Risk level: Yellow - Elevated

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

The elections in Venezuela and the European response to the Iranian nuclear agreement may be running the narrative in the oil market this coming week. Brent crude oil flirted with $80 per barrel in a week that saw the geopolitical risk factor surprise even OPEC. We expected a week of moderation, but were surprised by the market's response to Israeli military action against Palestinians protesting the U.S. embassy move to Jerusalem. Discounting the subsequent 1.4 percent jump in Brent on Monday, however, the market barely moved with the price of oil dipping to $78.51 by the end of the week. Washington's reaction to the potential for another six-year term for Nicolas Maduro in Venezuela and the battle of wills over the JCPOA could be supportive to crude this coming week, but $80 may stay as the ceiling.

U.S. Vice President Mike Pence joined the presidents of 15 other countries in April to sign a declaration warning Caracas it would not view the election process as credible unless it's free and fair. While Maduro's term doesn't end until January, his administration was able to put the opposition on its heels by moving the elections forward to Sunday.

So far, the process so far has lacked the legitimacy expected from Western powers. On Friday, the Trump administration targeted National Assembly Speaker Diosdado Cabello Rondon and three others with sanctions for alleged drug trafficking, money laundering and embezzlement. U.S. Treasury Secretary Steven Mnuchin said the sanctions reflect a commitment to hold Venezuelan authorities accountable for violating the trust of their people.

"These designations reflect the commitment of the United States to use every available diplomatic and economic tool to hold accountable corrupt officials and support the Venezuelan people’s efforts to restore their democracy," a Treasury Department statement read.

That commitment comes as the OPEC member teeters on economic collapse and the isolation for Caracas becomes even more profound. Reuters reported May 15 that state-run oil company PDVSA bought $440 million worth of foreign crude oil to send to Cuba, one of its few remaining allies, to shore up support. That leaves Caracas in further debt, but its debt well spent on political favor in the region. Nevertheless, Venezuela's own production is at a historic low and further pressure from Sunday's vote will add to a downturn that's been supportive of crude oil prices for more than a year. We expect additional support to show up in trading on Monday.

Recent price trajectory has been driven by lingering uncertainty over the fate of Iranian oil barrels. The United States stands as the only entity not committed to the 2015 agreement that gives Tehran relief from sanctions, including oil-related restrictions, in exchange for Iranian promises to scale back a nuclear program. The Trump administration's decision to walk away has widespread economic consequences in an interdependent world. By Friday, barely a week after Washington left the agreement, European powers said they would use blocking statute to protect their companies, even those doing business in the Iranian oil sector. For the Central Bank of Iran, whose leader was the target of U.S. sanctions, Europe said it was encouraging bank transfers for support. That shows Europe is standing up to a Trump administration in a way to reflects fractures in a long-standing friendship.

"Looking at latest decisions of @realDonaldTrump someone could even think: with friends like that who needs enemies," said European Council President Donald Tusk.

Robert Jervis, a professor of international politics at Columbia University, suggested more than a decade ago that a U.S.-European break could upset the global order. Tired of the volatility of President Trump, Europe seems to be charting an independent path. That volatility leads to uncertainty in issues like trade, an issue that has obvious and direct market implications.

An OPEC official said May 16 that crude oil prices are "high just because of the tensions" and we agree. Already, the IEA and others are warning that the price of oil is approaching the point of creating economic problems. We still, however, see $80 per barrel in play for Brent because of the dual strains from Iran and Venezuela. On Monday, Mike Pompeo will discuss "the way forward" on Iran, his first major foreign policy address as U.S. secretary of state. We're issuing a Yellow alert this week, expecting crude oil prices to move by about 1 percent for the week.