The GERM Report

Risk level: Yellow

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-Venezuela can’t walk the walk

-Sanctions and mismanagement caused irreparable damage

President Trump during his four years in office managed to devastate the Venezuelan oil sector with sanctions. At times, this administration hinted at outright intervention in the Latin American oil producer, siding heavily with opposition leader Juan Guaidó. Once one of the top oil exporters to the United States, Venezuelan oil has slowed to a trickle. But unlike Iran, Venezuela’s oil sector was already under pressure from years of state neglect. And unlike Iran, the prospects for meaningful recovery are slim.

Prospects for eventual economic recovery were overshadowed by the stubbornness of the global pandemic and a weak rollout for vaccines against COVID-19. Political chaos on the United States, meanwhile, left investors wary of risk. In the end, Brent finished the week at $55.10 per barrel, down some 1.6%.

“Like every time since assuming power, President Nicolas Maduro told the National Assembly following a landslide victor that the new year would be one of recovery,” said Jose Chalhoub, an independent consultant and former geopolitical analyst at Venezuelan oil company PDVSA.

State control is diminishing both by design and by external factors. During the weekend, Venezuelan Foreign Minister Jorge Arreaza blasted a U.S. court decision that authorized the sale of assets related to PDVSA’s U.S. refiner Citgo to pay off a $1.4 billion judgement in a messy arbitration with Canadian gold miner Crystallex. Seeing its grip over its prized asset slip, Arreaza decried the “fraudulent judicial process” playing out in the U.S. courts.

“Venezuela will never give up on the defense of its rights and interests in the appropriate forums with the goal of conserving its patrimony,” Arreaza said.

Elsewhere, however, Venezuela may be extending looser nationalist polices by inviting smaller domestic oilfield contracts to play a role in oilfield developments. Unlikely as it may be, Chalhoub said that Maduro has once again pledged to bring oil production back to 1.5 million barrels per day.

 “It seems more like a wishful thinking and just another empty promise from a man with tight grip on power for now,” he said.

Economists at the Organization of Petroleum Exporting Countries put Venezuelan crude oil production at 430,000 bpd, which Chalhoub said was the lowest it’s been since the 1930s. Once in abundance, meanwhile, gasoline is a scant resource in Venezuela, which was one of the founding members of OPEC. Rampant corruption, Chalhoub added, has been an issue plaguing PDVSA since before Maduro assumed the presidency after Huge Chavez died in 2013.

Sensing an opportunity for détente with the incoming Biden administration, Jorge Rodriquez, the head of the National Assembly, said he was hoping to open a new dialogue with the incoming president’s team. Gone are the hawks such as Elliot Abrams and in come veterans of tough negotiation like Tony Blinken as U.S. secretary of state. Admonishing the tacit effort to oust the Maduro regime through steadfast support of Guaidó as the legitimate president, Rodriquez said Caracas is looking for a reset in U.S. relations.

“We want what Venezuela has historically always done with the United States: good business,” he told the Associated Press.

Rodriquez warned of committing past mistakes, something Chalhoub in his comments suggested was a tad ironic. It’s convenient, but not really feasible, for Maduro to promise the world in terms of repairing a dilapidated oil industry. It will “surely take years and massive investments” to not only lift production, but get the aging refinery sector back up to speed. Overall, he said, it is a somber landscape for a country that was once a mighty and influential oil producer.

Crude oil prices could find direction this week from the International Energy Agency’s report on Tuesday. OPEC last week offered a mixed bag, though lockdowns in Europe and a slow vaccine rollout could set the mood. The fireworks are certain to be loud on Wednesday when Joe Biden takes the oath of office to become the next president of the United States. But if we’ve learned anything about the market over the last couple of months, it’s that trends don’t always follow the fundamentals. We see crude oil prices searching for a bit of stability in recent days and so are issuing a Yellow alert, thinking crude oil prices will move by at least plus or minus 2% on the week.