Market News Oil prices are hard to fall! U.S. has little hope of fully lifting sanctions on Venezuela
Oil prices are hard to fall! U.S. has little hope of fully lifting sanctions on Venezuela
President Biden is reportedly considering lifting tough sanctions on Venezuela. The lifting of sanctions could help bring more oil into a tense market. Further easing of tough U.S. sanctions on Venezuela depends on whether the Maduro regime resumes talks with U.S.-recognized Venezuelan opposition.
2022-05-27
10697
A surge in energy prices triggered by Russia's invasion of Ukraine and a drop in global oil production has brought renewed attention to Venezuela. Venezuela, a member of OPEC, is the world's leading oil exporter and has the world's largest oil reserves. The tough U.S. sanctions have effectively cut Venezuela off from global energy and capital markets, accelerating not only the conflict-torn country's economic and humanitarian crisis but also global crude supplies. Although Venezuela's oil production has plummeted to less than 2 million barrels a day since 2017, the near-bankrupt country is seen by oil industry insiders and analysts as a solution to increasingly strained global oil supplies. U.S. President Joe Biden's decision to ban oil imports from Russia, part of Washington's sweeping response to the Kremlin's decision to invade Ukraine, has exacerbated a shortage of crude in North America. The ban, approved by Congress in April 2022, takes about 200,000 barrels of crude oil per day from U.S. energy supplies, according to the U.S. Energy Information Administration EIA.
Soaring oil prices are a key driver of surging U.S. inflation, which reached a 41-year high of 8.5% in March 2022, posing a significant risk to the post-pandemic economic recovery. The impact of high inflation became apparent when the U.S. released GDP data for the first quarter of 2022, which unexpectedly contracted by 1.4%, further fueling fears of a looming recession. The international Brent benchmark rose a staggering 68.5% last year, with soaring global oil prices being the main reason for the recent spike in inflation. Aside from the Ukraine war, this can be attributed to a lack of investment and drilling activity in the oil industry following the August 2014 oil price crash, exacerbated by the Russia-Saudi price war and the pandemic in March 2020. Global oil supply will remain constrained for some time to come, which means oil prices will continue to rise sharply, at least in the near term. Even OPEC+ members are struggling to raise output to the level of agreed quotas.
Soaring oil prices hit U.S. consumers hard. U.S. gasoline prices recently hit an all-time high of $4.59 a gallon, according to the EIA. This, combined with the spiraling prices of other goods and services, has put considerable pressure on the Biden administration and the post-pandemic U.S. economic recovery. As such, Biden will make fighting inflation a top priority. The key to lowering inflation is lowering domestic fuel prices by expanding U.S. crude supplies. In early March 2022, the Biden administration sent an official mission to Venezuela with the goal of opening a dialogue with the Maduro regime. This is the first such engagement between the United States and the Caracas government since January 2019. Many see this as a cynical attempt to get more crude supplies from Caracas in exchange for Washington easing tough U.S. sanctions on Venezuela.
In a recent statement, the Biden administration said it would begin to ease some sanctions on Venezuela in order to build a positive relationship with Maduro-led Venezuela. The first step will be to allow global energy giant Chevron to negotiate a deal with Venezuela's state oil company PDVSA, according to White House officials. Chevron is the only U.S. oil company still operating in Venezuela. The change to this requirement does not allow Chevron to reach an agreement with PDVSA, meaning the oil major can only discuss and negotiate with Venezuelan government-run oil companies. Restrictions preventing Chevron from producing and exporting Venezuelan oil will remain in place . Whether this small change will bring any meaningful change to the situation in Venezuela, especially the deep-seated economic and humanitarian crisis engulfing OPEC members, is questionable.
Chevron's longstanding presence in Venezuela demonstrates the company's ability to maintain a positive working relationship with PDVSA and the Maduro regime, which provides the U.S. government with a powerful lever in negotiations with the Venezuelan government. The integrated oil company is one of the few Western oil companies with the necessary capital, technology and skilled labor desperately needed to rebuild Venezuela's deteriorating energy infrastructure. To revive Venezuela's shattered economy, the country's crumbling oil industry, which is the backbone of the country's economy, must be rebuilt. This will require significant capital, estimated to be as high as $250 billion, and crude production will exceed 2 million b/d in a few years, an output not seen since 2017. The White House also intends to remove from the sanctions list Carlos Erik Malpica-Flores, a former senior PDVSA official who is the nephew of Maduro's wife .
The Biden administration expects the measures will motivate Maduro to maintain a dialogue with Washington, and the White House wants more concessions from Caracas and the release of more Americans detained in Venezuela. Severe U.S. sanctions have exacerbated Venezuela’s severe economic and humanitarian crisis, and small changes to those sanctions will not help alleviate those scourges . Small concessions from Washington would also deny PDVSA access to the capital, labor and components needed to rebuild damaged oil infrastructure, meaning no significant increase in Venezuelan crude production, which averages 55.5 percent in 2021 10,000 barrels per day, while before Chavez became president in February 1999, Venezuela's crude oil production exceeded 3 million barrels per day.
