Oil market's 'ticking time bomb' set to detonate — and the price reaction will be 'anything but muted'

  • The oil-rich, but cash-poor, South American country is embroiled in a political meltdown.
  • It comes after an opposition leader stood in the streets of Caracas last week and declared himself as the rightful president.
  • "Oil's ticking time bomb is sure to detonate at some point and the price reaction will be anything but muted," Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note published Monday.
An anti-government demonstrator stands next to a national flag during an opposition protest blocking the Francisco Fajardo highway in Caracas on May 27, 2017.
LUIS ROBAYO | AFP | Getty Images
An anti-government demonstrator stands next to a national flag during an opposition protest blocking the Francisco Fajardo highway in Caracas on May 27, 2017.

Crisis-stricken Venezuela has been thrust back into the energy spotlight, analysts told CNBC on Monday, with a further slide into political chaos likely to trigger wild swings in the oil price.

The oil-rich, but cash-poor, South American country is embroiled in a political meltdown. It comes after an opposition leader stood in the streets of Caracas last week and declared himself as the rightful president.

Growing unrest in Venezuela follows years of economic mismanagement, repression and corruption.

As a result, millions of people have been driven out of the country amid skyrocketing hyperinflation, power cuts and severe shortages of basic items — such as food and medicine.

"(Venezuela) provided little in the way of bullish impetus with markets having become accustomed to its long-running woes. Even so, recent events have provided a timely reminder of its wildcard status for the energy complex," Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note published Monday.

"Oil's ticking time bomb is sure to detonate at some point and the price reaction will be anything but muted," he added.

Parallel government

Opposition leader Juan Guaido staked his claim for the presidency on Wednesday, prompting a flurry of world powers to immediately recognize him as the country's "acting president."

President Nicolas Maduro broke off diplomatic ties with the U.S. shortly thereafter and ordered all U.S. diplomatic personal to leave the country.

Maduro also dismissed Guaido's claim to the presidency, saying it was part of an American-led conspiracy to orchestrate a coup from afar.

Guaido's declaration takes Venezuela into uncharted territory, with the possibility of the opposition now running a parallel government recognized abroad as legitimate but without control over state functions.

China, which has made large investments in Venezuela, has said it "opposes foreign forces from interfering" while Russia, another country with strong Venezuelan connections, said Guaido's assertion of power was a violation of international law.

'Monkey wrench in the oil market'

In an apparent suggestion of U.S. military action, as well as further targeted sanctions against Caracas, President Donald Trump has said "all options are on the table."

If the U.S. moved to impose sanctions on Venezuela, it could "throw a monkey wrench in the oil market," John Kilduff, partner at Again Captial Management, told CNBC on Friday.

Kilduff said Washington and Caracas have a "symbiotic relationship" when it comes to crude, with an abrupt breakdown of those ties likely to send shockwaves worldwide.

The U.S. has five oil refineries on the Gulf coast that are "heavily reliant" on Venezuelan crude to the tune of about 500,000 barrels per day, Kilduff said.

Meanwhile, the U.S. ships large amounts of naphtha to Venezuela. This helps the South American country dilute its extra heavy oil for export around the world.

So, if U.S. sanctions were imposed, Kilduff said: "Not only would we not be buying their oil and our key refiners would be losing out, the rest of the world might not be getting Venezuela's oil because they might not have the by-product they need from us to make their oil flow."