Recent headlines around Venezuela have raised questions about potential impacts on global oil markets. Below, we address the most common investor questions and explain why, despite the headlines, the near-term fundamentals appear to have remained largely unchanged.
Q. How much oil does Venezuela currently produce?
A. Venezuela currently produces approximately 1 million barrels per day (bpd) of oil, representing less than 1% of global oil supply.
Q. Does Venezuela possess significant oil reserves?
A. Yes. Venezuela holds significant heavy-oil reserves, primarily in the Orinoco Belt.
Heavy oil is the preferred type of oil used by U.S. refiners. Heavy oil is often a cheaper raw material than light sweet crude, such as that produced in the Permian Basin, making it more profitable for U.S. refiners to refine crude oil into refined products like gasoline, diesel, and jet fuel.
This heavy oil is similar to Canadian oil sands crude oil and is well-suited for U.S. refining systems, many of which have been configured to process heavier crudes.
Q. How do we expect the current situation in Venezuela to impact oil prices?
A. We do not expect the situation in Venezuela to materially impact oil prices in the short term.
The physical global oil market remains unchanged. Oil prices have declined primarily due to an oversupplied global oil market, and current developments in Venezuela do not appear to have altered that dynamic.
Q. What could cause oil prices to rise related to the current situation in Venezuela?
A. Oil infrastructure remains a key variable to monitor.
At present, Venezuela’s oil infrastructure appears largely intact and capable of exporting oil to global markets. If infrastructure disruptions were to occur and global oil supply were temporarily reduced, oil prices could move higher.
Q. Will Venezuela add supply to an already oversupplied global oil market?
A. No. While Venezuela has produced up to 3 million barrels per day in the past, production has been declining for many years. Reversing this decline would require significant capital investment and extensive repairs to aging oil fields and infrastructure.
As a result, we do not expect Venezuela to meaningfully add supply to the global oil market anytime soon. Importantly, revitalizing Venezuela’s oil industry would take years, not days or months.
Q. Will U.S. oil and gas producers begin investing in Venezuela?
A. It would be unlikely in the near term.
In 2007, then-President Hugo Chávez nationalized oil projects in Venezuela’s primary producing region, the Orinoco Belt. Foreign operators were required to transfer assets into joint ventures that were more than 60% owned by PDVSA, Venezuela’s state-owned oil company. ExxonMobil refused and exited the country, while Chevron accepted the terms and remains the only U.S. oil producer with significant operations in Venezuela.
U.S. and international operators are likely to wait for political clarity and stability before committing the millions or billions of dollars required to rebuild Venezuela’s oil industry.
Q. Could this situation add to the geopolitical risk premium in oil prices?
A. The geopolitical risk premium embedded in oil prices over recent years appears to have largely dissipated. While physical oil markets have not been affected by current events in Venezuela, oil prices could rise modestly to reflect increased geopolitical risk.
Bottom line
While Venezuela remains geopolitically relevant and resource-rich, we believe its current situation does not materially alter global oil fundamentals or near-term pricing dynamics.
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