WTI Jumps Above $50 On Report US Prepping Sanctions Against Venezuela Oil Industry

Tyler Durden's picture

After both Brent and WTI rose above their respective 50DMAs on Friday, capping 2017's best weekly rally for oil, the rising tide is accelerating as the latest CFTC COT data confirmed, when net specs boosted bullish Nymex WTI crude oil bets by 27K net-long positions to 423K, the highest in two months, as producers continued to cover short hedges, sending their net position to the most bullish since the summer of 2015.

Meanwhile, oil started the Sunday session jumping out of the gate, with WTI rising above $50 for the first time since May in early Asian trading, following the usual non-material weekend chatter and "noise" out of OPEC (which to exactly nobody's surprise "can't stop pumping"), however what has attracted traders' attention, is a WSJ report that following last week's latest round of sanctions, and after today's vote to overhaul Venezuela's constitution further entrenching Maduro's unpopular regime, US government officials are considering announcing sanctions against Venezuela's oil industry as early as Monday, although as the WSJ notes, a full-blown "embargo against Venezuelan crude oil imports into the U.S. is off the table for now."

In its latest escalation, last Wednesday the U.S. government levied additional sanctions on 13 high-ranking Venezuelan officials for alleged corruption, human-rights violations and undermining democracy in the South American country. On Friday Mike Pence vowed “strong and swift economic actions” if the vote goes ahead.

While Maduro's government has responded defiantly, "dismissing sanctions and warnings from Washington", with Maduro insisting the government would notch a triumph in Sunday’s vote, the potential collapse in oil trade between Venezuela could crippled the country even more, while sending the price of oil sharply higher.

In fact, in a note from last week posted here, Barclays Warren Russell explains just what will happen should Trump expand Venezuela's sanctions to impact its oil sector: "a sharper and longer disruption (eg, exceeding three months) could raise oil prices at least $5-7/b and flatten the curve structure despite an assumed return of some OPEC supply, a more robust US shale response, and weaker demand. It may be just the opportunity OPEC needs to exit its current strategy. US producer hedging activity would pick up if WTI moves to $50-55, limiting price upside potential."

Furthermore, among the downstream consequences, is that refining margins should deteriorate if Venezuelan crude oil supply is curtailed. US refiners will be negatively affected by any sanctions related to trade constraints. On the other hand, China and India could benefit if Venezuelan oil is offered at a discount to comparable grades, Barclays suggests.

Finally, looking at Venezuela from a longer-term perspective, this is how Barclays estimates the local investment climate:

It is too early to assess the investment appetite in Venezuela in a post-Maduro environment. Though Venezuela’s assets are large, they are not short-cycle. Companies with deep connections to the country are likely to maintain a presence, but wait for the political landscape to stabilize before making incremental investments. Either way, it looks like Venezuela’s production trend is down over the near term.

Of course, the higher the price of oil goes, the more profitable shale will be, the more oil it will produce and so on, in the diabolic feedback loop that will assure oil does not go too far above $50 for the foreseeable future, as Goldman explained efficiently in just three bullet points last Thursday:

  • Oil prices have rebounded over the past month on large inventory draws, a declining US rig count and strong demand data, suggesting that the rebalancing is accelerating.
  • We remain, however, cautiously optimistic on prices from the current level with the recent improvements in fundamentals needing to be sustained for oil prices to rally meaningfully further.
  • In fact, too large a price recovery now would only increase the downside risks to our year-end $55/bbl WTI price forecast given the fast velocity of shale’s supply response.

At which point it's back to square one. For now, however, the bulls get to enjoy the next few days until the momentum reverses once again.

* * *

For those who are eager for more reasons to buy oil, there are more details in the full Barclays excerpt below and posted here first last week:

Looming risk of sanctions against Venezuela

The Trump administration is considering a wide variety of sanctions against the Venezuelan regime, which could range from sanctions on several senior government officials to targeting PDVSA’s ability to transact in US dollars, according to Reuters. This would not be the first time the Trump administration has taken action against Venezuela. The US already imposed sanctions on Venezuela’s vice president (February 2017), eight members of the Supreme Court (May 2017), and other military and government officials. The most recent Supreme Court sanctions were in response to the court’s decision to disband the democratically elected congress. The administration’s recent discussion of potential new sanctions would aim to keep elections “free and fair” and prevent President Maduro from being able to establish a dictatorship, which could occur as early as July 30.

