The Potential U.S. – Venezuela Oil Sanctions Deal Would Not Hurt The Oil Rally

Key Insights

• U.S. is reportedly planning to ease sanctions on Venezuelan oil industry. 
• The country’s oil industry is in poor condition, and it remains to be seen whether it could boost production in the upcoming months. 
• Oil traders will stay focused on the situation in the Middle East.

Oil prices got a major boost amid Israel-Hamas conflict. Oil traders have started to price in the risks of a major war in the Middle East that could disrupt oil supply routes and send oil prices above the $100 level.

While oil bulls and oil companies want to see high oil prices, the rising cost of energy leads to higher inflation. Not surprisingly, the U.S. is trying to put some pressure on the price of oil as it fights inflation.

Previously, the U.S. was selling oil from the Strategic Petroleum Reserve. In the near term, the tactic was successful, and the price of WTI oil moved below the $70.00 level.

However, the Strategic Petroleum Reserve reached multi-decade lows that were not seen since the eighties, and its low levels has started to serve as a bullish catalyst for oil markets.

At this point, the U.S. cannot sell oil from reserves, so it tries to bring more oil to the market. Domestic oil production has recently jumped from 12.9 million bpd to 13.2 million bpd, but this spike would not be sufficient to put any pressure on oil prices if anything happens to the oil trade in the Middle East.

Thus, the U.S. is searching for alternative ways to boost oil supply. According to recent reports, U.S. and Venezuela may soon announce a deal that would ease U.S. sanctions on Venezuelan oil industry. Venezuela is expected to loosen its grip over its upcoming 2024 presidential election.

Traders have reacted to the news, sending oil lower. However, it remains to be seen whether the potential deal can have any impact on the oil markets in the near term. Venezuelan oil industry has been hit by sanctions for many years, and its condition is poor.

Venezuela may not have the resources to boost its oil production in the upcoming months even if the deal is successful. Thus, oil market dynamics will mostly depend on the current supply/demand balance and the developments in Israel – Hamas conflict.

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