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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
Source: Center for Strategic and International Studies
In September, President Trump authorized attacks on what were described as “drug boats” emanating from Venezuela after alleging that these boats were bringing fentanyl – a highly addictive and potent synthetic opioid often added into narcotics – that was held responsible for causing a massive number of drug-related overdose deaths over the course of more than a decade across the United States.
However, the U.S. government’s own experts hold this to be untrue: fentanyl is manufactured in Mexico using precursor material from China and mostly smuggled in through legal ports of entry. The boats, U.S. military officials are reported1 to have confirmed to Congress in closed-door hearings, were likely carrying cocaine. A little under 10% of the U.S. consumption of cocaine is estimated to be from Venezuela; the biggest source for cocaine is Venezuela’s neighbour Colombia – which is not under attack from the U.S.
The true reason behind the very specific stance of the U.S. with regard to Venezuela is likely something completely different: Venezuela’s oil reserves, which are estimated to be larger than Saudi Arabia’s and near-completely under the control of its state-owned enterprises.
A Brief Recent History of OilOil prices haven’t quite followed the mechanics of supply and demand in over a half century now. This is best exemplified by the events of the 1980s. 1980 began with the U.S. and most advanced economies contending with high unemployment and inflation, which somewhat ameliorated disruptions in oil supply from Iran in 1979 on account of the Islamic Revolution by resulting in a slight reduction in global oil demand. Nonetheless, Saudi Arabia – which helped make up for the shortfall from disruptions in oil from Iran – broke from its OPEC members by raising the price of oil while Iraq and Iran – also major oil producers – went to war with each other. High oil prices didn’t hold in 1981 as the Saudis flooded the market with inexpensive oil, other OPEC members struggled to come to terms on a commonly-agreed price, and U.S. President Reagan lifted controls on domestic production.
Source: U.S. Energy Information Administration; World Bank; Leverage Shares analysis
From 1980 through 1982, the price of oil – measured as an average of Brent, Dubai and WTI – fell along with global production volumes. Despite the “tanker war” between Iran and Iraq starting in 1984 and causing a spike in insurance rates, the decline in oil price continued until 1986 while production volumes steadily rose. This fall was only halted in 1986 after OPEC agreed to raise prices but consensus was ragged. 1987 saw a fall again while the Iran-Iraq war escalated and 1988 saw OPEC reaching a production accord in the wake of a ceasefire between Iran and Iraq. Oil prices stabilized and rose through to the end of the decade.
Throughout this decade, the largest casualty of the oil crisis was the Soviet Union – by far the world’s largest producer of crude oil. The shrinking returns from oil production relative to the untold billions invested in infrastructure over past decades is widely attributed as a leading cause of the demise of the U.S.S.R by the end of the decade. In this period, the top 10 oil-producing nations saw their net market share reduce from 69% to 62% – with only Iran showing a near-doubling of its market share to 5%.
Throughout this period, Venezuela and its oil industry held a stable 3% share of global oil production. Virtually the entirety of production was via Petróleos de Venezuela S.A. (PDVSA), a state-owned company formed by the 1976 nationalization of all foreign oil companies operating in Venezuela. PDVSA is also a part owner of the American downstream petroleum company Citgo.
Like the 1980s, the 2010s began amidst an economic crisis now known as the Global Financial Crisis (GFC).
Source: U.S. Energy Information Administration; World Bank; Leverage Shares analysis
Production rose while average oil price fell until prices shifted upwards starting from 2016. In 2018, however, Brent fell 20% despite U.S. sanctions on Venezuela and Iran ostensibly in place and OPEC nations committing to cutting production. This slide in production and price continued until 2020, after which the re-engagement of the global economy that was stilled due to pandemic-era restrictions briefly pushed up prices. Despite production continuing to rise in the midst of the Russo-Ukrainian conflict and economic headwinds in China, oil prices have been consistently falling from 2022 until the current day.
In the 2010s, the U.S. went on to displace Russia to become the world’s leading producer of oil with production running at twice that of its ally Saudi Arabia, with whom it had spent much of the decade running neck and neck.
Venezuela’s story is markedly different: after domestic politics swung steadily leftwards to bring Hugo Chavez – present president Nicholas Maduro’s direct and ideological predecessor – into the Venezuelan presidency in 1999, he enacted policies that rerouted PDVSA’s cash reserves towards social spending and replaced numerous long-term employees with his party’s loyalists. With shortages in cash and experienced personnel leading to the inability to purchase or upgrade equipment, Venezuela’s contribution to global oil production steadily reduced to only 1% of global oil production by the end of the 2010s.
