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Venezuela's opposition leader Juan Guaido speaks during a news conference in Caracas, Venezuela, on Jan. 25, 2019.

CARLOS GARCIA RAWLINS/Reuters

The political crisis in Venezuela is roiling global oil markets, with the prospect that steep declines in the country’s oil output will drive up prices for the heavy crudes that Canada produces.

Production by the country’s state-owned Petroleos de Venezuela SA (PDVSA) plunged in recent years and is expected to fall further in 2019, with dramatic cuts if the United States follows through on threats to impose new sanctions on its oil trade with the South American country. Despite years of political disagreements with the United States, South America’s only member of the Organization of Petroleum Exporting Countries still sends roughly 500,000 barrels a day of crude to U.S. refineries, primarily to Gulf Coast facilities that process its bitumen-like heavy oil.

However, while Canadian producers should benefit from rising prices for heavy crude, they are not in a strong position to replace any declines in Venezuelan imports to the United States, owing to the lack of pipeline space and the straining capacity of the crude-by-rail option.

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“Canadian producers should be able to capitalize on a crisis like this in terms of placing their barrels [in the U.S. market], but that’s where the infrastructure constraints really come to bear," Helima Croft, global head of commodity strategy at RBC Capital markets in New York, said on Friday. Canada is by far the largest source of U.S. crude imports at 3.6 million barrels a day (b/d), while Venezuela trails Saudi Arabia (one million b/d) and Mexico (670,000 b/d).

In markets on Friday, West Texas intermediate (WTI) gained 64 US cents to US$53.77 a barrel. Western Canadian select (WCS) traded at a discount of US$10 to WTI for March delivery, according to NetEnergy, a Calgary-based trading company. That differential had briefly widened to US$50 last fall as pipeline constraints and temporary refinery shutdowns in the United States created an inventory glut in Alberta. WCS prices jumped sharply after Alberta Premier Rachel Notley ordered a production cut of 325,000 b/d to drain the excess supply from the system in December. The leading U.S. heavy-oil benchmark, Mars, rose US$1.10 to US$60.98 in spot markets on Friday, Bloomberg reported. (The WTI price is quoted at Cushing, Okla., and includes the cost of transportation.)

The long-brewing crisis in Venezuela reached a head this week as the United States, Canada and other countries in the hemisphere recognized opposition leader Juan Guaido as interim president following a move by the country’s National Assembly to have him replace Nicolas Maduro. The incumbent won re-election in May in a widely criticized vote that banned key opposition members. Mr. Maduro remains in office and U.S. President Donald Trump renewed American threats to increase sanctions on the country, including possible prohibition on oil trade with the United States.

Analysts on Friday said it is unlikely the United States will impose a complete ban of imports of oil or exports of petroleum products to the country, but added it could adopt less dramatic steps that would curtail Venezuelan exports. Even without such measures, Venezuelan production is expected to continue to fall as debt-burdened PDVSA is unable to reinvest in its oil fields or infrastructure and has lost many of its most experienced technical staff under its military management.

Venezuela’s crude production has declined steadily since former Socialist president Hugo Chavez won power in 1999, and has fallen by half over the past decade to 1.2 million barrels a day (b/d). The price collapse in 2014 was a major hit to both PDVSA and the Venezuelan government, which relies on it for revenue.

Even without sanctions, Ms. Croft forecasts that production will decline by up to 500,000 b/d in 2019. U.S. sanctions would reduce it by an additional several hundred thousand barrels a day, she said. Venezuela also imports 150,000 b/d of petroleum product from the United States, including 75,000 barrels of diluent – a light hydrocarbon that is used to dilute bitumen so it can be transported in pipelines.

There has been continuing debate within the Trump administration as to how to respond to the political crisis in Caracas, said Francisco Monaldi, a former PDVSA consultant who now teaches energy economics at Houston’s Rice University. Hawks in the administration favour a strong round of sanctions including on the oil industry, while others argue for a more restrained approach that would allow Venezuela’s collapse to proceed under its own steam, he said. One proposal would see Washington declare that any payment to Venezuela in return for oil must go to the new government, or perhaps some form of humanitarian account to help feed the country’s starving people.

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Mr. Monaldi said the U.S. imports account for 80 per cent of PDVSA’s revenue. The state-owned company owes China US$17-billion and is behind on its payment, so any effort to divert its exports to that market may not yield the company any revenue. As well, it is deeply in debt to Russian’s Rosneft, which has a joint venture with PDVSA in Venezuela.

Over the longer term, a change in government in Venezuela could give the country an opportunity to rebuild its oil industry, so long as that change is accompanied by political stability, Mr. Monaldi said. However, it will take years and many billions of dollars in investment to recover the ground lost over the past decade.

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