U.S. Venezuela Sanctions Not A Market Supply Shock

IHS Markit observes that Venezuela was once a major global oil power, producing more than 3 MMbbld in the mid- to late-1990s. The nation is a founding member of OPEC. But oil industry decay— it never fully recovered from the 2002-2003 Petróleos de Venezuela SA (PDVSA) strike and brain drain— means the U.S. ban on Venezuelan oil imports is not a major oil supply shock. North Dakota produces more crude oil than Venezuela.

For context, the volume of U.S. imports from Venezuela involves only a little more oil than the 400,000-bbld estimated reduction in western Canadian supply as a result of production curtailments that were imposed in Alberta in January. Prices for Alberta oil fell in October to record lows because of congested pipelines that backed up crude in storage and prompted curtailments. The oil cuts averted disaster for many small producers that were selling, in some cases, below cost. In addition, the 500,000 bbld to 600,000 bbld of Venezuelan oil previously exported to the U.S. could be redirected elsewhere, leading to an even smaller reduction than in Alberta.

The global oil market is currently well supplied. Inventories in Organization for Economic Cooperation and Development countries are slightly above the five-year average level. On Jan. 29, Saudi Arabian energy minister Khalid al-Falih reaffirmed the Vienna alliance cuts and indicated Saudi Arabia would produce below its new ceiling for the full six-month duration of the current agreement. Brent and West Texas Intermediate prices rose Jan. 29-30 by about $2/bbl. The Saudi and Venezuelan news contributed to the rise, but the price move does not reflect a supply disruption.

But beware of complacence, IHS Markit cautions. Heavy crude oil refiners are facing a tighter market. However, refiners with capacity to process Venezuela’s heavy crude oil may have the opportunity to purchase at a discount, as long as they are not part of a loan deal with Venezuela and are not located in the U.S.

Venezuela’s diluted crude oil (DCO) grade is difficult to process owing to its high-sulfur residue and the high naphtha yield from the diluent. In any case, distressed pricing could drive oil previously exported to the U.S. into other markets. Unique crude selections can occur at distressed cargo price levels.

And in terms of overall global oil supply—of all grades—there is currently about 2.2 MMbbld that is off the market owing to U.S. sanctions on Iran, Vienna alliance cuts, and the Alberta curtailment. Venezuela could make this number bigger, as could a May reduction in waivers granted to import Iranian crude under U.S. sanctions.

So, IHS Markit maintains, the ingredients for severe oil price volatility—like what was seen in 2018—remain in place, perhaps even more so now.

(SOURCE: The Weekly Propane Newsletter, February 25, 2019)