Valero Energy Corporation (VLO) is heavily exposed to the Venezuelan oil trade and, as a result, could be disproportionately affected by possible American sanctions on Venezuela. Valero shareholders should carefully monitor the political developments in Venezuela during the next few weeks. If American sanctions are levied on the Venezuelan oil sector, Valero could rapidly become an unattractive investment.
The Situation in Venezuela
Venezuela is on the verge of becoming a failed state. The country, which has long been plagued by shortages of basic goods and skyrocketing inflation, is now being roiled by violent street protests. The Socialist government, which has ruled the country for over a decade, is on the verge of instituting controversial political reforms intended to cement its grip on power.
Source: Commentary Magazine
The proposed reforms have drawn the attention of President Trump who has vowed to impose a "strong and swift economic" response if the reforms go ahead. While the sanctions could target individual members of the Socialist regime, it is also possible that the U.S. could ban oil imports from Venezuela. Although it is unclear what the sanctions will look like, the Trump Administration has made it clear that "all options are on the table".
Valero's Exposure To Venezuela's Oil Sector
Valero's exposure to Venezuela's oil sector stems from the company's major imports of Venezuelan oil to its refineries in the U.S. Although these imports have slowed down in the last year, they are still significant for the company and Valero remains one of the largest importers of Venezuelan oil in America.
The Impact of Sanctions on Valero
If the U.S places broad sanctions on Venezuela which restrict the importation of any oil from Venezuela, Valero will have two basic options:
- Attempt to access oil supplies from other regions of the world.
- Reduce the production of gas and diesel until the sanctions are lifted and full production can begin.
Neither of these options would be palatable for the company. Both would likely result in an increase in costs and/or a decrease in revenue. This could negatively impact the company's share price in the short and medium term.
It is, of course, possible that American sanctions on the Venezuelan oil sector could fail to materialize. The Venezuelan government could decide to abandon the controversial reforms. Alternatively, the Trump Administration could decide to impose lighter sanctions on Venezuela which target other sectors of the economy.
What Shareholders Should Watch For
Valero shareholders should pay close attention in the coming weeks to several factors:
- Political developments in Venezuela;
- Rhetoric from the Trump Administration in relation to Venezuelan sanctions;
- Communication from Valero to its shareholders about company efforts to diversify sources of oil imports.
The Trump Administration has taken aim at Venezuela. If the U.S targets Venezuela's oil sector, Valero may be caught in the crossfire. Valero shareholders should vigilantly monitor developments in the coming weeks. If sanctions on Venezuela's oil sector materialize and Valero fails to adapt to this situation, the company could rapidly become an unattractive investment.
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