NICOLÁS Maduro Moros’s Venezuela is in a mess. The romance that many had with the country while Hugo Chávez was at the helm in Caracas seems to have evaporated.

Despite question marks all around about the Chavez economic model, many felt then that in this unipolar world, he at least had the guts to stand up to the Yankee imperialism.

That euphoria is now gone. With a vote due in the country today (Sunday), that could result in the concentration of power in the hands of the incumbent President Maduro, the troubled

nation seems destined to more chaos and turbulence. And bestowed with the largest oil reserves in the world, this carries immense implications to the world of oil.

Venezuela could become the first sovereign oil producer to ‘fully fail’ as a state if the vote goes through, some are now insisting. The Venezuelan economy is almost completely dependent on the oil industry that contributes 95 per cent of its export earnings. The recent crash in oil prices has already sent the economy into a tailspin. Now, the International Monetary Fund expects Venezuela’s inflation rate to rise by a crippling 720pc this year.

US is a major buyer of heavy crude from Venezuela. Almost 10pc of American imports are from the country. Washington imported 673,000 barrels per day (bpd) from Caracas in June, as compared to 741,000 bpd on an average last year.

In the wake of the crisis, the US is reportedly considering a ban on crude imports from Venezuelan. The sanctions packaged being considered in Washington could also mean freezing the US assets of Venezuelan oil and other officials and preventing American entities from doing business with them. Washington has already imposed economic sanctions on 13 current and former Venezuelan officials and more could be coming. The US on Thursday also ordered relatives of American diplomats to leave the Venezuelan capital ahead of Sunday’s vote.

Maduro branded the US sanctions ‘illegal, insolent and unprecedented’.

No doubt, a ban on Venezuelan blends would be damaging to the South American country. But it would also affect the US refiners, especially on the Gulf coast and put a strain on the US heavy crude market. Already in order to reduce the inventory levels in the country, Saudi Arabia is also tightening export of medium sour oil to the US In the most recent week, the EIA said the US imports of Saudi crude fell to 524,000 bpd, a seven-year low.

S&P Global Platts thus argues that a ban on Venezuelan crude could strain the supply of heavier types of crude for US refiners. For example, Phillips 66’ Sweeny Refinery in Old Ocean, Texas imported over 46 million barrels of Venezuelan oil last year, the most out of any other refinery. Also, the Citgo refinery at Lake Charles, Louisiana, imported 44 million barrels of crude from Venezuela in 2016.

The US refining has thus put a premium on medium-to-heavier types of crude. Other sources might not be able to replace the lost supply. As such, Venezuelan supplies are exceptionally important to some US Gulf Coast refiners in today’s market.

The industry is, therefore, urging the White House to avoid oil-focused sanctions on Caracas. US oil and petrochemicals makers have formally warned President Donald Trump that proposed oil sanctions against Venezuela could hurt domestic companies and consumers.

In a letter to the president, the head of the American Fuel and Petrochemical Manufacturers, Chet Thompson, underlined that some 20 US refineries are supplied with heavy Venezuelan crude and that there were practically no other sources of supply for this type of oil. So a suspension of purchases from Venezuela would destabilise the world market for hydrocarbons, he added.

But the deepening crisis could also do to the oil markets – what Opec couldn’t, writes Myra P Saefong. It could fuel a rise in oil prices.

The ‘possibility of chaos’ in the country is the ‘only true element that would change the dynamic for crude,’ Tom Kloza, global head of energy analysis at Oil Price Information Service, told MarketWatch. If ‘Vendemonium,’ as he dubbed it, comes to pass, it could lift West Texas Intermediate crude-oil prices up from their current trading range of roughly $42 to $53 a barrel, said Kloza. And, if the Trump administration ‘tries to put financial handcuffs’ on Venezuela’s state-owned Petróleos de Venezuela, SA, or PdVSA, ‘it might provide the catalyst for the (oil) market and for consumer gasoline prices to rise appreciably,’ Kloza added.

This seems a God-sent opportunity to crude producers. What more they could have asked for?

Published in Dawn, July 30th, 2017