Crude Oil: Venezuelan Developments Leave Room for Long-Term Supply Increases

Core Viewpoint - The arrest of Venezuelan President Nicolas Maduro by the US has significant implications for the oil market, with a focus on potential long-term supply increases rather than immediate disruptions [1] Supply Uncertainty - The oil market is currently facing further supply uncertainty, which has been a recurring theme over the past year [2] - The nature of the power transition in Venezuela will determine short-term supply risks, with a messy transition posing greater risks [2] Transition of Power - Vice President Delcy Rodríguez has assumed power, and her initial defiance is shifting towards a more cooperative stance with the US, which could lead to a smoother transition and potential downside for oil prices [3] Sanctions and Supply Potential - A smoother transition may increase the likelihood of the US lifting its blockade on sanctioned oil tankers, potentially leading to short-term price declines and easing of sanctions in the future [4] Venezuelan Oil Supply Risks - A chaotic transition could put approximately 900,000 barrels per day (b/d) of supply at risk, primarily affecting exports to China and US refiners [5] - The current forecasts suggest that the loss of this supply could provide some upside, but a well-supplied market limits the potential for significant price increases [5] Long-term Oil Market Outlook - The outlook for the oil market in 2026 remains unchanged, with expectations of a well-supplied market keeping prices low, forecasting Brent to average $57 per barrel [6] - For 2027, there are downside risks to the $62 per barrel forecast if Venezuela's supply increases significantly, contingent on OPEC+ responses [6] Venezuelan Oil Production Context - Venezuela has significant oil reserves but currently produces just over 900,000 b/d, which is less than 1% of global consumption [7] - Production has declined from nearly 3 million b/d in the early 2000s to below 2.4 million b/d by 2015, with further declines since then [7] Investment Needs for Recovery - A recovery in Venezuelan oil production will require substantial investment in infrastructure, which has been neglected for years [9] - Foreign oil companies may be hesitant to invest due to past expropriations and unpaid damages, necessitating a more stable environment for investment [10][11] Heavy Crude Supply Dynamics - Venezuelan heavy crude oil is crucial for US Gulf Coast refiners, with imports dropping from 1.3 million b/d in the early 2000s to less than 150,000 b/d in 2025 [12] - Increased supply from Venezuela could pressure other heavy crude suppliers, particularly Canada, in the long term [13]