Venezuela Regime Shift Could Trigger Oil Price Spike Followed by Slump

Background

Since President Trump’s first term, the United States intensified sanctions on Venezuela, a nation that holds the world’s largest proven oil reserves, the majority of which are heavy crude suitable for U.S. Gulf‑Coast refineries. The sanctions, originally in place since 2005, prompted Canadian heavy producers to increase supply to the U.S. market, filling the gap left by Venezuelan exports. The Trump administration’s policy shift aimed to pressure Caracas into political change, raising speculation about a direct intervention.

Current Production and Export Levels

Venezuela’s oil output has fallen sharply from its peak. According to Wood Mackenzie, the country produced roughly 900,000 barrels per day (bpd) this year, a steep decline from the 3 million bpd it achieved about two decades ago and from the 2 million bpd seen in 2017. Export data for November showed a daily average of around 900,000 bpd, the third‑highest figure reported for the year. These numbers illustrate a modest rebound after years of sanctions and mismanagement, yet the output remains far below historical levels.

Potential Impact of Regime Change

A U.S.‑backed regime change in Caracas would likely cause an immediate price surge as market participants anticipate a sudden tightening of supply. However, analysts predict that once a new government is in place, sanctions would be lifted, allowing Venezuelan crude to re-enter the global market. The influx of heavy oil would create a surplus that could depress benchmark prices, leading to a subsequent slump.

Wood Mackenzie’s Ed Crooks noted that Treasury Secretary Scott Bessent hinted at this scenario in the context of the Trump administration’s focus on keeping oil affordable. Bessent said on Fox News that “there’s a very good chance that if something happens with Russia‑Ukraine, if something happens down in Venezuela, we could really see oil prices go down even more.” His remarks suggest that a political shift in Venezuela could be a catalyst for a broader price decline.

Reactions from Industry

Energy analyst David Blackmon highlighted the implications for Canadian crude. In a recent podcast, he explained that a return of Venezuelan heavy to Gulf‑Coast refineries would reduce demand for Canadian heavy crude, potentially hurting Canadian producers. Blackmon suggested that the Canadian government consider expanding access to markets outside the United States, such as China, to mitigate the impact.

The scenario remains hypothetical, but most observers agree that a U.S.‑favoured government in Caracas would alter Venezuela’s oil fortunes, possibly restoring production to pre‑sanction levels.

Implications for Canadian Crude and Market Dynamics

Should Venezuelan oil re‑enter the market, Canadian heavy crude would face increased competition. Refineries in the Gulf Coast, already calibrated for Venezuelan grades, would likely shift their feedstock mix, reducing the demand for Canadian heavy. This could influence shipping routes, bunkering patterns, and freight rates for vessels carrying heavy fuel oil, especially HSFO380, which is commonly used in large tankers and power plants.

The potential price volatility underscores the need for shippers and fuel traders to monitor political developments closely. A sudden spike could tighten supply temporarily, while a later slump might create opportunities for hedging and cost‑saving measures.

Conclusion

A regime change in Venezuela is poised to add a new layer of uncertainty to oil markets. While a short‑term price jump is expected, the subsequent removal of sanctions could trigger a significant decline. Market participants, particularly those involved in heavy fuel oil and shipping, should remain vigilant as geopolitical shifts unfold.