The country’s economy is almost entirely dependent on its oil industry, and production has already slumped about 13 percent so far this year.
Venezuela has been in political turmoil in recent years, and the chaos has deepened since socialist President Nicolas Maduro inaugurated a controversial constituent assembly last Friday (August 4).
His move is expected to have wide-reaching effects, with one of them being a potential reduction in Venezuelan oil exports. Experts believe lower supply from the country could help boost OPEC’s efforts to balance the market.
The crisis is “going to be the biggest geopolitical story to watch in the oil markets,” Helima Croft of RBC Capital Markets told CNBC. “Venezuela has no capacity to overproduce at this point. Their oil production is going in one direction and that is down,” she added.
Venezuela’s economy is almost entirely dependent on its oil industry, which accounts for 95 percent of its exports. It produces about 1.9 million barrels of oil per day, but its production has already slumped about 13 percent so far this year.
As mentioned, that supply reduction could help OPEC’s efforts to reduce the glut in the oil market, something the cartel has not been able to achieve so far. In fact, according to Reuters, Venezuela’s oil production is on track to end 2017 at a 25-year low. Croft suggested that as a result, oil prices could go up to $70 to $80 per barrel later this year.
Others are less bullish — Barclays (LSE:BARC) forecasts that oil prices will go up to just $54 in the last three months of the year, based on continued inventory draws, OPEC discipline and the ongoing decline in output in Venezuela.
US oil sanctions still on the table
Venezuela’s new legislative superbody, which is expected to rewrite the constitution and give vast powers to Maduro, has defied protests and worldwide condemnation that it undermines democratic freedoms.
The US imposed sanctions on Maduro last week following similar action against 13 Venezuelan figures in July; it also extended sanctions to other eight officials on Wednesday (August 9). But analysts argue that broader oil sector and financial sanctions may be the only way to make the Venezuelan government feel the impact.
Venezuela exports just under 800,000 barrels of oil per day to the US, accounting for about half of its oil exports. That source of revenue is the only thing keeping the government going right now, and sanctions could have an immediate effect on the oil market.
“There’s a huge dependency on exports to the United States at a time of profound economic turbulence. It would be basically cutting off the single most important source of revenue. It would significantly raise the risks of default,” Roberto Simon of FTI Consulting told The Wall Street Journal.
That said, the US has been mindful of the effects that oil-related measures could have on US companies and consumers.
“A ban on US crude imports from Venezuela could … impact US consumers through higher costs of alternate heavy crudes, although such a ban would likely be implemented with a lag to minimise logistical shortages,” Goldman Sachs (NYSE:GS) analyst Damien Courvalin aid.
On Wednesday, September West Texas Intermediate crude gained 39 cents, or 0.8 percent, to hit $49.56 a barrel on the New York Mercantile Exchange, while Brent crude for October delivery on London’s ICE Futures Exchange rose 56 cents, or 1.1 percent, to $52.70 a barrel.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.