(S&P Global Platts) Any major easing of US oil sanctions against Venezuela remains off the table, but the country’s Nov. 21 elections could provide a chance for relief around the edges like a restart to crude-for-diesel swaps.
Candidates backed by President Nicolas Maduro are expected to sweep the local and regional elections. Key differences this cycle include a fractured opposition and EU election monitors who could lend credibility to the vote counts.
Factors complicating the outlook for any US sanctions relief include the breakdown of Mexico-hosted talks between the government and opposition, the US extradition of Maduro ally Alex Saab, and Venezuela’s ongoing oil trades with fellow sanctioned oil producer Iran.
S&P Global Platts Analytics expects Venezuelan oil production to remain capped around 600,000 b/d through next year as a result of the US keeping most sanctions in place.
Orinoco Belt crude output increased 120,000 b/d in early October compared with September, driven by Iran’s initial shipment of diluent for PDVSA to use in blending with its heavy crude, according to Platts Analytics.
Suspended talks
The Trump administration sanctioned state-owned PDVSA in January 2019, cutting off flows of Venezuelan crude to US Gulf Coast refiners among others.
In October 2020, the US blocked refiners in India, Italy and Spain from supplying Caracas with diesel cargoes in exchange for Venezuelan crude. The Biden administration reportedly came close to allowing the crude-for-diesel swaps to restart on humanitarian grounds but ultimately decided to keep the ban in place.
Fuel shortages persist in Venezuela outside the capital Caracas. Drivers face extreme gasoline rationing, waiting 15 days for the chance to buy five gallons.
Venezuelan refiners are producing 68,000 b/d of gasoline and 56,000 b/d of diesel — well below the estimated October demand of 225,000 b/d of gasoline and 130,000 b/d of diesel, according to PDVSA data.
After three rounds of negotiations in Mexico with opposition leaders, the Maduro government in mid-October suspended the talks following the US extradition of Colombian businessman Saab on charges of money laundering.
Reshaping the opposition
Fernando Ferreira, Rapidan Energy Group’s geopolitical director, said the election results will likely reshape the opposition strategy going into 2022. He said many in the opposition are looking forward to moving past the failed leadership of Juan Guaido and Leopoldo Lopez and “are willing to negotiate terms of coexistence with Maduro.”
“The Saab extradition has hardened Maduro’s negotiating position, but I don’t think it necessarily means talks are over,” Ferreira said. “We’ve heard of informal discussions going on in Caracas to restart the process. Maduro may wait until after the election to reengage, but I expect talks will resume before the end of the year — especially if that process helps further divide the opposition.”
Einstein Millan, a Caracas-based expert on Venezuela’s oil sector, said the November elections will mark the way forward economically, socially and politically.
“For now, no recognized operator has decided to invest in Venezuela, because there is reticence and distrust in the face of the gray and diffuse reality of the institutions, the political climate and fear for the intensification of sanctions,” he said.
Millan sees the possibility of production surging back to 1.5 million b/d by the end of 2022 if it can restart joint ventures with China, Russia and even the US.
Sanctions here to stay
Jesus Seguias, political analyst and director of Datincorp, said wins by mostly Maduro candidates during a “moderately transparent” election would “totally change the game.”
“If Maduro is legitimized, the sanctions will begin to gradually disappear, as well as the support of the international community for the opposition, depending on the negotiations that take place in Mexico,” Seguias said. “And of course, the level of concessions that Maduro would be willing to grant at a negotiating table in Mexico will be key. These negotiations will take a determined course after these elections.”
Rapidan’s Ferreira said US oil sanctions on Venezuela are probably here to stay.
“However, I still think we could see some form of crude swaps — not to calm down oil markets but as some type of negotiated concession to Maduro that helps ease some of the humanitarian impact of the Venezuela crisis,” he said. “My sense is that there are several different options under consideration, but the Administration is struggling to find that magic formula that lets oil flow but keeps revenues away from Chavistas.”
