Oil prices and the stocks of U.S. companies that produce the commodity initially rose but quickly pulled back after news that the U.S. captured the leader of Venezuela and brought him to New York to face federal charges. Yo-yo oil prices are an indicator of the level of uncertainty of how the changes in the South American nation will affect the energy market.
“The situation remains fluid, with many questions outstanding about the way forward,” says Darwei Kung, head of commodities and portfolio manager at DWS Group. “The ongoing governing of Venezuela remains to be seen given the various statements by the U.S. government, the regime in place and the lack of a strong opposition political party.”
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Venezuela sits on the biggest oil reserves in the world, just edging out Saudi Arabia, and U.S. President Donald Trump has indicated that the seizure of Venezuelan President Nicolas Maduro over the weekend of Jan. 3 will lead to U.S. oil-company investment in the Venezuelan oil industry, which is in tatters after years of mismanagement. Maduro has pleaded not guilty to narco-terrorism and several other criminal charges in a New York federal court.
On Jan. 6, Trump also claimed on social media that Venezuela will be turning over up to 50 million barrels of oil to the U.S. “This Oil will be sold at Market Price, and that money will be controlled by me, as President of the United States of America, to ensure it is used to benefit the people of Venezuela and the United States!” he posted on his Truth Social account. The following day, Energy Secretary Chris Wright said the U.S. will control sales of Venezuelan oil “indefinitely.”
On the morning of Jan. 7, oil futures fell about 1.2% and West Texas Intermediate crude hovered around $56 per barrel.
What Will Happen With Oil Production and the Energy Market?
As a member of the Organization of the Petroleum Exporting Countries, or OPEC, what happens in Venezuela is of consequence to global oil markets and is of particular importance to American oil majors, some of which left Venezuela after former President Hugo Chavez nationalized the industry in 2007.
The tarlike crude in the South American nation requires considerable processing, and production has declined by more than half since most American oil companies left the country. Output has fallen from more than 3 million barrels per day in the 1990s to less than 1 million barrels per day recently because of mismanagement, sanctions and poor infrastructure.
That means billions of dollars will have to be spent to return Venezuela’s oil production to its former glory, if a political situation emerges that is stable enough to convince foreign oil companies to return.
“It is important to remember that even in the best-case scenario, in which Venezuela becomes a democracy and foreign investment flocks to the country, its oil production infrastructure has been so poorly maintained that it will require a long time and massive amounts of money to revive production to its historic peak,” says John Berman, founder and chief investment officer with commodity trading and investment management company Berman Capital Group. He cites estimates that suggest that about $100 billion of investments will be required.
What Might Happen Next in Energy Markets
Berman sees three main ways that the situation might play out.
A base case is that the status quo more or less continues, with the regime in Venezuela continuing under acting president and Maduro ally Delcy Rodriguez. In this scenario, Venezuela might be slightly less antagonistic toward the U.S. and more open to foreign investment, but that might not be enough to cause a significant rebound in production in the long run.
Another possibility, Berman says, is a U.S.-led democratic transition without further military action that spurs significant investment from U.S.-based supermajors such as Exxon Mobil Corp. (ticker: XOM) and Chevron Corp. (CVX). Even in this best-case scenario, it would still take a decade to revive production.
However, if the U.S. puts troops on the ground in an Iraq War-style occupation, that would not bode well for political stability, which is usually the precursor for massive infrastructure investments that won’t see significant return for at least a decade, Berman says.
In the near term, a removal by the Trump administration of a blockade on Venezuelan oil exports could boost exports, and allowing foreign companies to operate and service oilfields could bring production up to 1 million barrels per day relatively quickly, Kung says.
But overall, that would be relatively neutral for oil prices, he adds. A true restoration to peak oil production would require a successful transition of power, which would take time, even with U.S. intervention, Kung says. Plus, there is still the risk that Venezuela maintains its regime and policy stance, he says.
Tom Seng, assistant professor of professional practice in energy finance at Texas Christian University, expects the U.S. to remove all sanctions on Venezuela in the short term, which will increase supply and put pressure on oil prices.
But the long term is more murky, as no one knows if the Trump administration’s plans for U.S. oil companies to invest billions will actually happen. With U.S. oil prices at less than $60 per barrel, U.S. companies are reluctant to increase capital expenditures this year even for domestic activity, Seng points out. The fact that oil in Venezuela is more challenging to produce adds to the uncertainty, he says.
Potential Winners and Losers in the Stock Market
When it comes to U.S. oil companies that could benefit from a more-open Venezuela, Chevron is the forerunner, as it didn’t leave after the industry was nationalized. It’s been operating there under a U.S. sanctions waiver. As Usha Haley, an expert in international business at Wichita State University, puts it, Chevron “knows the lay of the land.”
ConocoPhillips (COP) is another potential beneficiary, as Venezuela owes it billions of dollars stemming from nationalization. Exxon is in a similar situation, although Venezuela owes it less money. Exxon also stands to benefit because of its operations in neighboring Guyana, with which Venezuela has had a boundary dispute that Maduro emphasized. Increased stability between the two countries could benefit Exxon, notes Rockford Weitz, director of the maritime studies program at Tufts University’s Fletcher School of Law and Diplomacy.
Oilfield Services Companies Could Get a Boost
Because rebuilding Venezuela’s oil industry will require oilfield services, Halliburton Co. (HAL) and Baker Hughes Co. (BKR) could also benefit, as they have deep pockets that “can weather any storms,” Haley says. SLB Ltd. (SLB), formerly knowns as Schlumberger, is also a major oilfield services company.
Other beneficiaries could include Gulf Coast refiners, such as Valero Energy Corp. (VLO) and Phillips 66 (PSX), that are capable of dealing with the type of heavy, sour crude that comes from Venezuela.
While they probably won’t see any benefit in the short term, an increase in oil production in Venezuela and shipments to Gulf Coast refineries would likely benefit those refineries by improving their margins, Berman says. Canadian crude is of a similar heavy, sour variety to Venezuelan oil, and the increased competition from Venezuelan oil could mean U.S. refiners have to pay less for feedstock.
Canadian Oil Producers May Come Under Pressure
That means that Canadian tar sands oil producers could come out with the short end of the stick. Indeed, Canadian oil sands producers Canadian Natural Resources Ltd. (CNQ) and Cenovus Energy Inc. (CVE), as well as pipeline companies Enbridge Inc. (ENB) and South Bow Corp. (SOBO), fell on the news of Maduro’s capture.
A Sticky, Murky View of the Energy Market
At the end of the day, the situation in Venezuela is in flux, and there are many moving parts that make it difficult to see exactly how Maduro’s ouster will affect the energy market, so investors should use caution. “We know next to nothing about how President Trump plans to ‘run’ Venezuela and how this transition will be managed,” Haley says. “We simply do not know what we do not know about Venezuelan oil, and this high uncertainty does not guarantee great returns.”
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Oil Stocks Volatile, Oil Prices Fall After U.S. Raid in Venezuela. What Happens Now? originally appeared on usnews.com
