US sanctions on Venezuela could lead to higher gas prices

• The Trump administration announced last week it would impose sanctions on Venezuela's state-run oil industry.
• That could lead to higher energy prices, especially in wake of the US withdrawal from the Joint Comprehensive Plan of Action.
• Together with Iran sanctions, analysts say the new move against Venezuela has threatened to cut global supply by two million barrels per day.

A US crackdown on foreign oil exports could lead to higher prices at the pump.

The Trump administration said last week it would impose sanctions against Venezuela's state-owned oil industry in an attempt to cripple the government of President Nicolas Maduro, who is facing global pressure to cede power to opposition leader Juan Guaidó.

The sanctions ban most Americans from doing business with PDVSA, the parent company of Citgo, blocking $7 billion in assets and leading to $11 billion in export losses for Venezuela over the next year. Because funds would be diverted away from the government and into a separate account, analysts say that will likely halt most Venezuelan shipments to the US.

While production levels there have dropped dramatically in recent years, American refiners will likely have a difficult time making up for imports compromised by sanctions. Shipping more than a half million barrels per day to the US, PDVSA has remained a major source of heavy crude supply.

Treasury Secretary Steven Mnuchin said he didn't expect the sanctions to affect American fuel prices, suggesting Middle Eastern producers "will be happy to make up the supply." But output has been falling in the countries that ship the US heavy crude, which differs from the shale that has helped send domestic stockpiles to record levels.

Saudi Arabia is one of the only producers positioned fill the gap, according to Helima Croft, head of commodities research at RBC, but it has been working to lower production and exports to the US shore up prices.

"If they are multi-month measures, I think they will potentially have a very significant price impact as there are few countries that can surge heavy oil output," Croft said. "I think the US Treasury Secretary may be overly optimistic about the ability of other producers to fill the gap."

The sanctions could also dissuade those indirectly affected from purchasing Venezuelan oil, according to Abhishek Deshpande, the head of oil research and strategy at JPMorgan. He said because the Office of Foreign Assets Control tends to take a broad view of prohibited conduct involving blocked entities, buyers outside of the US may halt business with Caracas.

"One particular risk could be insurance companies being overcautious, and that could restrict the flow of Venezuelan barrels more than what a US embargo on oil would do, at least initially," Deshpande said. "In the team's view, the risk to Venezuela's oil is an additional supply side risk which is likely to tighten oil markets more than what is currently priced."

This all comes at a time when the world is laboring to wean itself off of oil from Iran, the fourth-largest OPEC producer. Following President Donald Trump's withdrawal from the Iran nuclear deal last year, the US called on most countries to stop buying oil from the Islamic Republic. While some major importers received sanctions waivers, the Trump administration has indicated its ultimate goal is to send Iranian energy exports to zero.

The oil output at stake from recent policies against Iran and Venezuela amounts to two million barrels per day, according to an analysis led by Barclays economist Alejandro Arreaza. All else equal, they estimate sanctions could decide the difference between a surplus and a deficit in the global market next year. And in 2021, production outcomes could still vary by around one million barrels per day depending on US policy.

"These sanctions, in addition to those on Iran, leave the US administration with even more leverage on the oil price, enabling it to adjust the severity of implementation," Arreaza said.

In Venezuela, sanctions could cause gasoline shortages and further erode conditions at PDVSA, which was already seen as at risk of collapsing following years of mismanagement, underinvestment, and lower commodity prices. Because the government gets nearly all of its revenue from oil and sells about 40% its energy exports to the US, opponents say that they could worsen the crisis there and lead to consequences for Venezuelan civilians.

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