The Trump administration is likely to proceed cautiously and incrementally with any sanctions. In contrast to the energy-related sanctions imposed on Russia and Iran, the more entrenched connections between US companies and consumers and the Venezuelan oil industry lead us to believe that the US administration will take a cautious approach.

Venezuela produces around 2.2 mb/d of oil and NGLs, which represents roughly 2% of the global petroleum market. Its Orinoco heavy oil plays a critical role as a feedstock for complex refineries around the world, particularly along the US Gulf Coast. Close to half of its 1.8 mb/d of oil exports go to OECD countries, with Asia consuming most of the remainder. Venezuela is the third largest exporter of oil to the US (?750 kb/d), behind Canada (3.2 mb/d) and Saudi Arabia (1.1 mb/d).

As a guide to potential outcomes, we examine US sanctions on Iran and Russia and their impact on the oil market. We find that the sanctions on Russia have not had a noticeable effect on its production or the oil market, while sanctions against Iran lowered its production and exports and supported oil prices. For more on sanctions on Russia and Iran, see the Appendix of this report.

We see several important differences between the situation in Venezuela and those in Iran and Russia.

  1. Unlike Russia and Iran, Venezuela is at significant risk of political and economic collapse. Low oil prices have greatly reduced the government’s ability to pay its outstanding debts while funding imports of basic goods. As a result, President Maduro has taken decisions that have resulted in a deteriorating quality of life for Venezuelans in recent years. Amid the current instability, even limited sanctions are likely to have an outsized effect on the oil market.
  2. A collapse in Venezuela could turn it into a regional crisis. More than 1.5mn Venezuelans have already fled the country because of the current crisis, this number could increase exponentially, affecting neighboring countries, particularly Colombia. The international community will need to support the region in a refugee crisis. In the case of Colombia, the situation could have additional implications because there are nearly 2mn Colombian and Colombian descendants living in Venezuela. Those people would likely be the first to cross the border and the Colombian government cannot deny them their rights as Colombian citizens. This could become significant fiscal burden for the Colombian government.
    Venezuela needs to import oil and refined products to produce oil. Roughly 50% of Venezuelan production is heavy oil, which is typically blended with diluent for transportation purposes. Without access to diluent imports from the US and elsewhere, certain Orinoco projects may be at risk of being shut-in. A trade embargo, sanctions that affect PDVSA, or a sovereign default could be catalysts for heavy oil shut-ins in the Orinoco. We estimated earlier this year that a default could take around 300 kb/d of heavy oil production offline (Commodities special report: The black swans of 2017, January 2017).
  3. The current state of Venezuela’s refinery sector necessitates fuel imports, which have been met in part by imports from the US. Plagued by underinvestment, Venezuela’s refineries have been running well below nameplate capacity, with Bloomberg recently reporting that the Puerto La Cruz refinery is running at 15% utilization. Restricting fuel shipments to Venezuela would result in increased dependency on the PDVSA’s dilapidated plants and imports from other origins to prevent the country coming to a standstill.
  4. Venezuela’s oil sector is much more intricately connected to the North American energy system, due to CITGO’s presence in the US and the dependence of other US refineries on Venezuelan feedstock. This interdependency with the US and the lesser connection with other OECD countries, mean Venezuela’s position in the international energy system is quite different to that of Russia or Iran.

If the US does impose further sanctions on Venezuela, it would likely take into account these differences. The use and timing of various sanctions will likely depend on how much the conflict escalates in the coming days and whether other factors (such as the potential for default on sovereign debt payments due in October and November), might be a catalyst for political change in the near future. In our view, if the Trump administration decides to issue sanctions, it would proceed conservatively and become increasingly restrictive only if its goals are not being achieved. One of the stated goals of the Trump administration is for Venezuela to hold “free and fair elections,” according to the White House press statement on July 17, 2017. Before implementing more aggressive sanctions, the administration is likely to seek multilateral support from other nations.

