On Monday, the Trump administration slapped sanctions on Venezuelan crude exports to the US in response to the re-election of President Nicolas Maduro, in a vote viewed by many as fraudulent. AP/Getty Images photo by Juan Barreto.
Venezuelan crude not easily swapped out by refiners
On Monday, the US government imposed sanctions on PDVSA, Venezuela’s state run oil company, in response to what many observers call the fraudulent election of President Nicolas Maduro.
Under the sanctions, the Trump administration will allow US companies to purchase Venezuelan crude, but money from the sales will be put into a “blocked account”. With this arrangement in place, PDVSA is expected to stop shipping crude to the United States.
Reuters reports that overnight, Maduro said crude cargoes loaded for the US that have not already been paid for will not leave port.
US refineries that depend on heavy oil from PDVSA are scrambling to secure supplies of domestic sour crude grades which could be used in place of the Venezuelan crude. Lighter grades of oil produced by the US cannot be substituted for the heavy crude in the production of diesel and other high-margin products.
“The region with the biggest shortfall of Venezuelan crudes, either through sanctions or inadvertently through further production declines is the U.S.,” Michael Tran, commodity strategist at RBC Capital Markets, said in a note.
As a result of the supply crunch, the price of grades like Mars Sour have risen significantly. On Tuesday, Mars crude traded at about a $6 premium to the US crude futures benchmark, a near five-year high.
“It’s nuts. Everything with sulphur in it is getting bid,” one U.S. crude trader told Reuters, referring to crude’s sulphur content that is known as “sour grades.”
Canadian heavy crude could replace Venezuelan crude in the refining process, however, pipeline bottlenecks out of the Alberta oil sands continue to slow exports.
“Until the ongoing (Canadian) pipeline issues are addressed, crude by rail is simply not as scalable as increased shipments from Mexico or Iraq,” said RBC’s Tran. But, Mexico’s production has fallen in recent years as its top-producing fields have aged and new ones have not been developed.
According to Reuters’ sources, the US may need to sell crude from the US Strategic Petroleum Reserve to cover the shortfalls, however, the quality in the SPR differs from Venezuelan crude.
The impact from the US sanctions on Venezuela could be devastating. The United States is Venezuela’s biggest oil customer, importing about 500,000 barrels per day (b/d) on average in 2018, according to data from Refinitiv Eikon.
The US accounts for about 75 per cent of the country’s cash crude sales, according to Barclays. While PDVSA sells oil to Russia and China, these shipments are largely part of oil-for-debt repayment structures.
As well, Reuters reports that Venezuelan crude sales to China have tapered off in the past two years.
Venezuela may be forced to sell its crude at steep discounts to buyers in Russia, China and India, according to traders and analysts. “There’s going to be appetite around the world to take Venezuelan oil,” Zachary Rogers, an oil markets analyst at consultancy Wood Mackenzie told Reuters.
Valero Energy Corp and Chevron Corp say they will comply with US laws concerning the sanctions. Meanwhile, Citgo Petroleum, the US refining arm of PDVSA and the largest importer of Venezuelan crude did not respond to Reuters’ request for a comment.