US-Venezuela tensions cause concerns about oil market

The political volatility between the US and Venezuela could greatly impact oil prices.

The current volatile relationship between the US and Venezuela is not only affecting the Venezuelan and US residents caught in the middle. The economic relationship between the two nations is being brought into focus as there may possibly be a US embargo against Venezuelan oil. The political turmoil in Venezuela could lead to a financial breakdown between the two countries.

How would an oil embargo affect Venezuela?

After US President Trump recognized Juan Guaidó as Venezuela’s president, current leader Nicolás Maduro refused to step down and expelled US diplomats from Venezuela. Trump may retaliate by expanding existing sanctions against the South American nation to include energy. If the US stops importing oil from Venezuela, it would devastate the nation that is already economically disadvantaged, according to Risa Grais-Targow, director for Latin America at risk consultancy Eurasia Group. She noted that a ban on exporting US dilutents to dilute heavy Venezuelan oil could greatly impact the nation.

‘Their[Venezuela’s] dollars are very strained. This would add to this. If they can't get those [US] diluents, they can't export,’ said Grais-Targow.

Helima Croft, global head of commodity strategy at RBC, noted that though Venezuela would have other nations to supply oil to in the wake of oil sanctions, the nation is the most dependent on US cash.

‘Most of the cash that the Venezuelan government gets comes from the US market, so that means they will have to figure out how to ask the Chinese to get some cash back, because otherwise they will be starved for cash,’ said Croft.

How would an oil embargo affect the US?

Trump may have more power to impose sanctions on Venezuelan oil because prices are lower, according to Croft.

‘This lower oil price environment may give Trump more cushion to implement these sanctions. If this were back in October when oil prices were much higher, he may have punted on such a move,’ said Croft.

Venezuelan oil only accounts for 6% of US oil imports, but an oil embargo could cause the US to strain its domestic supply. Francisco Monaldi, fellow in Latin American energy policy at Rice University’s Baker Institute, noted that in the event of oil sanctions, the US would also have to import oil from Organisation of the Petroleum Exporting Countries (OPEC) that are tightening their supply.

‘The scarcity of heavy oil in the Gulf Coast will increase the price, plus the fact that you have to import from a place like Iraq, makes it a little costlier,’ said Monaldi.

What’s next for US-Venezuela relations?

The US and Venezuela are dependent on each other and this latest political unpredictability could lead to changes that affect the US and Venezuela for years to come. Political observers and commodities traders will be watching to see how this drama will unfold.

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