The EU recently expressed a willingness to impose sanctions on Venezuela as well. We believe sanctions could turn out to be a double-edged sword. Multilateral sanctions implemented after having exhausted negotiations are most likely to be successful. Nonetheless, history shows that sanctions alone are not enough to trigger political change, eg, Cuba, North Korea, and Syria. This finally depends on the level of internal pressure, which in Venezuela seems high.

Sanctions against individuals

Additional US-imposed sanctions against government officials may be the next step. Such sanctions are likely to cause some inconvenience but probably would have only a limited impact on Venezuela’s oil industry, in our view.

Sanctions on Venezuela’s energy sector

Sanctions could take several forms, ranging from sanctions similar to those imposed on Russia to more disruptive ones that could completely halt existing operations.

  • Sanctions that prohibit or limit investment in new exploration and production activity would not likely have an immediate direct impact on Venezuelan production. Many of the companies with equity stakes in Venezuela’s new greenfield developments are headquartered in non-OECD countries. Furthermore, due to the current upstream investment environment and the increasing political risk within Venezuela, we believe upstream spending on greenfield projects is limited, with many projects shelved for future reconsideration.
  • Sanctions prohibiting businesses from operating in Venezuela would be much more disruptive to Venezuela’s current contribution to the oil market. A policy that would limit US producer and service company operations and further investment in Venezuela, would require PDVSA and other international companies to step in to maintain operations. This scenario is likely to exacerbate Venezuela’s declining production profile.

Sanctions against PDVSA

The US could take an even more drastic approach by issuing direct sanctions against PDVSA. In an extreme scenario, if the NOC is banned from banking activity in the US and from trading with US entities, the impact would likely be swift and very damaging to Venezuelan oil production. Directly targeting PDVSA will also likely lead to a sovereign debt default in 2017. This action would affect Venezuela’s petroleum imports and exports.

  • PDVSA would have to find new destinations for nearly half of its oil exports, assuming production does not collapse. Currently, Venezuela ships more than 700 kb/d of oil to the US and nearly 100 kb/d to the EU. China and India would likely be alternative destinations for some of this crude.
  • PDVSA would also need to find a new source for some of its diluent needs. Algerian and Nigerian crude and condensates were previously used for diluent purposes and could substitute for shipments of US crude and products used in the transport of heavy oil. PDVSA could ask it JV partners to import diluent, but the capacity to do this would depend on the extent of sanctions and other countries’ participation. Even if possible, this could also increase the production cost of these fields to levels that are not financially viable, which could ultimately result in shut-ins.

We believe the US would implement such measures only as a last resort. In addition, the US would likely seek multilateral support from other nations before taking this route. Such an action is likely to be severely disruptive to Venezuela as well as the oil market and its participants.

Sanctions against PDVSA would likely also mean that US producers and service companies conducting business in Venezuela would have to cease operations, which would have an outsized effect on oil production compared to the effect of the US-imposed sanctions on Russia. Compared with Russia, Venezuela is much more reliant on foreign oilfield service companies for oil extraction.

Discussions of broader sanctions likely limits Venezuela’s access to capital

Regardless of whether new sanctions are imposed, discussion of broader sanctions could limit the Venezuelan government’s ability to raise financing and to make debt payments coming due in October and November. Moreover, it could change the government’s willingness to pay. If the current government wants to remain in control and not negotiate, it may be unwilling to use the few assets left to service its debt. As mentioned above, default alone would have a significant impact on oil production and the domestic economy.

The US could sell oil from the SPR to steady the market

We believe the US would consider the sale of oil from the strategic petroleum reserve (SPR) in order to smooth any price volatility that may result from a disruption to supply from Venezuela. The previous US administration was willing to tap the SPR to steady markets after the Libyan supply disruption, and we believe the current administration would consider this option as well. The US did not sell oil from the SPR during the 2002-03 Venezuelan supply disruption and prices rose by more than 40% during that period, although other factors also contributed. We doubt a disruption will result in a 40% price increase in the event of a supply disruption, but we think prices will rise nonetheless. For this reason, we think the US government would consider using the SPR as a backstop.

At present, we believe the price response to a disruption would be more muted than previous disruptions due to the apparent increased willingness of the US to use its SPR, the fact that OPEC could raise quotas, and US producers would begin to respond to sustained higher prices.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
curbjob's picture

Yup, $4/gal gas would really make America grate again.

