With brent crude touching 14-year highs on news that the US is imposing a ban on Russian oil imports, could things be looking up for Iran and Venezuela?

Of the two pariah states - both of which have been subject to years of crippling US financial, economic and oil sanctions – Iran is by far the most important to global supply.  

According to our Principal MENA analyst Torbjorn Soltvedt, the growing sense of urgency in the Biden administration over the conflict in Europe increases the likelihood of a nuclear agreement with Iran. Any deal will spark criticism from both Democrats and Republicans, but Biden will view rising fuel prices as the bigger issue ahead of the US midterms in November. For its part, Iran, which to date has shown little willingness to compromise, now has an opportunity to strike a deal on its own terms.

Soltvedt makes the point that a nuclear agreement would help ease pressure on prices, even if it takes months for additional Iranian oil to come onto the global market. Although Iran has claimed it can raise production from current levels of around 2.4 to 4 million bpd within three months of a deal, the timeline is likely to be at least twice as long in practice.  Oil currently held by Iran in storage – including over 100 million barrels reportedly held in floating storage (on ships and tankers) – would be available sooner; assuming timely verification of Iranian compliance with any new nuclear deal.

Soberly, however, Soltvedt warns that the contrast between a nuclear deal and the collapse of talks would be stark. While an agreement would help ease pressure on oil prices, the outlook in the event of a diplomatic failure would be far more uncertain.

Iran has already stated its support for Russia and laid the blame for the crisis in Ukraine on the US and NATO. If negotiations fail, Iran’s alignment with Russia and China will only increase, at a time when fears about a new Cold War and the risk of a wider military conflict between West and East are mounting.

And what of Venezuela? With output levels of just 680,000 bpd as of December 2021, Venezuela, one of the founding members of OPEC back in September 1960, has been reduced to a mere bit player on the global oil market in recent years. Russia’s output is almost 14 times that of Venezuela, at 11 million bpd, and with exports of some 7 million bpd it is the world’s third largest supplier of crude.  Even without formal sanctions, international traders are already shunning Russian supply, amounting to a de facto embargo, creating chaos on the market.

According to our sister company Wood Mackenzie, Venezuela at best could substitute some of the Russian supply imported by the US. Ironically, Russia increased its volume sales to the US quite sharply in the wake of Washington’s sanctions on the Venezuelan oil sector in January 2019.  In 2021, the US was importing around 550,000 bpd from Russia, on EIA data, roughly what Venezuela was sending prior to the sanctions.

In the good old days, Venezuela was sending over 1.0 million bpd to the US - peaking at 1.7 million bpd in 1998, before the radical socialist Hugo Chávez took power. But even after Chávez came to office, US imports were still running at the million-mark until about 2009 – when Chávez pivoted East to China with a slew of cash-for-oil loans that over a decade later still have Caracas badly in-hoc to Beijing.

News that a very high-level US delegation flew from Washington to Caracas on 5-6 March for talks sparked a flurry of international media comment.

Certainly, Maduro will play along (on some accounts, the initiative was his). Top of his agenda is sanctions relief – not least because the latest sanctions on Russian banks including Promsvyazbank (PSB) mean that Venezuelan assets previously moved to Russian entities - precisely to evade sanctions - are now trapped. Venezuela also remains cut off from the SWIFT international payments system – so that will also be on the table for Caracas. And finally, a roll-back of some of the US restrictions on the local oil sector would be necessary for important players including the likes of the US major Chevron to ramp back up Venezuelan operations and exports.

Washington, for its part, will demand transparent presidential elections in 2024, and legal guarantees for US investment in the oil and other key economic sectors.

In our view, Maduro, one of Putin’s closest Latin American allies, is unlikely to do more than pay lip service to the US requests, and the Biden White House is not likely to easily prise Venezuela away from its alliance. In fact, before the conflict in Ukraine, Russia seemed to be doubling down on its Latin American engagement, including with Argentina and Brazil.

Neighbouring Colombia, the top US ally in the region, has recently voiced concern about an (alleged) Russian military presence in Venezuela, warning that Russia may be looking to interfere in upcoming elections in the region. Colombia holds congressional elections on 13 March, followed by a presidential ballot on 29 May, while Brazil’s general election is on 2 October.

As with Iran, any outreach to Maduro by the Biden administration is fraught with domestic political risk ahead of the midterms. Florida Republican Senator Marco Rubio was among those to warn Biden on 6 March against swapping US oil purchases “from one murderous dictator to another murderous dictator”.

And this raises another uncomfortable question. If international oil majors and other corporates are pulling out of Russia, should they be really returning to the repressive states of Iran and Venezuela?