US sanctions on Venezuelan crude could force global oil rebalance: sources
The US is again considering sanctions on Venezuelan crude, an action which would likely boost demand for heavy Saudi and Canadian crude grades currently subject to output cuts, cause medium and heavy prices to strengthen further and, potentially, force US Gulf Coast refiners to run more domestic sweet grades.
The impact of the sanctions may also have unintended impacts as Venezuela redirects barrels to Asian markets in need of heavy crudes, leaving US Gulf Coast refiners to scramble for barrels from Colombia, Mexico, Iraq and other sources to fill a roughly 500,000 b/d gap, according to sources.
“At the end of the day, how effective is it going to be?” one US refining lobbyist asked about the potential sanctions. “It’s really just going to harm our domestic industry for no upside or geopolitical benefit. We see a potentially significant impact on some US refiners, particularly if this were to happen overnight.”
The White House National Security Council last week informed some US refiners that sanctions on Venezuelan crude exports were under consideration, according to sources, The Trump administration has long resisted this path, partly due to the potential for an economic impact on US refiners.
The US refining industry continues to press administration officials, arguing such sanctions will hurt domestic refiners, cause a needless disruption to the market and impact crude and refined product prices.
“Disrupted supply chains and higher prices in the short term, that’s what will happen,” one refining source said.
It remains unclear if the US will impose these oil sector sanctions and, if it did, what their implementation may look like. Would, for example, the sanctions be phased in over time? Would certain refiners receive temporary waivers as the biggest buyers of Iranian crude received last year when Iranian sanctions were reimposed?
John Auers, executive vice president of Turner, Mason & Co., said that, depending on implementation, the impact of Venezuelan oil sanctions may be relatively minor.
“I don’t know that you’d see a real dramatic impact,” Auers said. “It’s not going to be as big of an impact as it would have been two or three years ago when volumes coming in from Venezuela were much higher. US refiners have been getting ready for this.”
The biggest refiners of Venezuelan crude in the US, including PDVSA-owned Citgo, have been diversifying away from Venezuelan crude over the past year, Auers said.
US imports of Venezuelan crude oil averaged about 574,000 b/d in December, down roughly 40% from July 2016, when US refiners imported more than 850,700 b/d. US imports of Venezuelan crude fell as low as 409,150 b/d in February 2018.
Despite the decline in imports from Venezuela, 500,000 b/d of medium and heavy barrels will not be easy to replace and will “likely require a global rebalance over a few months,” according to Lenny Rodriguez, director, pricing and trade flows with S&P Global Platts Analytics.
Canadian barrels are both logistically constrained by limited pipeline and rail capacity and 325,000 b/d in output curtailments put in place in Alberta on January 1.
Some crude from Iraq and South America, including Colombia’s Castilla and Vasconia grades, which is currently shipped to Asian markets, could be backed out by Venezuelan crude if US sanctions are imposed and sent to the US Gulf instead.
“US refiners may be forced to run more domestic sweet or may even need to trim runs on lack of enough medium/heavy” grades, Rodriguez said.
The loss of Venezuelan crude could cause medium and heavy prices in the US to spike.
This week, US Gulf Coast sour grade Mars reached parity pricing with Permian Basin light sweet grade WTI MEH for the first time in more than three and a half years, largely due to increased export demand for medium sour crude, but also partly due to the increasing odds of sanctions on Venezuelan crude.
Venezuelan sources said, if imposed, the US sanctions could impact the renewal of a supply contract between PDVSA and Valero, which expired on December 31 and is currently under negotiation. Due to an agreement with ConocoPhillips, a contract with Valero must be in force as a guarantee of compliance with PDVSA’s obligations to this company.
Sanctions could also compromise 14 million barrels in diluted crude oil (DCO) exports that PDVSA planned to ship to Citgo refineries over the next three months, sources said. Chevron is in negotiations for 1 million barrels of DCO in January, sources said, and Chevron is a customer for Boscan crude.