Cloud9.5's picture

Saw how you spelled that. 

jeff montanye's picture

how much more fucking disfunctional can the u.s. government get?  can you imagine the total salaries of the absolute assholes that come up with these sanctions on sovereign countries we should just be trading with and leaving the fuck alone?  the third richest area in the nation is washington d.c. and the immediate environs.  and what do we have to show for it?

Jimmy Jimmereeno's picture

So the USA is going to embargo imported Venezualian oil for the purpose of ----- what?

Venezuela will sell its oil elsewhere while the US consumer pays more for gasoline at the pump?  Have I got it right?

Benjamin123's picture

For the purpose of forcing Venezuela to sell it at a discount elsewhere. Gas prices go up in the US and down elsewhere. It was the same with the Iran sanctions, they started to sell to Turkey and Russia as middlemen at a discount, since they could not reach the market directly. The pressure could increase if the US manages to coordinate this with China and India, to worsen the venezuelan bargaining terms. The EU is already on board with any possible embargo.

That takes time to arrange though, in the short term they will simply be unable to sell anything.

Now you'll play dumb and ask why. This is done to drain the Venezuelan forex reserves and starve them harder, because they are too stupid to grown their own food in a lush tropical country with at least 6 months of rain, no winter and an endless domestic supply of diesel fuel. Too hard, gotta lose 19 pounds.

They cant grow food because the venezuelan national guard has spent 18 years arresting farmers for growing food. Its a capitalist activity you see, food is a human right and selling it is profiting from misery. Better to starve in diginity than to enrich kulaks.

Now i know venezuelans are a bunch of lazy spics but so are the colombians, brazilians, peruvians, etc, and noone are starving, so what gives?

a Smudge by any other name's picture

Never heard about their national guard arresting farmers unless they were selling to black market.

Benjamin123's picture

Deadpanning much? Food black market, eh?

Never heard of it you say. How many decades you spent in Venezuela?

Sapere aude's picture

Don't get sucked in to giving answers to a story that has a lot of holes in it.


For example Venezuala's oil?

Look at facts not what a journalists plucks out of the air.

Venezuala might be producing 2.2million barrels, but it uses more than that. Currently it imports oil!!

Benjamin123's picture

Dont be a retard. Venezuela imports oil for the same reason Canada does: Logistics.

Basically they blend 1 barrel of heavy oil with 1 barrel of imported light oil, then export 2 barrels of improved oil. Because the heavy oil is too viscous and doesnt flow easily down pipelines. Its still a net export but you have to go full autist "EHH I SAW A FULL OIL TANKER DOCKING IN PUERTO CABELLO VENEZUELA IMPORTS OIL DURR DURR"

Guyzz239's picture

Appears to be the Shep Wave guys will be right again this week. Just checked futures. I am ready for the change.

c2nnib2l's picture

As far I know Shep said it's a bigger correction, that should take oil back to 42.05 

Mon T's picture

Shep has been dead on in oil, stocks and gold. He may say to wait for clarity from time to time but he gets It right.

Mon T's picture

They are the only analysts who are still consistent after 30 years and show past reports and market calls going many years back. THE ONLY ONE!! No one eale can be trusted any more.

cherry picker's picture

Venezuela has enough problems and like usual the USA will see to it the poor slob and his family are deprived.

7thGenMO's picture

Yep, I doubt the ex-Goldmanite in the photo cares about any "poor slob."  After Goldman dumped its Venezuelan bonds (as detailed on ZH), sanctions now seem to be a back door way of obtaining a controlling stake in the black gold.

Yen Cross's picture

 I'm getting pretty close to shorting this overbought PIG. I like the risk reward, and I'm seeing lots of crude demand slowdowns.

  Retail also relies heavily on CL products. Manufacturing, production, supply.  I'm not seeing increased travel, hotel/motel growth either.

 Crude is going to dump like a rock, if the Hurricane season is weak, along with weak travel, retail numbers leading into Labor Day.

  Venezuelan CL is heavy, and needs extra cracking.

GodHelpAmerica's picture

You looking at the west or the entire globe?

Growth in the west isn't coming back, but probably is elsewhere...

Yen Cross's picture

 The globe. This is a fake reflation trade.


  Northern Hemisphere Summer hopium.

