Investment banks cool Trump’s optimism: Venezuelan oil will not lower prices

Investment banks are tempering the White House’s enthusiasm over the oil deal with Venezuela. UBS warns that crude output will take years to recover and will have limited short-term impact on prices. The closure of the Strait of Hormuz and lingering doubts about the pact are keeping markets focused on much more immediate factors, analysts at the Swiss bank warn.

The Trump administration last Friday announced an agreement to acquire 65 billion barrels’ worth of oil reserves. With great fanfare, the U.S. president presented it as one of the largest transactions in history. North American Blue Energy Partners (NABEP), a company owned by the controversial businessman Alejandro Betancourt, will receive a 100-year concession to develop 17 fields. On Wednesday, U.S. Energy Secretary Chris Wright said from Caracas that production would more than double in the coming years.

Energy-sector sources are far more cautious. Specialist consultancy Rystad Energy says Venezuela’s market will take decades to recover. Despite holding the world’s largest proven oil reserves (300 billion barrels), Venezuela—producing 1.1 million barrels a day—is only the world’s twentieth-largest producer, behind newcomers such as Angola and on par with Colombia, the International Energy Agency says. At its historical peak the country pumped three times that amount, a level Rystad says will not be regained until 2050.

Rystad says achieving that would require an $85 billion investment (about €73 billion). In addition, Venezuela’s oil infrastructure is so degraded after years of underinvestment, sanctions and power cuts that it will take not only time and money but also new transportation infrastructure, technical expertise and a stable environment, UBS adds.

Political uncertainty in the country is a primary factor. Both the opposition and the more radical sectors of Chavismo have sharply criticized the deal. Last week Bloomberg also reported that Venezuela is considering a possible exit from OPEC after the United Arab Emirates did so in April. That decision, Homayoun Falakshahi, a senior analyst at energy markets specialist Kpler, said, “would be a big win for Trump,” but it could also increase internal pressure on Venezuela’s acting president Delcy Rodríguez by suggesting her administration has conceded too much. There are also U.S. doubts about the deal’s durability. Citi says there needs to be “greater transparency” and “broader political legitimacy” for agreements to survive a future change of administration in the White House.

Some major U.S. oil companies such as ExxonMobil and ConocoPhillips remain cautious and have not confirmed interest in returning to Venezuela. Both left the country in 2007 after parts of their assets were nationalized, and so far have said conditions do not exist to return, Bloomberg reports. The companies that did not exit Venezuela are more willing to boost investment and production.

Chevron, which never fully abandoned its Venezuelan operations, is explicitly betting on the market. The company—the second-largest U.S. oil firm by market capitalization, behind ExxonMobil and ahead of ConocoPhillips—announced on Wednesday that it will invest $7 billion in the country over the next five years. It is the largest U.S. corporate investment since the capture of Nicolás Maduro in January, and aims to double its production in Venezuela by 2031. Spanish firm Repsol has also signaled a willingness to expand its presence in the country. The multinational was mentioned by Delcy Rodríguez this weekend when presenting the terms of the alliance. It plans to accelerate investments to triple production in the country.

Under the deal, U.S. companies would take over projects previously run by Russian and Chinese firms. UBS sees the possibility of litigation arising from that, which would add geopolitical and legal complexity. The Swiss company has not changed its industry forecasts as a result of the agreement.

Meanwhile, oil prices are rising. On Tuesday the barrel of Brent crude hit €95 after a surge in attacks between the United States and Iran. All analysts agree that this factor carries far more weight than developments in Venezuela. UBS says oil prices “continue to react mainly to events in Hormuz.” The Middle East conflict remains entrenched, and tensions have risen in recent hours. Washington and Tehran have clashed for three consecutive days, a wave of attacks that presents the worst scenario in a month.

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