According to Washington, whether the United States will further ease its tough sanctions on Venezuela depends on whether the Maduro regime will resume talks with the Venezuelan opposition recognized by the United States. For Western energy companies to be willing to take the risks associated with investing in Venezuela, significant adjustments to existing sanctions would have to be made, which would include allowing the sale of Venezuelan crude and capital transfers to the country without fear of punishment from Washington. To get there, Maduro would have to make massive concessions to the U.S.-backed opposition and commit to substantial democratic reforms, with the key being a liberal democratic presidential election in 2024, which currently looks unlikely . That means Venezuela's oil production will remain stuck at its current level of around 700,000 barrels a day, and the U.S. won't be able to count on importing crude from the OPEC member.
Brent Crude Oil Daily Chart
GMT+8 at 13:58 on May 27th, Brent crude oil continuously reported $117.26/barrel
Soaring oil prices are a key driver of surging U.S. inflation, which reached a 41-year high of 8.5% in March 2022, posing a significant risk to the post-pandemic economic recovery. The impact of high inflation became apparent when the U.S. released GDP data for the first quarter of 2022, which unexpectedly contracted by 1.4%, further fueling fears of a looming recession. The international Brent benchmark rose a staggering 68.5% last year, with soaring global oil prices being the main reason for the recent spike in inflation. Aside from the Ukraine war, this can be attributed to a lack of investment and drilling activity in the oil industry following the August 2014 oil price crash, exacerbated by the Russia-Saudi price war and the pandemic in March 2020. Global oil supply will remain constrained for some time to come, which means oil prices will continue to rise sharply, at least in the near term. Even OPEC+ members are struggling to raise output to the level of agreed quotas.
Soaring oil prices hit U.S. consumers hard. U.S. gasoline prices recently hit an all-time high of $4.59 a gallon, according to the EIA. This, combined with the spiraling prices of other goods and services, has put considerable pressure on the Biden administration and the post-pandemic U.S. economic recovery. As such, Biden will make fighting inflation a top priority. The key to lowering inflation is lowering domestic fuel prices by expanding U.S. crude supplies. In early March 2022, the Biden administration sent an official mission to Venezuela with the goal of opening a dialogue with the Maduro regime. This is the first such engagement between the United States and the Caracas government since January 2019. Many see this as a cynical attempt to get more crude supplies from Caracas in exchange for Washington easing tough U.S. sanctions on Venezuela.
In a recent statement, the Biden administration said it would begin to ease some sanctions on Venezuela in order to build a positive relationship with Maduro-led Venezuela. The first step will be to allow global energy giant Chevron to negotiate a deal with Venezuela's state oil company PDVSA, according to White House officials. Chevron is the only U.S. oil company still operating in Venezuela. The change to this requirement does not allow Chevron to reach an agreement with PDVSA, meaning the oil major can only discuss and negotiate with Venezuelan government-run oil companies. Restrictions preventing Chevron from producing and exporting Venezuelan oil will remain in place . Whether this small change will bring any meaningful change to the situation in Venezuela, especially the deep-seated economic and humanitarian crisis engulfing OPEC members, is questionable.
Chevron's longstanding presence in Venezuela demonstrates the company's ability to maintain a positive working relationship with PDVSA and the Maduro regime, which provides the U.S. government with a powerful lever in negotiations with the Venezuelan government. The integrated oil company is one of the few Western oil companies with the necessary capital, technology and skilled labor desperately needed to rebuild Venezuela's deteriorating energy infrastructure. To revive Venezuela's shattered economy, the country's crumbling oil industry, which is the backbone of the country's economy, must be rebuilt. This will require significant capital, estimated to be as high as $250 billion, and crude production will exceed 2 million b/d in a few years, an output not seen since 2017. The White House also intends to remove from the sanctions list Carlos Erik Malpica-Flores, a former senior PDVSA official who is the nephew of Maduro's wife .
The Biden administration expects the measures will motivate Maduro to maintain a dialogue with Washington, and the White House wants more concessions from Caracas and the release of more Americans detained in Venezuela. Severe U.S. sanctions have exacerbated Venezuela’s severe economic and humanitarian crisis, and small changes to those sanctions will not help alleviate those scourges . Small concessions from Washington would also deny PDVSA access to the capital, labor and components needed to rebuild damaged oil infrastructure, meaning no significant increase in Venezuelan crude production, which averages 55.5 percent in 2021 10,000 barrels per day, while before Chavez became president in February 1999, Venezuela's crude oil production exceeded 3 million barrels per day.
According to Washington, whether the United States will further ease its tough sanctions on Venezuela depends on whether the Maduro regime will resume talks with the Venezuelan opposition recognized by the United States. For Western energy companies to be willing to take the risks associated with investing in Venezuela, significant adjustments to existing sanctions would have to be made, which would include allowing the sale of Venezuelan crude and capital transfers to the country without fear of punishment from Washington. To get there, Maduro would have to make massive concessions to the U.S.-backed opposition and commit to substantial democratic reforms, with the key being a liberal democratic presidential election in 2024, which currently looks unlikely . That means Venezuela's oil production will remain stuck at its current level of around 700,000 barrels a day, and the U.S. won't be able to count on importing crude from the OPEC member.
Brent Crude Oil Daily Chart
GMT+8 at 13:58 on May 27th, Brent crude oil continuously reported $117.26/barrel
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