GodHelpAmerica's picture

Not really seeing that as the driver. Looks like 2010-2011 to me.

Yen Cross's picture

 To each his/her own. I respect your input.


 I don't see any drivers?  Commodity prices are depressed, and the Dept. of Energy has been selling off reserves, to artificially boost CL prices.

GodHelpAmerica's picture

Depressed commodity prices...? That's a bullish factor 2 years after a crash...

Yen Cross's picture

Ummm [ 10 years after the great Central Bank reflation put] would be more appropriate?

  It's pretty obvious you're a youngster. Where's your Father? He should know some of these happenings.

c2nnib2l's picture

 Breaking the 48 twice should be a sell :& that would be something 


undermind's picture

The mainstream think it's a supply problem. Soon everyone will see the real problem. Best of luck!!! This debt fueled low interest comet is about to collide with reality.

Yen Cross's picture

  Good point. Remember in February when everything was in contango, and supply was backed up for at least 18 months?

 Where is/was that sudden uptake? Chinese reserves were filled in late '16. More rigs came online, yet global demand has dropped.


P Christmas Carole's picture

When you short let the rest of us know.  You always seem to find the wrong side of a trade.  Thanks in advance.

Latitude25's picture

Each sanction is the US shooting itself in the foot.

logicalman's picture

Venezuela needs higher oil prices to survive.

US sanctions put up the price of oil by their actions of trying to hurt them.


adr's picture

No it doesn't. What Venezuela needs if a private market based economy to come back. Destroy the government monopolies and state owned enterprises and allow private companies to flood the market with cheap oil. The flood of real money would bring Venezuela back in no time. 

But that means no more welfare and social engineering. Not sure if Venezuelans will want to work instead of being handed promises of prosperity by a mad man. 

logicalman's picture

Fall for the propaganda, why don't you?

Horse Pizzle's picture

The market can supply the American heavy crude refinery.  Citgo will have to go without.  Sanctions will target Citgo.

lakecity55's picture

Picture Maduro, on the Freeway entrance ramp, holding a sign: Will Trade Oil For Food.

logicalman's picture

We all trade oil for food.

We (indirectly or directly) eat it, wear it, live in it and use it to get around.

Why do you think it's so important to those who wish to control humanity.

That's the paradigm we deal with every day - doesn't have to be that way, but it will require a lot of effort to change it,

Unfortunately, one of the failings of most humans is their tendency to stick to the status quo.


There's a handy fusion reactor at a nice safe distance from here with a maintenance-free lifetime of about 4 billion years. All it would take is the will to harness it, but even then, there are limits.


Jack Oliver's picture

The FUCKING oil 'curse' strikes again !

The only reason Iran negotiated the lifting of sanctions against them - they just want to get rid of the shit at ANY price !!

Have oil ???
Will get bombed !!!

Iran has developed FREE plasma energy and have copious reserves of NG - they don't need no FUCKING oil - it just brings trouble to your doorstep !!

The US economy is addicted to it - no oil - no economy !

sinbad2's picture

The oil price is a very real problem for the US.

Contrary to the BS pumped out endlessly by the US, no US offshore oil rig is profitable at 50 bucks a barrel. Some onshore production is still viable, but the US like the Saudis is running out of cheap to access oil.

All the American oil companies are losing money, $50 is some sort of psychological comfort to Americans, but it means nothing in reality.


The US is fucked if it can't get oil back over 70 bucks.

Sapere aude's picture

Someone is using their brain here. Well done.


ALl these dodgy articles about oil gluts etc. etc., and how cheap to produce are all fake news.

Even this story about Venezuala.

Now you pick the bones out of it, then look at the facts.

It suggests Venezuala produces 2.2million barrels a day. Its around 2,156,00 per day and dropping.

But then the article goes on to suggest its all exports and to the USA!!!!

So Venezuala is the only country on earth that doesn't use any oil?

But the fact that it uses more oil than it produces escapes some people. It was even importing from the USA! It has to really as its own crude is really heavy.

What is clear though is there is no oil glut, as you look at all the countries whose economies are being pummelled through war or other factors....they all have one thing in common....Massive oil reserves.

This looks more like a sick game of ensuring future oil for the USA, rather than any glut.

