Venezuelan oil prices reached US$86/b, their highest value in five years and US$7 more than Brent crude on the back of political tensions caused by Wednesday’s self-appointment of Juan Guaidó as interim President of the Caribbean country and Nicolas Maduro’s refusal to concede power. One of the causes of this price increase is the possibility that Venezuela will be forced to reduce its production due to the political crisis.
The decision was made based on the premise that the results of the May 2018 elections were fraudulent and therefore, there is no legitimate President at this time. According to the Venezuelan constitution, in this event, the President of the National Assembly – in this event Guaidó – assumes the position of interim President until new elections are called. “In its role as the only legitimate branch of government duly elected by the Venezuelan people, the National Assembly invoked the country’s constitution to declare Nicolas Maduro illegitimate, and the office of the presidency therefore vacant,” said President Trump in a statement as the White House publicly backed Guaidó.
The US had already implemented economic sanctions for the export of some of the products produced by Venezuela and the satellite countries to the Maduro regime, although these have so far not been applied to crude, since almost half of the Venezuelan crude is exported to the US.
A sanction on the sale of Venezuelan oil would have very significant economic and geopolitical consequences for the region. According to Forbes, one of the most worrisome aspects is the huge debt that Venezuela has to Russia and China. If Venezuela stops selling oil to the US, its revenues, entirely allocated to the payment of that debt, would be reduced, which could lead to default, and to Moscow and Beijing blocking Venezuela’s oil assets.
A blockade of Venezuelan oil would also have an important impact in the states of Texas and Louisiana, where refineries specializing in heavy oil processing of Venezuelan crude are installed. If Donald Trump imposes the sanctions that the White House is contemplating, these refineries would be left without work. Mexico, Colombia and Ecuador are some of the candidate producing countries to replace this gap, although the situation is much more complicated than it may seem. According to Bloomberg, Mexico has already increased its shipments to the southern states of the US, while Colombia and Ecuador tend to send their crude to West Coast refineries.
The White House quickly supported the self-proclaimed new President through a statement posted on Twitter, a decision that was soon supported by countries such as Argentina, Chile, Costa Rica, Peru, Colombia, Canada, Brazil, Ecuador and Paraguay. The EU’s diplomatic chief Federica Mogherini issued a statement calling for “the beginning of an immediate political process leading to free and credible elections” in the country, while both Mexico and Uruguay maintaining a position of non-intervention, urged Venezuelan society “to find a peaceful solution to their differences.”
The political instability experienced by Venezuela, one of the main oil producers in the world and a member of OPEC, has barely had an impact on any reference oils other than Mars Blend. On Wednesday, the day the crisis began, Brent fell 0.6 percent, while today it has shown stability; meanwhile Texas WTI increased on Wednesday 0.1 percent and today its price has remained relatively unchanged.