Key Takeaways
- The overthrow of President Nicolas Maduro in Venezuela is unlikely to shock energy markets in the near term
- Venezuela has the largest proven oil reserves in the world, but currently produces less than 1% of global oil production
- The global oil market is oversupplied, and demand is relatively weak, which will limit the impact of the conflict on oil prices
- Analysts predict that Brent crude prices will only rise by about $1 to $2, or even less, in the short term
- The regime overthrow raises the possibility of eventually boosting oil production in Venezuela, which could have a bearish impact on the market
Introduction to the Venezuelan Oil Market
President Donald Trump’s overthrow of President Nicolas Maduro in oil-rich Venezuela is unlikely to shock energy markets in the near term, analysts told CNBC on Saturday. While the scale of the U.S. attack was unexpected, markets had already priced in a conflict with Venezuela that would disrupt oil exports. Venezuela, a founding member of OPEC, has the largest proven oil reserves in the world, but the South American nation currently produces less than a million oil barrels a day, which is less than 1% of global oil production. It exports just about half its production, or some 500,000 barrels.
Assessing the Impact on Oil Prices
The conflict also comes as the global oil market is oversupplied and demand is relatively weak, a pattern that is customary in the first quarter of the year. Arne Lohmann Rasmussen, chief analyst and head of research at A/S Global Risk Management, estimated that Brent crude prices will only rise by about $1 to $2, or even less, when futures trading opens. He projected that Brent will edge lower next week than where it closed on Friday, which was $60.75. Rasmussen noted that despite this being a huge geopolitical event, the bottom line is that there’s still too much oil in the market, and that’s why oil prices will not go ballistic.
Short-Term Risks to Oil Markets
Analyst Bob McNally of Rapidan Energy said he was advising clients before the weekend that about a third of Venezuela’s oil production was at risk. While he does not predict that all of Venezuela’s output would be cut off, he told CNBC that it would not pose a meaningful risk to oil markets in the short term. The oil market in 2025 posted its biggest annual decline in five years, with the global benchmark Brent falling about 19% last year, while U.S. crude oil lost nearly 20%. The market has been under pressure as OPEC+ ramped up production after years of output cuts, and the U.S. produced at a record level of just over 13.8 million barrels per day.
Long-Term Implications for Oil Production
Oil prices may decline further as the regime overthrow raises the possibility of eventually boosting oil production in Venezuela, analysts told CNBC. Saul Kavonic, head of energy research at MST Financial, estimated that exports could approach 3 million barrels in the medium term if a new Venezuelan government led to the lifting of sanctions and the return of foreign investors. David Goldwyn, a former top State Department energy official in the Obama administration, noted that if anything, the future of Venezuela will have a bearish impact on the market, because there’s really nowhere to go but up. Currently, the embargo on Venezuelan oil is still in effect, and Trump said that U.S. oil companies will invest billions of dollars to rebuild Venezuela’s energy sector.
Challenges for U.S. Oil Companies
Goldwyn said it is hard to predict whether U.S. oil companies will invest, given the uncertainty about the interim and future governments in Venezuela. Everything we have learned about government transitions from Iraq, from Afghanistan, from other countries, is that transitions are hard, he said. No company is going to want to commit to invest billions of dollars for a long-term operation until they know what the terms are. And they can’t know what the terms are until you know what the government is going to be. Goldwyn added that companies, including Exxon Mobil, are still waiting to collect on debt owed by Venezuela’s national oil company, Petróleos de Venezuela S.A. (PDVSA).
Investment Prospects in Venezuela
Rapidan Energy’s McNally said it is a complicated proposition for U.S. oil companies. Oil producers have not forgotten being kicked out of Venezuela in the early 2000s, when the country expropriated the assets of foreign oil companies, he said. That said, accessing the world’s largest oil reserves would be tantalizing to U.S. oil companies if sanctions were lifted, he added. But it would take decades of investment and billions of dollars, McNally said. Whether it’s worth it comes down to one central question, he said: Does the world need that much oil? Until late last year, the market consensus had been that demand for oil is going to stop growing in four years, but as the U.S. and other nations weaken their climate policies and sales of electric vehicles fall, the prospect of investing in Venezuela has become much more attractive.