Venezuela's political and humanitarian crisis remains fluid with President Nicolas Maduro clinging to power amid protests led by opposition leader Juan Guaido.
Street protests are expected to continue Thursday with Guaido telling thousands of supporters yesterday that "there's no turning back" as he called for a series of national strikes. In the meantime, Venezuelans are reportedly experiencing shortages of food and medicines.
What the current situation, and any potential outcomes, mean for Venezuela's primary economic asset — its oil sector — are now under scrutiny.
OPEC-member Venezuela is reliant on oil for 98% of its export earnings and is laboring under U.S. sanctions, which penalize Venezuela's state-owned energy company PDVSA and any vessels or companies enabling oil shipments to Venezuela's ally Cuba.
Unrest in Caracas has weighed on markets, as have stricter U.S. sanctions on Iran, but news of higher U.S. crude stockpiles have kept prices subdued so far. On Wednesday, Brent crude futures stood at $71.36 per barrel and West Texas Intermediate (WTI) stood around $62.85.
RBC Capital Markets' Global Head of Commodity Strategy Helima Croft and her team have examined three possible scenarios for Venezuela, and their respective implications for the global oil market.
Scenario 1: Maduro goes, Guaido comes to power
A sudden Maduro departure and transition to a Guaido-led reformist government would provide "the best hope for kick-starting the revival of the Venezuelan economy," Croft and her team said in a note Wednesday.
"This scenario presents the most bearish outcome for (oil) prices, especially as many investors might assume that the recovery will be quick and uncomplicated. However, even if such a situation comes to pass we would caution that the road back will be arduous given the magnitude of the collapse."
Croft and her team, comprised of commodity strategists Christopher Louney and Michael Tran and associate strategist Megan Schippmann, warned that even if Guaido came to power, Venezuela's security situation "would likely remain fraught." They didn't think a Guaido victory likely at this stage, either.
"Given the apparent absence of high level military defections to the Guaido camp as well as Moscow's marked aversion to such a regime change, we think this scenario has the slimmest chances of success in the near term."
Scenario 2: Maduro stays
If Maduro manages to ride out the current wave of protests, RBC noted that the country's economic collapse will undoubtedly accelerate as the United States ups the sanctions ante.
"The White House will likely look to further erode the country's oil export revenue by compelling consuming countries like India to curb their Venezuelan purchases. Washington may also demand that U.S. energy companies cease operating in the country and that European firms stop providing diluents and other services to (Venezuelan state-owned oil firm) PDVSA."
Such punitive measures, along with rolling power cuts, would further compress the country's oil production, potentially sending it close to zero by year-end, the strategists noted.
This outcome would be most bullish for oil prices and "is quite plausible given the substantial support Maduro is receiving from Moscow as well as the fact that junior officers have been the principal defectors."
In this scenario, it's likely President Donald Trump would pressure Saudi Arabia to fill an extended supply outage by increasing production and adding between 400,000 to 500,000 barrels a day to the market.
Scenario 3: Maduro departs but military rule remains
Another near-term outcome seen as plausible by Croft and her team would be for the military leadership to oust Maduro in favor of a candidate that they said would "avoid sweeping economic and political reforms that would dismantle the prevailing patronage machine."
"Such a coup from above could freeze the sanctions status quo while the White House considers how much more time and energy it wants to expend on Venezuela once Maduro is gone," the analysts said.
This would represent a moderately bullish case for crude, the strategists noted. "A handpicked military candidate may not be able to garner the necessary international support to revive the oil sector even if more sanctions were not in the immediate offing."
OPEC in turn would likely adopt a wait-and-see approach to filling the Venezuela supply gap.