SO when Venezuala falls to a friendly....all ok again. Same with ensuring Iranian oil went into market...You don't do that if there is a glut.



whatamaroon's picture

Good news for my MLP's!!??

sinbad2's picture

Great news for China, more cheap oil.

Everytime the US shuts down an oil producer to prop up the oil price, to make American wells profitable, China slips in and gets oil at a discount.

Short term US oil companies don't go bankrupt, long term China can produce goods cheaper, because its energy costs are lower.

Yen Cross's picture

 The Chinese reserves are full.  That's why China is buying reserves in the ground. Massive investment in Africa and South America.

 China has YUUUUGE credit, and debt issues that are going to destroy any expansionist plans.

   The Chinese are compulsive gamblers... History has shown that.

Sapere aude's picture

they might be gamblers, but they have great logic and strategy skills, rather than using the stupid tactics that the U.S. and the West are using in suggesting falsely an oil glut.

All the Chinese are doing along with Russia, is hastening the demise of the petrodollar, and in doing so getting rid of paper U.S. dollars for real assets, knowing that the petrodollar has propped up the U.S. economy, and now a growing number of countries are joining the queue to remove the petrodollar or make it irrelevant to them.

First the West was able to pick them off, i.e. when Iraq did it Saddam once a friend became an enemy, so war.

Second, Gaddafi, once a friend, drops the dollar and he's an enemy, so war.

Iran, dropped the petrodollar....'axis of evil'

Venezuala...strangely plunged into economic ruin because of the orchestrated drop in the price of oil.

BRICS nations...all suddenly find their economies trashed by the same tactics.


Coincidence, I think not.

This was the same tactic used which led to the decline of the Soviet Union, but because it worked once, doesn't mean it works again, as the Russians and the Chinese are looking and laughing at the lack of new ideas, and holding billions of dollars of paper, buying up gold whilst the price of that is suppressed, using dollars to do it.

Until of course there are no more dollars to get rid of, then you'll see the price of gold move, the price of silver move, the price of oil too and what will the U.S. and the west do then if they have to pay the real price on 8,000,000bbls a day of crude, and when shale ends up in bankruptcy, which it will.

A silly strategy by the U.S. and the West that is becoming so predictable and a predictable strategy is one that fails.

Russia has learned and is increasing its gold reserves monthly, China too has bolstered its gold reserves and other countries are following suit, because they know that there is no oil glut, just a clamour for more of it, at any cost.



Herodotus's picture

Will Trump call for "free and fair" elections in China?

logicalman's picture

Free and fair elections, another oxymoron for the list.

Was the last US election 'free and fair' given the 'choice' of whoever you vote for Israel gets in?

Just asking.

Hongcha's picture

Old Chinese saying, "When the fish fight the fisherman benefits."

Long SNP, PTR and SHI.

83_vf_1100_c's picture

The Saudi oil is good even though they are a monarchial dictaotorship and chop off citizens heads.

Venezuelan oil is bad because the people elected a dictator who shoots citizens.

I am a little slow but it does not smell right. How is it we are helping the Venezuelan citizenry by trying to kill their economy?

a Smudge by any other name's picture

Domestically produced regime change.

83_vf_1100_c's picture

  Because that has worked so well in Iraq, Libya, Afghanistan etc...

  The Venezuelans will figure out their problem without our help. Or they won't.

Sapere aude's picture

because we are not, what we are doing is fomenting a change of government to give the US access to the largest oil reserve in the world.

So if anyone really believes this bullshit about a glut when everything points to the opposite!

Sapere aude's picture

Oh yes, here it comes the excuse to sell oil from the SPR to balance the books, because the oil has already been taken from the SPR to bolster U.S. production figures.

This was bound to happen or else the U.S. would have great difficulty explaining to the public how its SPR was missing several hundred million barrels of crude.

For the record this article uses dodgy figures. It counts Venezual's oil production as its export? So Venezuala produces how much? In fact when you consider its home use. its an oil importer!!!!



"We believe the US would consider the sale of oil from the strategic petroleum reserve (SPR) in order to smooth any price volatility that may result from a disruption to supply from Venezuela. The previous US administration was willing to tap the SPR to steady markets after the Libyan supply disruption, and we believe the current administration would consider this option as well."