cash flow. Therefore, Maduro has turned to gold sales to obtain extra cash.

Currently, except for China, Russia and several other anti-US regimes who still back Maduro, more than 50 countries in the world have recognized Juan Guiado as the interim president and urged for free elections. However, military intervention is not yet on any country’s agenda. As tensions between the two parties continue to escalate amid Maduro’s latest intent to dissolve opposition-run parliament, a peaceful power transition in the near future seems highly unlikely. Assuming Maduro stays in power, sanctions will continue to cripple the country’s oil industry despite support from China and Russia. 

Source: Stratas Advisors

Dwindling oil production from Venezuela coincides with tightening global crude supply with OPEC extending production cuts, Iran export plunging, and U.S. shale facing headwinds. Even assuming Guaido takes control and the U.S. lifts all sanctions, Stratas sees limited prospect for recovery in Venezuela’s oil sector in short term as mismanagement crippled the industry, leaving significant challenges amid slowing oil demand and a challenging global economy.

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