The lifting of sanctions on Venezuela will not curb oil prices

By Rhod Mackenzie

 The US government has eased sanctions against Venezuela in the hope that it will improve the situation in the oil market, where there has been a noticeable shortage recently. This is a significant breakthrough for the Latin American country. However, due to the state of Venezuela's oil industry, it will be much more challenging to decrease prices globally. What are the US's reasons for lifting Venezuela's sanctions and the possible impact on the global market.

Oil prices have soared in recent months, surpassing $95 per barrel, despite unfavorable conditions such as high interest rates and concerns about decreasing demand in the major consumer countries. According to the International Energy Agency (IEA), there will be a 1.2 million barrel per day shortage of crude oil globally in the latter half of 2023. This is due to the extension of the production limit agreement among OPEC nations. For example, Saudi Arabia has voluntarily reduced its output by one million barrels per day, whilst Russia has done so by 500 thousand.
Some consumers lacked enthusiasm for this. Firstly, let's focus on the USA. While American oil companies are reaping benefits from the current situation, the same cannot be said for the relationship with the Biden administration. It is currently in the interest of the US government to lower prices for three reasons. Expensive oil poses a risk of a fresh wave of inflation in the country, causing apprehension for the incumbent Democratic Party just a year ahead of elections. Washington is attempting to curtail Russia's export earnings and enforce a $60 ceiling on the cost of Russian oil, which currently surpasses the limit by a substantial margin. Meanwhile, the American strategic oil reserve has hit a record low not witnessed in four decades. The administration intended to top up its reserves to some extent, but given current prices, this goal is unachievable. If pursued, it will even exacerbate the surge in prices.

Peace in Barbados.
In light of these considerations, the United States has endeavoured to spur certain market players to ramp up production in recent months. Washington has attempted to exert pressure on Saudi Arabia (without success) and even turned a blind eye to Iran's circumvention of the sanctions regime (with some success). Attempts at mediation in the internal political dialogue in Venezuela have hit a snag. On 17th October, representatives from the Venezuelan government and opposition came to an agreement to hold the 2024 elections after a meeting in Barbados. The Biden administration's more favorable stance towards the leadership of the South American country, as opposed to the previous government led by Donald Trump, which had imposed sanctions on the Venezuelan oil sector, also played a role in facilitating the agreement.
For Venezuela, the past quarter of a century has been disastrous for its oil production. The country's output hit a record high in early 1998, reaching 3.2 million barrels per day. However, by 2016, massive underinvestment had caused production to decline to 2.4 million barrels. Since then, Venezuela has experienced political instability coupled with a downturn in global prices, causing production to plummet further. In August 2020, during the pandemic, output reached an unprecedented low of 300,000 barrels. Since then, it has experienced a sluggish growth and presently produces less than 800,000 barrels per day.

According to Finam FG analyst Oksana Lukicheva, lifting the restrictions on sanctions will enable the Venezuelan company PDVSA to recommence operations and market its oil to the world.

"This will streamline the process of securing capital, importing drilling equipment, repairing refineries, executing projects and establishing partnerships, facilitating payment for oil sales.

"Due to the prolonged sanctions, Venezuela's recovery process is expected to be slow and require substantial investments," stated Evgenia Popova, a consultant at Implementa. In the past three years, production has increased by approximately 100,000 barrels per day through projects in collaboration with China, Russia, and Iran. If the United States were to join these projects, production could potentially increase by 200,000 barrels per day in the coming year."

As stated by Marcel Salikhov, the President of the Institute of Energy and Finance, it is anticipated that Venezuela will be capable of boosting its production by 150-200 thousand units in the months to come, thus achieving a 20-25% increase.
"This will positively impact the economy by increasing export revenues. A key factor will likely be the reduction in discounts, currently at approximately $20 per barrel for the Venezuelan Merey grade compared to Brent.

According to Evgenia Popova, the Venezuelan authorities have set a target production level of 1 million barrels per day."

"However, granting permission for joint ventures between the US and Venezuela in previously exploited oil fields could lead to a production increase of up to 850,000 barrels per day in a realistic scenario - an increase of 100-150,000 barrels. Moreover, it is worth recalling that Venezuela announced their strategy to systematically increase oil production back in March 2022. However, over the course of the year, it has grown by only 10% (+71 thousand barrels per day), as highlighted by the source of the comment."
It may take over a year to reach the designated production target level, and an investment of more than £10 billion over at least te next five years is necessary to achieve the pre-sanction level (more than 2 million barrels per day).

Marcel Salikhov observes that the current state of the Venezuelan oil industry restricts the potential for growth in production, which had reached 3 million barrels per day in the early 2000s.

-- Oil production has been declining continuously for two decades, despite the country holding the world's largest oil reserves. As such, sizeable investments are necessary to reverse this trend and achieve long-term sustainable growth. Unfortunately, the Venezuelan authorities do not have the financial means to do so on their own. According to the expert, global oil companies, including those from China, possess a wealth of experience operating in the country but remain unlikely to provide substantial new investments unless there is a significant improvement in the institutional environment.
He announced that the current authorisations from the US Treasury governing the suspension of some sanctions are temporary. For substantial investors, this implies that these sanctions can be easily reinstated if the political landscape shifts.

Analysts concur that the relaxation of the sanctions will not significantly affect oil prices.

This news briefly curtailed the upsurge in oil prices. Under the impact of heightened geopolitical risk and a predicted slight rise in consumption during the final months of the year, oil prices may fall between the range of $84-$97 per barrel. Lukicheva claimed that in 2024, the average annual cost of Brent may hit $96 per barrel, with a price range presently perceived as $88-$102 per barrel.

Evgenia Popova notes that a production increase of 100-150 thousand barrels per day over several years is insignificant.

For comparison, OPEC+ plans to decrease production by an additional 1.4 million barrels per day from 2024 onwards. It is also important to consider specific characteristics: Venezuelan oil is viscous, and production expenses are expensive. The specialist concluded that only supplying to the USA is profitable.