What will be the impact of the crisis in Venezuela on oil prices

The diplomatic relations between the United States and Venezuela are in ruinsand this week has reached a new minimum.

Despite growing tensions between the administration of US President Donald Trump and the government of Nicolás Maduro, the two countries still share a crucial link: oil.

The United States is Venezuela's largest and most important oil consumer., with 39% of OPEC sales in the country last year, according to ClipperData. And Venezuela was the fourth largest source of foreign oil flowing to America last October.

Now that The close oil relationship is under enormous pressure. The White House announced Wednesday the recognition of Venezuelan opposition leader Juan Guaidó as the legitimate president of the South American country. Maduro reacted by breaking relations with the United States.

More information: Juan A. Lagos (PC): "Legitimize this attempt to
coup in Venezuela is contrary to human rights and democracy "

What is most important for the oil market is that President Trump is considering taking a series of measures to punish Maduro, including possible oil sanctions, sources told CNN.

Theantions against the Venezuelan oil industry would give an amazing blow to the country's economy, but would also have important implications for the United States. The loss of Venezuelan barrels could drive up oil prices and force American refineries that receive hundreds of thousands of barrels of Venezuelan oil every day.

"The United States will be harmed when it applies these sanctions to Venezuela," said Matt Smith, director of resource research at ClipperData.

Oil is the "blood" of the Venezuelan economy

The Venezuelan oil production had already dropped to a minimum of 30 years because of the rapid decline of its energy sector. RBC Capital Markets predicted that Venezuela's output would drop to half a million barrels a day in 2019. But the company warned that sanctions imposed by the United States could result in an increase of several hundred thousand additional barrels.

The oil sanctions would aggravate the economic chaos in Venezuela, which depends on oil exports for 90% of its revenues.

"The rapid evolution of the situation in Venezuela seems to be approaching some sort of turning"Helima Croft, global director of resource strategy at RBC, wrote a letter to her clients.

Other information: Guaidó effect: Masisa up after the backup
International to the President-designate in Venezuela

The other main oil customers of Venezuela are China and India. But you do not get money for these sales. Deliveries are made in exchange for payments to the huge Venezuelan debt.

"The sanctions would cut the blood that would flow in the Venezuelan economy"said Smith.

The country already facing a humanitarian catastrophe. Venezuela's GDP has fallen by 37% between 2012 and 2017, according to the International Monetary Fund. Inflation is expected to reach an impressive 10 million percent by 2019.

Will Trump take a firm stand?

Until now, the oil market has had a mild reaction this week to the chaos in Venezuela. This probably happens because he is very uncertain of what will happen next.

Trump was a joker for the oil market last year. Fearing that the price per barrel will reach 100 US dollars, Trump has taken a less severe stance than expected regarding sanctions against Iran. This approach left the oil market with oversupply, which helped to drive down prices.

Read also: Daniel Matamala: "The support of dictatorships like those of
Cuba, China and Russia explain the character of the Venezuelan regime "

"There is a lot of doubt in the market that Trump is pulling the trigger regarding the oil sanctions" directed against Venezuela, said Joe McMonigle, a former Energy Department chief under the presidency of George W. Bush.

But McMonigle, now senior badyst in energy policy Hedgeye Potomac Research, estimates that it is very likely that Trump will impose penalties.

McMonigle warned that sanctions increase the risk of a major crisis, like a civil war or the cessation of activities of the Venezuelan national oil company.

"It could stop all oil production and cause chaos in the country"said McMonigle.

US refineries depend on Venezuelan crude

Analysts said that the severe sanctions imposed by the United States against the Venezuelan oil industry would result in higher prices.

The problem is that, despite the fact that US oil production has reached record levels, the United States is not self-sufficient. Refineries on the Gulf Coast can not work alone with American shale oil. To produce gasoline, jet fuel and other products, refiners need a good dose of heavy crude oil. They now depend on inexpensive and very heavy crude found in Venezuela.

What is it that explains, although Venezuelan oil production has declined significantlyThe country was still sending 506,000 barrels a day to the United States in October, according to the latest statistics from the Energy Information Administration. The only countries that sent more crude to the United States were Canada, Saudi Arabia, and Mexico.

Sanctions USA on Venezuela could increase the cost of heavy oil, causing a turnaround of US refineries, warned badysts. They will have to find heavy oil elsewhere.

Read also: Venezuela: What power has Maduro and what power has Guaidó?

According to Rystad Energy, the largest US importers of Venezuelan crude last year were Citgo, Valero and Chevron. (PDVSA, the Venezuelan national oil company, is the majority owner of Citgo).

"The sanctions would make the refineries of the US Gulf Coast the biggest loser," wrote Paola Rodriguez-Masiu, an badyst at Rystad Energy, in a report released Thursday.

Chevron, which operates in Venezuela, declined to comment on the situation in that country.

"Chevron's operations in Venezuela are continuing and the company is committed to the country's energy development in accordance with all applicable laws and regulations," Chevron said in a statement.

The recovery would be slow, even without Maduro

And Venezuela depends on American products to keep its oil industry afloat. Venezuelan crude is so heavy that it has to be mixed with naphtha, a combination of liquid hydrocarbons used to dilute and transport the oil.

The US sanctions could block the sale of American diluent in Venezuela. Venezuela could find a substitute elsewhere, but it would probably be more expensive and more distant.

Not easy if the external pressure on Maduro will make him lose control of power. Until now, Venezuela's main military leaders have continued to support it and have also received support from Turkey, Russia and China.

Croft, of RBC, warned that Venezuela's oil production could be affected for a long time, even if the Maduro government collapsed.

"The return to Venezuela will be extremely difficult given the scale of the economic and humanitarian disaster," he said.