Oil Market Impacts from Venezuela

Investors are carefully watching the situation in Venezuela, with potential implications for the oil and other commodity markets on the top of investors' minds. So my guest today is Dan Streuven, co head of Global Commodities Research in Goldman Sachs Research. He joins us by phone from Miami where the Goldman Sachs Energy, Clean Tech and Utilities Conference is just getting underway. Dan, thanks so much for making the time.

Thanks a lot, Allison, for having me.

So, Dan, first, catch our listeners up on the recent developments in Venezuela. What's happened? And give us a sense of the importance of these developments for the oil market.

Venezuela's president Maduro was captured by The US over the weekend in Caracas on charges of drug trafficking along with his wife, and his VP, Delsi Rodriguez, is now the interim leader. We have not seen any disruptions to oil production of Venezuela. Venezuela is an important oil producer, I should say potential oil producer, accounting for about 1% of global production, but 20% of global reserves. But so far, no disruptions. The big question are on the political side, will we see elections? And then, of course, what will happen to the oil industry in coming months and years ahead?

So just to reiterate, there have been no disruptions to oil supplies at this point. So with that backdrop, how have oil markets responded so far, and what do you make of this initial market reaction?

The reaction has been quite muted. Oil prices are up about a dollar or so. And I think it makes sense that the reaction is muted because the short term effects are quite ambiguous and because we haven't seen any disruptions so far. The impacts on supply in the short term are ambiguous because on the one hand, you could argue that the risks of disruptions have gone up with the possibility that the blockade of Venezuelan oil may intensify, may lead to a lack of storage capacity and therefore production shut ins. On the other hand, you may also argue that it's more likely now that production will

Then when we talk about over the shorter term and this uncertainty about where supply goes, we're talking about pretty small quantities in terms of the potential swing in oil supply again over the shorter term.

Yeah. That's exactly right. We think that Venezuela is producing around 800 KBD of oil at the moment. That is just under 1% of global production. I think that the upside risk to oil production over the next year or so is around 300 to 400 KBD. Similarly, I think the downside risk to the New Zealand production is also 300 to 400 KBD. Running that to our models, that implies a symmetrical risk to oil prices from the Venezuelan production in the next year of around plus or minus $2 per barrel, so relatively limited. That said, over the long term, the effects could be much more significant because

Yeah. Well, let's talk about that a little bit more because president Trump did say that The US will be, quote, very strongly involved, end quote, in the future of the Venezuelan oil industry and will, again, quote, get the oil flowing the way it should be, end quote. It seems that investors are putting some stock in these comments judging by the rise in US oil majors' share prices. How seriously should investors actually take these comments? What could be the implications on supply growth?