US oil prices initially rallied on Tuesday as TV images depicted a violent uprising in Venezuela, which was once one of America's leading oil suppliers.
But crude prices have since retreated as observers try to decipher whether US-backed opposition leader Juan Guaido will be successful in his bid to oust President Nicolas Maduro.
"We simply don't know what is happening on the ground," said Helima Croft, global head of commodity strategy at RBC Capital Markets. "I would be cautious about saying we are in the final chapter."
Croft, a former CIA analyst, said it's unclear if the uprising is supported by senior military officers.
"Junior officer coups tend to be bloody, erratic and the success rates are lower," she said.
The crisis in Venezuela comes at a tricky time in the oil markets. Crude prices have surged in 2019 in response to deep supply cuts by OPEC and the Trump administration's crackdowns on two OPEC nations: Iran and Venezuela.
In the United States, the average gas price has climbed by 63 cents a gallon since the beginning of the year to $2.88, according to AAA.
Venezuela's oil exports plummet
The crisis in Venezuela has led to mass human suffering marked by shortages of food and medicine as well as widespread power outages.
Even though Venezuela has more oil reserves than any nation on the planet, production there has collapsed following years of underinvestment, recent blackouts and US sanctions on PDVSA, the state oil company.
Venezuela's daily oil production plunged from 1.2 million barrels in December 2018 to 750,000 barrels in March 2019, according to field level data from Rystad Energy.
Shipments to the United States, long Venezuela's leading customer, have vanished after the PDVSA sanctions.
Overall, Venezuela exported just 476,000 barrels of oil per day in April, down from 1.24 million in January, according to S&P Global Platts Analytics and cFlow tanker tracking.
Recovery could take years
Venezuela's oil industry may rapidly rebound if Guaido takes over.
The United States reiterated its support for the people of Venezuela and Guaido on Tuesday. In a statement, the Treasury Department said the "path to sanctions relief" for PDVSA and other institutions is to support Guaido and "those who seek to restore democracy."
In other words, Washington could quickly lift the oil sanctions on Venezuela, paving the way for more barrels to reach the market.
"If Maduro is ousted, that would actually be bearish for oil," said Ryan Fitzmaurice, an energy strategist at Rabobank.
But the recovery would likely not be swift.
Even after three or four months, Venezuela's oil output would likely only rebound to about 900,000 barrels, according to Artyom Tchen, Rystad Energy's senior analyst.
"The crisis in Venezuela is multi-decades in the making. That is what people need to understand," said RBC's Croft. "If Juan Guaido comes to power, the road back is going to be arduous."
And even if Maduro is ousted, violence could linger as his supporters fight back.
But it remains unclear if Guaido will be successful. If Maduro prevails, the United States could be forced to impose even tougher sanctions that only push Venezuela's oil production lower. That would be a bullish driver for oil prices.
"Momentum around Guaido was lagging. He had to do something," said Reva Goujon, vice president of global analysis at consulting firm Stratfor.
Goujon said the key thing to watch is whether military forces aligned with Guaido move to secure Venezuela's oil facilities, including the Jose oil export terminal and drilling infrastructure in the Orinoco Belt.
Will OPEC or Texas make up for Venezuela?
Worries about Venezuela's shrinking oil output have been somewhat mitigated by hopes that OPEC could act.
US President Donald Trump has urged OPEC to prevent a price spike by ramping up production.
However, Saudi Arabia Energy Minister Khalid al-Falih signaled on Tuesday that the kingdom is no rush to pump more oil. He told Russia's RIA news agency that OPEC and its allies could even extend their supply cut agreement to the end of 2019.
America's oil producers are likely to respond to higher prices by increasing output. The shale oil revolution has catapulted the United States beyond Saudi Arabia and Russia as the world's leading oil producer.
The gains have been driven by the Permian Basin, the West Texas shale oilfield that is at the heart of a bidding war over control of Anadarko Petroleum (APC).
However, US Gulf Coast refiners can't solely rely on high-quality shale oil, which is very light. To churn out gasoline, jet fuel and diesel, US refineries require a steady dose of the heavy crude — the kind typically found in Venezuela.
"A Permian barrel is not a replacement for a Venezuelan barrel," said Croft.
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