US has been ramping up pressure on Cuba, banks

Measures would cause Venezuelan output to fall to 500,000 b/d by Q4

New sanctions would target over 430,000 b/d in exports to India

Washington — Trump administration officials, frustrated that nearly three months of sanctions on PDVSA have yet to force Venezuelan President Nicolas Maduro from power, are now giving serious consideration to secondary sanctions, which are expected to cause the OPEC nation's oil output to fall to 500,000 b/d before the end of the year, sources said.

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Those secondary sanctions, which would explicitly prohibit trade between PDVSA and non-US companies, would be aimed at halting crude flows to India, which remains Venezuela's primary cash export market, and pressuring China and Russia, whose support for Maduro hinges on billions of dollars in debt.

"Secondary sanctions would definitely have an impact," said Andrew Stanley, an associate fellow with the Center for Strategic & International Studies' energy and national security program.

Sources said secondary sanctions will likely not be imposed until after April 28, when prohibitions on trade in dollars with PDVSA are set to take effect. If imposed, secondary sanctions would cause Venezuelan crude output to fall to 500,000 b/d by the fourth quarter of 2019 and to 375,000 b/d by the end of 2020, according to S&P Global Platts Analytics. Venezuela's oil output in March averaged 740,000 b/d, a 16-year low, due to power outages and sanctions, according to the latest Platts OPEC survey.

India's Reliance and Nayara are the main importers of Venezuelan crude, and responsible for the uptick in crude exports from the South American nation to India in March, Stanley said.

Venezuelan crude exports to India, which averaged just over 349,800 b/d in January, climbed above 357,600 b/d in February and over 431,300 b/d in March, according to cFlow, Platts' trade flow software.

Reliance and Nayara are private companies with massive exposure to the US financial system and would certainly stop importing Venezuelan crude if secondary sanctions were imposed, Stanley said.

IRAN, PRICE COMPLICATIONS

The administration's path forward on secondary sanctions is complicated by the upcoming expiration of waivers, known as significant reduction exemptions, from US sanctions on Iranian crude flows.

"On secondary sanctions, I don't think the administration will be hesitant to go that route but, for now, I think they are exerting some behind-the-scenes [pressure in] negotiations with both China and India on that front," said Joe McMoningle, an analyst with Hedgeye Risk Management.

McMonigle said the administration may tie an extension of the waivers, which would allow India and China to continue to import a set amount of Iranian crude with US sanctions in place, to an agreement to reduce Venezuelan crude imports.

"Certainly, Iran waivers provides some leverage to the administration," McMonigle said. "I see China and India further reducing imports, but in China's case the oil is going to pay past loans to Maduro and not generating any new cash."

In addition, secondary sanctions are complicated by President Donald Trump's concerns that more stringent oil sanctions could further increase oil and domestic gasoline prices.

"Secondary sanctions would be a major step up in terms of the impact on revenue streams, but it would also majorly impact the crude market. This may tie the administration's hands to move towards full secondary sanctions because of the current state of the oil market," Stanley said.

Front-month ICE Brent futures were trading at about $71.70/b early Thursday afternoon, up about $12/b from late January, when US sanctions on PDVSA were unveiled.

Over the past two weeks, the US has ramped up pressure on Cuba, which it has accused of propping up the Maduro regime, by sanctioning vessels and companies it argues are facilitating crude and refined product trade between the two countries. On Wednesday, it sanctioned Venezuela's central bank.

"Each day that goes by, we are further tightening that set of restrictions, not only the political restrictions but economic restrictions as well," US Secretary of State Michael Pompeo said in an April 14 interview with EFE. "I think every minute, every hour, is one step closer to Maduro leaving."

Francisco Monaldi, the Latin American energy policy fellow at Rice University's Baker Institute for Public Policy, said that, despite the fact that Maduro remains in power, the US sanctions have been effective.

"The situation in Venezuela is getting worse and worse and it's only going to continue to get worse," he said.

Still, Monaldi said, there are limits to sanctions.

"Sanctions have never fully caused a government to give up its grip on power," he said.

-- Brian Scheid, brian.scheid@spglobal.com

-- Eklavya Gupte, eklavya.gupte@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com