Now, while Venezuela contribution to global oil production volumes is presently near-negligible, there is an entirely different dimension that might be of keen interest to the oil lobby backing the current Trump administration: profits.
Shifts in the U.S. Oil IndustryUnlike in the U.S., a steady feature of the oil industry worldwide is the preponderance of state-owned enterprises among most oil producers and even net oil consumers such as economic powerhouses China and India. This is for good reason: energy supplies are critical for the masses and several political systems across the world consider this sector to be far too critical to be left to market risks: even at a loss, energy must be procured to sustain citizens’ lives.
Given the weight of the global population, total demand for petroleum-based refined products is in the midst of an ongoing and progressive shift out of the Western Hemisphere:
Source: S&P Commodity Insights, September 2025
It can be assumed that this shift for refined product demand will increasingly see additional refining capacities being built outside of the Western Hemisphere and mostly in the hands of state-aligned (if not outright state-owned) enterprises in regions where demand is emanating from.
Venezuela’s oil output principally is of the “heavy sour” crude variety, which isn’t typically found within U.S. borders. Canada, Russia and Venezuela are the world’s largest producers of this variety – among which Canada hold the lion’s share of supply to the U.S. While “lighter, sweeter” grades of crude cost more as they’re easier to refine into petrol/gasoline or diesel, “heavy, sour” grades cost less since they require more refinement to produce the same. Complex refineries typically have more processing units that can convert heavier crude oil into greater volumes of lighter, more valuable fuels – including and not limited to like diesel, jet fuel, LPG, and naphtha as well as a greater amount of diesel and petrol/gasoline – leading to a higher Gross Refining Margin (GRM).
The U.S. refining industry is advanced and capable of refining heavier, more sour crude oils. About 80% of its capacity2 is in PADD 2 (U.S. Midwest) and PADD 3 (U.S. Gulf Coast), which is expected to grow to 90% by 2050. In these regions, “heavy sour” constitutes 30% of its input.
Source: S&P Commodity Insights, September 2025
It is anticipated that within the next 10 years, the U.S. refining industry will almost completely forego “hydroskimming” refinery configurations – which have limited capacity to upgrade or convert heavy crude feedstock into higher-value products – in favour of complex high-GRM configurations such as “cracking” and “coking” which can handle all crude grades, including “heavy sour”.
Source: Leverage Shares analysis
As of currently, Canada drives about 30% of global production of “heavy sour” and is expected to hold steady through 2040. This potentially leaves the U.S. refining industry with a bottleneck in terms of supply and limited bargaining power for further GRM improvement via cheaper input cost. Enter Venezuela, which was estimated in 2020 to have the world’s largest proven oil reserves at an estimated 304 billion barrels (translating to 18% of global reserves) of which a substantial portion is expected to be in the “medium” and “heavy” grades.
Spoilers and LimitersWhile Venezuela’s problems with oil production is a story that has spanned most of the 21st century till date, other players outside of the Western Hemisphere have been moving in over the past decade. After sanctions on Venezuela were steadily tightened from 2014 onwards, Sinovensa – a joint venture between PDVSA and China National Petroleum Corp (CNPC) – has been focused on extracting and upgrading extra-heavy crude from the country’s Orinoco Belt into medium-grade Merey oil for export. Currently, Sinovensa is estimated to account for about 10% of Venezuela’s crude output. Russian consortiums led by Rosneft began securing large stakes in Orinoco oil fields from 2010 onwards. In 2016, Venezuela pledged 49.9% of Citgo to Russian oil firm Rosneft as collateral for a $1.5 billion loan3. After sanctions tightened, Rosneft transferred its Venezuela stake to Russian state entity Roszarubezhneft, with whom Venezuela approved a 15-year extension of joint ventures in November this year4. All told, both China and Russia have stakes amounting to several billions of dollars within Venezuela’s oil industry.
Prior to the start of the Russo-Ukrainian war in 2022, India – the world’s second largest oil importer – had historically imported a very small portion of its oil demand from Russia. India’s foreign minister S Jaishankar revealed earlier this year5 that they had agreed to switch to importing more Russian oil at the behest of the previous U.S. administration in order to stabilize world energy markets as numerous countries complied with U.S. sanctions on Russia. This was a technical challenge as India’s refineries were not configured to process “heavy crude” effectively. The challenge was met effectively, with estimates indicating that 40-80% of most major refiners’ capacities are now set to process “heavy crudes”. India’s oil purchase decisions vary with the dynamically-adjusted discounting system applied by Russia, and India’s purchasing strategy remains unchanged despite the current U.S. administration slapping increased tariffs on the country over its continuing oil imports.
