Venezuela now has two heads of state, Juan Guaidó and Nicolás Maduro. The US firmly backs Guaidó and has promised economic and diplomatic support. Maduro, meanwhile, still retains the support of the Venezuelan military. The situation will evolve over the coming days and weeks. The US remains undecided on whether to ban the 500,000 b/d of US imports of heavy Venezuelan crude. In the meantime, these developments will continue to provide support to heavy crude prices.
US Actions Key to Market Implications
Venezuela now has two heads of state. Juan Guaidó – recognized as interim president by the United States, Canada, Brazil, Argentina, Colombia, Ecuador, and Peru, and supported by Europe – accepted the responsibility of President of Venezuela yesterday based on provisions in the Constitution and related to his role as head of the Congress. Nicolas Maduro is still recognized by China, Russia, Mexico, Turkey, Nicaragua, Bolivia, Cuba, and others. Importantly, Maduro still maintains the support of the country’s military leadership.
What now? The lynchpin in Guaido’s strategy is to win the support of the military, and so far they have indicated they still support Maduro. Maduro has prepared for this situation over the last year, promoting the defense minister, Vladimir Padrino, to super-cabinet status, where he oversees several ministries and the armed forces. In remarks today, Padrino said the focus is to “avoid confrontation between Venezuelans,” but also firmly backed Maduro. At the same time, it is well documented that the military leadership has access to preferential exchange rates, illegal gold mining activity, and drug trafficking routes. The country’s thousands of generals have a lot to lose if Maduro and his party lose power.
But will the rank-and-file, under-paid and under-fed, remain if having to face the threat of U.S. or regional military forces? So far, President Trump has promised the full economic and diplomatic weight of the United States in supporting Guaidó. The U.S. strategy, led by Vice President Pence, Senator Rubio, and National Security Advisor Bolton, so far appears to be a plan to deliver humanitarian aid to a starved and medically underserved population, though Maduro and the military still control the ports. So far, U.S. diplomats have ignored Maduro’s order for them to leave the country and have remained in the embassy despite Maduro threatening to shut off power there.
Because it moved so quickly into Guaidós corner, the US is likely to increase pressure on Maduro. The US could take action in the oil markets. If Trump decides to ban crude imports, which average 500,000 b/d, heavy crude prices, already high, will increase above current levels. US Gulf Coast refineries will scramble for alternative heavy crude, which will ultimately drive up the price of gasoline – an adverse outcome, especially during a government shutdown. Bolton has also suggested the US could continue imports but reroute payments to PDVSA into an escrow account for the new government. This presupposes that PDVSA, still functionally controlled by Maduro’s government, would continue selling crude knowing that the revenue would head to its opponents; this is unlikely. A third option is to stop selling naphtha and gasoline to Venezuela. A recent outage of another gasoline-producing refinery unit means gasoline shortages are increasing. This would increase the burden on the Venezuelan people and eliminate an export market for U.S. refiners.
Whatever is to come, for now Venezuela has two opposing heads of state. This will create more uncertainty at PDVSA and in the international markets, which will further increase the price of heavy crude.