Power struggle could have major impact as prices rise, analysts say, with few clear indications of what’s to come

The escalating power struggle in Venezuela between the sitting president, Nicolás Maduro, and the opposition party, led by Juan Guaidó, is rattling the oil markets.

Prices for the global benchmark Brent crude oil and the US West Texas Intermediate rose slightly on Thursday, at $61 a barrel and $53 a barrel, respectively, but oil-market participants are nervously watching the outcome of the tug-of-war.

“This Venezuelan situation could potentially turn into something big,” said Daniel Pavilonis, senior market strategist with RJO Futures.

Tensions ratcheted up after the Trump administration recognized Guaidó as interim president on Wednesday and called Maduro’s government illegitimate.

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Alejandro Arreaza, analyst at Barclays, said in a Thursday research note a binary outcome was possible. “Either there’s a short-term exit by Maduro, or if he manages to ride this crisis out and keep power, he could stay for a prolonged period. However, Maduro’s margin for maneuver to hold on to power seems extremely tight at this point, in our view. Considering the escalation of tensions with the US, the next few days could prove critical,” he said.

Compounding the situation for the oil market was a tweet on Wednesday by the Reuters Venezuela news service saying that the Trump administration warned US energy companies it could impose sanctions on Venezuelan oil exports.

Venezuelan oil production has been circling the drain for several years as the South American country’s economy collapses, but several factors mean it can still influence global oil markets, and the US. Venezuela still produces about 1.5m barrels a day, according to Barclays, citing data from the Organization of Petroleum Exporting Countries (Opec), of which nearly 1.2m are exported. Venezuela is an Opec member.

The US takes in much of that oil. In October 2018 alone, the latest data available from the Department of Energy’s energy information administration, the US imported roughly 17.7m barrels of crude oil and petroleum products from Venezuela, much of that going to refineries in the Gulf coast to be made into diesel fuel and other high-margin products.

Nor can the US replace that with plentiful domestic shale-oil. Venezuela produces heavy crude, whereas US shale-oil is light crude, so it can’t be swapped out one-for-one. The same goes for Saudi Arabia, which often plugs the supply holes for delinquent Opec members.

Daniel Ghali, commodity strategist at TD Securities, said one potential substitute for Venezuelan crude oil was Canadian oil, which is of a similar consistency. He said US weekly inventory data showed a surge in Canadian crude imports of 500,000 barrels a day, although there are limits on Canada’s export capacity.

“I’d say that’s a welcome sign, given the context of Venezuela. It would be one avenue of substitution without paying significantly more money out of pocket,” he said.

Since this latest Venezuelan situation escalated quickly, energy analysts say they are waiting to see what develops, as there’s not much clear information available.

Ghali said oil prices received a little support based on ideas that continued internal struggles in Venezuela mean even less money is being spent on the country’s already crumbling oil infrastructure.

“The market is likely to shrug this off because in the near term, we really don’t have any information to put a bet one way or the other,” he said.

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Pavilonis pointed out that it was not just the Venezuelan situation that had oil markets worried. There was also the continuing government shutdown, concerns over trade with China, the shaky stock market, and fresh news that the European Union may have a way to bypass US sanctions on Iran and access its oil.

In the longer term, the situation in Venezuela could have significant implications, especially if there is a new regime in place, but again, Ghali says, no one knows how that will play out.

“It does seem to me that the best bet is that there will be more turbulence ahead and that this situation probably isn’t going to resolve itself very quickly,” he said.