Venezuela—The Next Risk for Oil Markets

Caracas, Venezuela
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The prospect of snap elections in Venezuela — which may be triggered by the death of President Hugo Chavez — may create volatility in global oil markets though any upward price impact is likely to only be short-term.

Venezuelan President Hugo Chavez has died after a two-year battle with cancer, Vice President Nicolas Maduro said in a televised speech late Tuesday.

Chavez's death opens the way for a new election within 30 days. That would pave the way for a showdown between Vice President Nicolas Maduro, 50, and 40-year-old opposition leader Henrique Capriles, who lost last year's election to Chavez.

"All the signs are that Maduro is already in semi-campaign mode for a ballot which would probably see Capriles leading for the opposition," said Alastair Newton, senior political analyst at Nomura. "An uptick in uncertainty around an election could trigger some upward pressure on oil. But I'd expect any pre-election movement to be fairly minimal."

Brent crude oil prices broke a five-day losing streak on Tuesday, rising towards $112 a barrel, extending gains slightly after news of Chavez's death.

Newton warned that the "tail risk" to prices lay in the possibility of an opposition victory, "given that the army has said already — in the run-up to the last election — that it would not accept such an outcome." Assuming Vice President Maduro does formally take over the reins "I'd certainly not expect any early significant policy shifts."

(Read More: Crude Bounces Back After Fall to 2-Month Low)

Gal Luft, co-director at the Institute for the Analysis of Global Security and a senior adviser to the U.S. Energy Security Council said that though a Chavez departure may already be well factored into prices, it won't "translate into market calmness before it is clear what the nature of the new leadership is."

Clarity over who will be running state-oil producer PDVSA will be equally important, Luft said. "The company has been battered by terribly ineffective personnel changes and removal of competent leadership which has been replaced by political appointees," he said. "Once we begin to see changes in the company's leadership, reflecting professionalism and competence, that could mean the company is making a U-turn, becoming attractive for investors."

Meanwhile, a former executive at PDVSA told CNBC that Venezuela has lost its ability to influence global oil markets because years of under investment in the OPEC (Organization of Petroleum Exporting Countries) member's petroleum industry has constrained production.

"Venezuela is a weak OPEC hawk, as it has no sufficient production to influence prices," said Gustavo Coronel, a founding member of the board of state-oil firm Petroleos de Venezuela. "Venezuela is no longer a factor that can really upset the markets as it was the case 20 years ago."

(Read More: Venezuela Devaluation Hits US, European Companies)

Furthermore, the energy boom in the U.S. has helped cut dependence of Venezuelan net crude and oil products and exports to the U.S. have dropped to levels last seen nearly 30 years ago. "The U.S. would not miss Venezuelan oil very much," Coronel said. "Whatever disruption would be almost entirely psychologically induced."

A founding member of the OPEC, Venezuela's total deposits stood at an estimated 296.5 billion barrels at the end of 2011, according to BP's 2012 annual Statistical Review of World Energy. That compared to Saudi Arabia's 265.4 billion barrels.

However, Ed Morse, global head of commodities research for Citigroup Global Markets, described the statistic as "irrelevant" because the Latin American producer is struggling to secure enough investment and technical expertise to unlock the resource.

"The issue is not what's in the ground and commerciable, rather how quickly it can be put into production and so long as there's no capital flowing into the upstream in Venezuela, especially capital by the companies that have the technology to develop the heavy oil reserve base, the resource levels are going to remain kind of irrelevant," he said last June.

By CNBC's Sri Jegarajah