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Trump could 'punish' Venezuela with oil sanctions immediately after presidential vote

Sam Meredith
President Donald Trump has a number of unwritten rules for his associates who are looking to profit from their relationship with him.

Venezuela's oil industry could be directly targeted by the U.S. immediately after the crisis-hit nation's upcoming presidential election, oil experts warned Wednesday, as global energy markets braced for a further spike in crude futures.

Venezuela's export troubles have intensified ahead of the country's snap presidential election on Sunday, as incumbent Nicolas Maduro prepares for a second term in office despite an unprecedented economic and social crisis.

The U.S., alongside several other countries in the Americas, has condemned Venezuela's forthcoming vote as a sham.

"Maduro will win as the election is rigged and it won't be fair. The more important question is how the U.S. will react after the official results," Tamas Varga, analyst at PVM Oil Associates, told CNBC in a phone interview Tuesday.

"If U.S. refineries are forbidden from buying Venezuelan crude then you'd have to imagine the country is in trouble," he added.

When asked whether oil traders should expect to see sanctions imposed against Venezuela after the Latin American country's vote, Vargas replied: "Knowing Donald Trump , it is more likely than simply just a prospect because he likes playing hardball, he isn't fainthearted and he is not afraid to punish countries."

Far-reaching economic sanctions

A move to directly target Venezuela's oil industry would likely constitute a huge sucker punch to Maduro's socialist administration, which is depending almost entirely on crude sales to try and decelerate a deepening economic crisis.

In February, then U.S. Secretary of State Rex Tillerson said sanctioning Venezuela's oil or prohibiting the crude to be sold in the U.S. was something the White House would continue to mull over.

And while the Trump administration has already imposed far-reaching economic sanctions against Caracas, the additional risk of direct penalties on the country's oil sector remains.

Venezuela's production collapse has seen its crude output drop to around 1.4 million barrels a day (bpd) in recent months — a spectacular fall of nearly 40 percent since 2015. And with global creditors monitoring the country's assets and the U.S. reportedly considering further sanctions, the global energy market is bracing for a further spike in oil prices.

IEA sees 'potential' for oil sanctions

The country's state oil company, PDVSA, is also battling mounting problems after it recently lost control of its refining and storage assets in the Caribbean to U.S. exploration and production company, ConocoPhillips.

Output from PDVSA has slumped by almost 1 million bpd since its recent high in December 2015.

On Wednesday, the International Energy Agency (IEA) warned in its closely-watched monthly report that there is the "potential" for sanctions targeting PDVSA immediately after the looming presidential vote.

"With the oil sector spiraling deeper into crisis, it is possible that capacity could fall by several hundred thousand barrels a day by the end of the year," the Paris-based organization said.

'Expect even higher prices'

Brent crude traded above $78 a barrel on Wednesday, which could ratchet up the pressure on OPEC and Russia to unwind their ongoing production deal to curb a global supply overhang.

"The market is rallying on a perceived lack of output from Iran, yet if Venezuela is hit with an actual slide in production then you can expect even higher prices," PVM Oil Assocaites' Vargas said.

Citizens of the crisis-torn state are struggling to cope with widespread food shortages, the collapse of its traditional currency and relentless hyperinflation — which the International Monetary Fund (IMF) has forecast to hit 13,000 percent in 2018.

At the same time, almost 75 percent of Venezuelans are reportedly suffering from weight loss while unemployment in the country is expected to skyrocket to 32 percent by 2022.