US refiners wean off Venezuelan crude
Faced with the possibility of tighter sanctions on Venezuela, US refiners are switching to lighter crude slates and sourcing more heavy grades from Canada and Mexico. Asian refiners look set to reap the benefit.
The US government last week imposed sanctions on 13 Venezuelan officials, and further sanctions are likely to be imposed in the next few weeks by the administration of US president Donald Trump. Even if these do not result in an import ban on Venezuelan crude, refiners look set to wean themselves off these grades due to the risk of supply disruptions as civil unrest in the country mounts. Marathon Petroleum and Valero have already said that they would process more light and sweet crude oil in the next quarter, thus relying less on Venezuelan and Middle Eastern barrels.
US refiners look to Canada, Mexico
Venezuela depends on exports of crude oil and refined products for 95% of its revenue. Most of the Venezuelan crude oil imported by the US is processed on the Gulf Coast. The best alternative for these refiners will be Canada, which also produces heavy sour grades similar in quality to Venezuelan crude. However, pipeline constraints and railway transport will add up to $2.50/bbl to refiners’ average costs, at least in the early stages of intensified sanctions. Canadian benchmark West Canada Select (WCS) prices have surged – the discount to light sweet benchmark West Texas Intermediate (WTI) has narrowed to around $5 per barrel ($/bbl) in recent days. The price gap between the Midwest and the Gulf Coast could lead to higher profits for refiners in the Midwest at the expense of their Gulf Coast counterparts.
US crude imports from Venezuela have varied between 600,000-800,000 bpd in recent weeks, accounting for almost 10 percent of US requirements. Citgo Energy, the US refining arm of Venezuelan state-run PDVSA, Valero Energy, Phillips 66, Chevron and PBF Energy have been the key buyers of Venezuelan crude in 2017. The crude slate at BPF’s 190,000-bpd Chalmette Refinery in Louisiana has been more than 90% Venezuelan oil in recent years, while crude processed in Phillips 66’s 145,000 bpd Sweeny refinery in Texas and Valero’s 370,000-bpd St. Charles refinery in Louisiana has predominantly been from Venezuela.
Although Mexico would benefit from less competition from Venezuelan crude oil on the US Gulf Coast, its exports to Asia and Europe would suffer. Mexico has traditionally exported nearly two thirds of its crude oil to the US. Other Latin American oil producers would also benefit from an import ban on Venezuelan oil but their overall production has been declining in recent months. Any increase in Middle Eastern crude oil exports to the US is likely to be marginal because of OPEC/ non-OPEC production cuts.
US service companies such as Halliburton and Schlumberger are expected to leave Venezuela completely due to sanctions. The companies announced in 2016 that they would be curtailing their business activity in the country, although this decision appears to have been triggered in part by PDVSA’s tardiness in making payments to service firms.
Middle Eastern crude oil grades face more competition
Surplus Venezuelan crude oil supplies are expected to be sold in Asia, primarily China and India. This has the potential to widen the discount of Middle East marker crude Dubai’s to North Sea Brent by 20 to 40 cents/bbl. Middle Eastern crude oils that are similar in quality to Venezuelan crude include Arab Heavy from Saudi Arabia and Basrah Heavy from Iraq. These grades will suffer, although the impact is reduced by OPEC production cuts which have significantly reduced supplies of heavy fuel oil-rich grades. Increased exports from Venezuela into Asia would be accompanied by a fall in the region’s imports from countries such as Mexico.
Venezuelan oil exports to India could hit 1 million bpd if the country stops exporting to the US. Reliance and Essar have the main Indian beneficiaries of heavy crude oil from Venezuela. Russia’s Rosneft, which receives Venezuelan oil in return for loans, will benefit from its 49% share of Essar Oil. PDVSA reportedly owes India’s ONGC Videsh about $600 million in late dividends for their joint crude oil project at San Cristobal. The Venezuelan state oil company is now settling these debts by dedicating exports of 17,000 bpd for this purpose. Rising Venezuelan exports could reduce Indian refiners’ interest in Canadian crude. State-owned Indian Oil Corporation (IOC) acquired its first cargo of US and Canadian heavy crude in July this year, as medium and heavy sour supplies from the Middle East have dried up.
China will also profit from additional deliveries from Venezuela. China’s indigenous oil production has suffered hugely in the wake of lower oil prices. Venezuela’s exports to China to service debts owed to the country have almost doubled since oil prices collapsed from their mid-2014 highs above $100/bbl.
Venezuelan imports to worsen economic woes
The debt burden will get worse if the US applies sanctions on the Andean nation. Venezuela also imports gasoline and US light sweet crude oil for blending with its own heavy crude oil. Caracas will have to pay a higher price for gasoline imports and would be forced to source light crude from long-haul suppliers such as West and North Africa, if sanctions prevent it from taking US light sweet crude. Given the country’s spiralling debt burden, this could intensify the social and economic problems it faces.
Venezuela needs to blend its crude with that from countries such as Libya, Algeria and Nigeria to reduce the concentration of impurities such as metals and salt. Naphtha has also been used to improve the quality of Venezuelan crude oils. PDVSA could replace US naphtha supplies with European supplies but once again would have to pay higher freight. Similarly, US gasoline can be substituted by the European material while diesel can be sourced from the Middle East or Russia, but again at higher cost.
US sanctions against Venezuela are expected to be supportive of global crude oil prices, particularly if the political instability results in supply disruption, or to a perception that Venezuela has become an unreliable supplier. Unless this happens, however, Venezuelan crude oil supplies will simply be redirected towards Asia, increasing the competition for Middle Eastern grades, but doing nothing to reduce global oil stocks. Heavy sour crude differentials would come under pressure, but outright prices would be little affected.