What Donald Trump’s return to ‘maximum pressure’ means for Venezuelan oil

Welcome to Energy Source, coming to you from New York, where markets continue to melt down following Donald Trump’s “liberation day” tariff announcement last week.

Brent crude is trading at four-year lows and West Texas Intermediate, the US benchmark, lost just over 15 per cent of its value over three trading sessions to settle near $61 a barrel. My FT colleague Rachel Millard captures the gloomy mood among traders in this article, where Jorge Leon, head of geopolitical analysis at Rystad Energy, forecast a “significant deceleration in the global economy”.

Tariffs also pose a threat to America’s renewable energy industry by pushing up prices, disrupting supply chains and undercutting US ambitions to lead the artificial intelligence revolution.

For our main item today we turn to another Trump policy that is shaking oil markets: the cancellation of companies’ licences to operate in Venezuela.

Thanks for reading, Jamie

Trump returns to ‘maximum pressure’ on Venezuela

US President Donald Trump has stepped up his “maximum pressure” campaign on Venezuela’s leader Nicolás Maduro, in a major challenge to the South American nation’s all-important oil industry.

The Trump administration in February said it would cancel Chevron’s license to pump and export oil in Venezuela, as well as the permits of other western oil companies. Last month, the president also announced 25 per cent “secondary” tariffs on imports from any country that buys oil from the South American nation, an unprecedented step unveiled ahead of his “liberation day” tariff blitz.

While the oil companies have until May 27 to wind down their Venezuelan operations, secondary tariffs — which took effect on April 2 — can kick in at the discretion of secretary of state Marco Rubio. In the meantime, Energy Source looks at how the moves could impact Venezuela’s oil industry.

Venezuela’s Chevron problem

Chevron’s exit from Venezuela would deal a significant blow to the country’s oil production. About a quarter of the nation’s output comes from a joint venture between the US company and state-owned Petróleos de Venezuela (PDVSA), which has helped drive a recovery in Venezuela’s moribund oil sector.

Despite boasting the world’s largest proven oil reserves, corruption, mismanagement and US-led sanctions caused the country’s crude production to plummet from about 2.5mn b/d in 2016 to 400,000 b/d in 2020. It rose to roughly 1mn b/d last year, in part because of Chevron’s joint venture with PDVSA.

Through their joint venture, Chevron has supplied PDVSA with diluent — a substance oil producers use to thin out the type of heavy crude found in Venezuela — which is critical to the extraction and transportation of the fuel. The loss of diluent “could become extremely problematic” for Venezuela’s oil sector, said Schreiner Parker, managing director for Latin America at Rystad Energy.

According to Parker, Venezuela was unable to procure diluent on the open market after the first Trump administration imposed sanctions on Venezuela in 2019. The oil sector was “relying almost exclusively on illegal crude for condensate swaps with Iran to access the diluent”, he said.

The White House is also revoking the permits of western oil groups such as Italy’s Eni, Spain’s Repsol, and Global Oil Terminals — a trading company owned by Harry Sargeant III, a prominent Republican donor who has also acted as an intermediary between Caracas and Washington.

If the licences are revoked, PDVSA would probably take over operations of the affected oil projects and the sector would face a lack of investment, said Francisco Monaldi, a Latin America energy expert at Rice University in Houston. He estimated the cancellation of the licences would cause Venezuela’s production to fall about 100,000 b/d.

‘Secondary tariffs’ shine a spotlight on China

Analysts said European and Indian companies were unlikely to buy Venezuelan oil without US authorisation. But these countries were importing low volumes compared to China, the largest customer of Venezuelan crude.

China accounts for more than half of Venezuela’s oil exports. Much of this is purchased through the black market, using obscure intermediaries and “ghost ships” to avoid detection. The Venezuelan oil is often masked as Malaysian when it arrives at the independent Chinese refiners that purchase the crude.

China also receives Venezuelan oil as debt repayment so “there’s not necessarily a monetary exchange that’s taking place through” the US banking system, Parker said.

The secondary tariffs could still hinder Caracas’s ability to evade US sanctions. The crucial question, according to Monaldi, is whether the Chinese and Malaysian governments order companies, whether publicly or discreetly, to stop purchasing Venezuelan oil.

“So far the evidence seems to be that everyone is being super cautious,” Monaldi said.

“[Secondary tariffs are] very blunt . . . this is like having a bazooka to kill a mosquito”, Monaldi said. If the “Chinese thought this was a real threat then it’s a no-brainer” for Beijing to comply with the US measure — a move that would cause a “massive decline in Venezuela’s exports and in their production”.

And China may have less appetite for Venezuelan oil, with demand plateauing as electric vehicles replace cars with combustion engines.

But if Beijing were to halt imports of Venezuelan oil that would be “acknowledging that the US has that power”, Monaldi added. And for its part, China has expressed its opposition to Trump’s secondary tariffs.

Trump’s Venezuela policy: Rubio vs Grenell

Trump’s tough measures on the Venezuelan oil sector marked an abrupt shift from the opening weeks of his second presidency, when his special envoy Richard Grenell paid a surprise visit to Maduro and secured the release of six American nationals that Caracas took prisoner.

Venezuela’s opposition criticised the meeting, worrying it would legitimise Maduro’s rule after the authoritarian leader claimed victory in an election last July that was widely viewed as fraudulent. But oil companies were optimistic about the visit; it boosted hopes that Trump would not cancel their licences to operate in Venezuela.

The recent resumption of the “maximum pressure” campaign that Trump pursued against Venezuela in his first term hints at a struggle within the administration over its approach towards the country — between “America first” dealmakers such as Grenell and foreign policy hawks including Rubio, who has long opposed the Maduro regime.

“We have to be extremely cautious about thinking things are settled,” Monaldi said. “At some point we might see another turn in this saga either because of the rivalry between these two officials or because a change in the circumstances that make Trump move in a different direction.” (Benjamin Wilhelm)

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.