Given the Russian oil industry’s involvement in Venezuela and India’s evolving interest in oil grades, it could be argued that it is also indirectly linked to Venezuela’s oil industry. During the just-concluded state visit to India by Russian President Vladimir Putin – who was met with much bonhomie – he offered “uninterrupted shipments”6 of energy of India, remarking of the tariff threat: “The United States itself still buys nuclear fuel from us for its own nuclear power plants. If the US has the right to buy our fuel, why shouldn’t India have the same privilege?”
End Goals and BlundersIn the “National Security Strategy” document7 – typically released once every presidential term – released earlier in December, the Trump administration laid out its worldview wherein it raised doubts whether certain European countries will have economies and militaries strong enough to be considered “reliable allies”, stated that Europe lacked “self-confidence” in its relationship with Russia, and asserted that U.S. involvement is necessary to end hostilities in Ukraine. It also pivots attention to the Western Hemisphere, wherein it identifies Chinese involvement in South America to be a threat, and calls for increased and concerted effort from India and Japan via the “Quad” grouping to be more involved in security matters in the South China Sea, i.e. territory China considers its backyard.
The references to South America hints at a deeper purpose with Venezuela: of the one million barrels of oil a day produced in Venezuela, the bulk of its oil exports go to China, except for about 100,000 barrels per day that the U.S. energy company Chevron sells to the U.S. In the course of negotiations with the U.S., Venezuelan negotiators had offered8 to open up all existing and future oil and gold projects to American companies, give preferential contracts to American businesses, reverse the flow of Venezuelan oil exports from China to the U.S., and slash energy and mining contracts with Chinese, Iranian and Russian firms. The U.S. government refused to end tensions; instead, it demanded that President Maduro and his government also step down from office. This possibly suggests that the U.S. administration has concerns that any concession won through negotiation at this stage could be targeted for eventual nationalization, as had happened in 1976. If this fear is valid, then it is likely that U.S. involvement in Venezuela’s politics will have to be a recurring feature going forward.
Experts warn that the removal of Maduro – an ostensible moderate within the leftist “Chavismo” ideology that dominates Venezuela – will require a sustained military campaign that the U.S. isn’t equipped to handle. Instead, some sources point out that the goal might be one dear to Trump’s Secretary of State Marco Rubio and some among the administration’s waning Latino voter base based mostly in Florida: to target Cuba10, which receives deeply-discounted fuel in exchange for skilled personnel’s services through Venezuela’s “PetroCaribe” initiative.
With ongoing moves on Venezuela seemingly equal parts political signalling for the domestic scene and profit consolidation for select companies rather than policing measures to control the flow of deadly narcotics into the U.S., the Trump administration’s calls for international allies to work on its goals (while presumably buying more American-made arms and paying higher tariffs) rather than address common interests ring hollow and are mostly unlikely to elicit a tangible response. The shape of the oil market – including Russia’s investments in Venezuela and energy sales to India – is also unlikely to change. While China is more clearly apparent in the administration’s crosshairs (and likely to attract bipartisan consensus), the likelihood of a forcible uprooting of Chinese economic interests from Venezuela is unclear since Trump has simultaneously been attempting to sell more agricultural products to the Chinese: an outcome clearly desired by his party’s voter base in long-beleaguered rural America.
Thus, while strikes against these mysterious “drug boats” are very likely to continue, the only tangible impact on the oil market presently would be the vast amounts of fuel being burnt by the U.S. warships manoeuvring in the Caribbean. All said and told, escalated U.S. military action in Venezuela and the subsequent impact on China’s oil imports from Venezuela might have a temporary effect on oil prices in the $3-10/barrel range. However, global production rates are high, spare capacity is readily available and price trajectories are likely to remain largely unchanged in the short- to mid-term.
Professional investors in Europe might consider the +3X Long Oil & Gas ETP (XLE3) and the -3x Short Oil & Gas ETP (XLGS) during bullish and bearish runs in the State Street Energy Select Sector SPDR ETF (which provides exposure to companies in the oil, gas and consumable fuel, energy equipment and services industries) respectively. Also at hand are the +2X WTI ETP (WTI2) and the -2x Short WTI ETP (WTIS), which provide magnified exposure to the United States Oil Fund, an ETF that attempts to track the price of West Texas Intermediate (WTI) Light Sweet Crude Oil.
Footnotes:
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