Venezuela is a 'clear and present danger' for the oil market, says RBC's Helima Croft

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An attendant sits at a closed Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela, on Friday, Sept. 22, 2017.

One of Latin America's biggest oil producers could soon provide a key catalyst for oil prices.

"We continue to contend that, given 2018's tightening oil market, any potential geopolitically driven supply disruption would have an outsized impact versus recent years when the market was awash in crude," Helima Croft, head of global commodity strategy at RBC Capital Markets, said in a research note Wednesday.

"The clear and present danger to watch is Venezuela, which arguably has progressed past the risk stage given that production is in freefall," she added.

'Bleak backdrop'

While Venezuela boasts the world's largest proven oil reserves, crude production has been steadily declining as it slogs through an economic crisis precipitated by years of government mismanagement and exacerbated by a prolonged oil price slump.

Following years of sharp output losses, the oil-dependent state has slipped to near three-decade lows — with the exception of the 2002-2003 strike. In December, Caracas managed to pump 1.7 million barrels a day, according to S&P Global Platts.

Analysts expect the production losses to continue to deteriorate throughout 2018, with RBC Capital Markets projecting a fall of at least 700,000 to 800,000 barrels per day this year.

"Against this bleak backdrop, the recently scheduled April elections could prove to be the catalyst for more civil strife and economic sanctions that would further erode output," Croft said.

Last month, Venezuelan President Nicolas Maduro — labeled a "dictator" by the U.S. — said he was ready to seek another term in office. The new presidential elections are due to be held before April 30.

The move was branded by observers as an attempt by the ruling socialist party to exploit an opposition in disarray and strengthen its position in government before the economic crisis becomes even more acute.

The oil-dependent state is struggling to cope with hyperinflation — estimated by Venezuela's opposition party to hit 1,400 percent in 2018. This has put the South American nation's entire economy, including its nationalized oil industry that accounts for most of the country's export revenues, in jeopardy.

Prospect of US-imposed oil sanctions

The decline in oil production is also deepening the turmoil for approximately 30 million Venezuelan citizens, as they continue to suffer from food shortages and a lack of basic medicines.

Speaking to reporters in Argentina on Sunday, U.S. Secretary of State Rex Tillerson said banning exports of oil or refined oil products to Venezuela was on the table.

Carlos Becerra | Bloomberg | Getty Images
Nicolas Maduro, president of Venezuela, speaks during a swearing in ceremony for the new board of directors of Petroleos de Venezuela SA (PDVSA), Venezuela's state oil company, in Caracas, Venezuela, on Tuesday, Jan. 31, 2017.

Oil sanctions are seen as one of the few options President Donald Trump has to really hurt Maduro's government. Meantime, Tillerson said the U.S. administration would also consider the impact of oil sanctions on Venezuelan citizens.

"Even if the U.S. does not opt for the nuclear option of oil sanctions, Venezuela has already migrated from being a mere risk story to being a material disruption reality," Croft said.

Brent crude traded at $66.80 a barrel on Wednesday afternoon, down 0.1 percent, while U.S. crude was seen at $63.05, down 0.5 percent.

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