Markets

Geopolitical Risks Boil Underneath The Surface As Oil Markets Remain Complacent

Welcome to the geopolitical edition of Oil Markets Daily!

Geopolitical risks continue to escalate in all of the major oil producing regions. We have discussed many times about the implications for what will happen to the oil markets if Venezuela fails.

On Sunday, the Constituent Assembly elections will represent one of the major turning points for President Maduro and his regime.

In summary, if President Maduro proceeds with the current plan to hold elections for a new constituent assembly, it will effectively give him the right to rewrite the constitution. This is one of many steps President Maduro is taking to get rid of democracy in the failing oil nation state.

In response to this vote, President Trump has already threatened Venezuela with the potential sanction of its oil industry. Methods includes banning oil imports from Venezuela or prohibiting the use of the dollar in PDVSA related transactions.

In a report published this morning from RBC Capital Markets, Helima Croft, Global Head of Commodity Strategy, warned that this could mark a major point in Venezuela’s already battered economic crisis. She goes onto say:

President Maduro could stave off this imminent economic emergency by cancelling the Sunday elections, but he shows absolutely no signs of doing so at the time of writing. Instead, he has opted to publicly rail against the US and Colombia and accuse both of fomenting regime change. The White House may also have a change of heart about sector sanctions, fearing too much chaos and disorder in the streets in Caracas or job losses at refineries in the US Gulf Coast. But even if someone blinks, Venezuela will still be on the local train to collapse due to the deleterious policies that have been in place for decades. Moreover, while China has provided Venezuela with billions of dollars in loans, leading experts contend that it has also seen the writing on the wall and is reluctant to extend any more balance sheet. Hence, sector sanctions would simply accelerate the path to crash, in essence representing a ticket on the express train. The destination remains disaster and the train has already left the station. The only question is what track is Venezuela on?

Here are some charts published by RBC in the report highlighting the situation Venezuela is in:

As you can see, Venezuela’s production continues to move downward. Our expectation continues to be much more pessimistic than the street estimate. For example, Morgan Stanley in its latest oil market outlook showed 2 million b/d for Venezuela versus the current estimate around 1.9 million b/d.

While we don’t know why the sellside firms appear much more bullish for countries like Venezuela, the reality of the situation is that production decline will only continue for Venezuela. As RBC said, the train has already left the station, it’s just a matter of when things worsen.

In the case oil workers in Venezuela go on strike, oil production could fall by more than 1 million b/d for a few months as we’ve seen in 2002.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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