How US sanctions against Venezuela affect oil markets

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The sanctions, which were announced on January 28 to accelerate the withdrawal of Nicolas Maduro, prompted refineries on the US Gulf Coast to look for other sources for the heavy crude they previously used. Venezuela.

"Sanctions are already having a devastating effect on oil supplies," Rabobank energy strategist Ryan Fitzmaurice wrote to reporters in a report released last week.

Heavy crude is generally cheaper than light crude oil, but the demand for this crude has become so intense that it suddenly sells for more money than lighter barrels. US Gulf Coast refiners, led by Citgo, Chevron and Valero, blend heavy crude oil with lighter barrels found in American oil shale deposits to produce gasoline, diesel and jet fuel.

Meanwhile, the Venezuelan government, which relies on 90% of its revenue from oil exports, is looking for other customers for its crude oil. Venezuelan Oil Minister Manuel Quevedo traveled to India last week apparently seeking support.

"They are struggling to find buyers for their crude," said Matt Smith, director of raw material research at ClipperData.

Double blow for Venezuela

Venezuela is in the grip of a massive humanitarian crisis. Millions of people can not get basic supplies, which has led to famine and disease.

The country's oil industry, its main source of income, is in sharp decline. Venezuela's oil output has fallen from 2.4 million barrels a day in 2015 to just 1.34 million by the end of 2018, according to research firm Rystad Energy.

"This free fall is about to be postponed until 2019," Rystad analysts wrote in a recent report.

US sanctions are a double blow for Venezuela.

Venezuela's # 1 customer in the US was not only the country's main source of naphtha, the liquid hydrocarbon blend used to dilute the crude. Without it, Venezuela's heavy crude could not be easily transported. Rystad Energy predicts that some operators in Venezuela will be short of diluent by March.

The price of American oil has risen by almost 5% since the announcement of sanctions. Brent, the world's benchmark, rose 8%. But analysts do not believe that Venezuela is the main reason for the skyrocketing of crude. Instead, they point to deeper-than-expected production cuts from OPEC, the turmoil in Libya and the optimistic tone of the global financial markets as fears of recession abate.

"The rally was mainly driven by OPEC-plus cuts," said Artyom Tchen, Venezuela's expert at Rystad Energy. "Most Venezuelan risks had already been evaluated for a long time."

Saudi Arabia, another major source of heavy crude oil, has been particularly aggressive in reducing its shipments to the United States. Analysts say that's because the transparent and timely data from the United States makes these cuts immediately obvious to oil traders.

"It's there that they get the most for their money," Smith said.

Venezuela, which has the largest proven oil reserves in the world, has seen its production decline sharply in recent years. US sanctions are likely to accelerate this decline.

& # 39; Emergency Planning & # 39;

Refiners on the US Gulf Coast are trying to find ways to replace Venezuela's barrels.

Earlier this month, Chevron (CLC) CEO Mike Wirth said the company has activated an "emergency plan" to maintain supply at its refinery in Pascagoula, Mississippi, which trades an average of 70,000 barrels of crude per day. from Venezuela.

"We are actively working to continue providing premium fuels and lubricants to our customers in the United States," Chevron said in a statement to CNN Business.

Why exploit the oil reserves of America is a bad idea
Valero (VLO) stopped bringing Venezuelan crude and substituted it for oil from other parts of North America. Before the sanctions, Valero received a fifth of its heavy crude from Venezuela.

"We certainly hope that the crisis will be quickly resolved, not only for the benefit of the rough markets, but also for the well-being of the people of Venezuela," said Gary Simmons, Senior Vice President of Supply and Services. international operations, analysts said on Jan. 31.

Western oil companies partnering with PDVA found themselves caught in the middle.

From France Total (EARLY) recently declared his bank accounts were blocked. The company has also evacuated foreign workers from Venezuela, Reuters reported. Total has not responded to a request for comment.

Chevron said its operations in Venezuela were continuing and that the company "is committed to developing the country's energy sector in accordance with all applicable laws and regulations."

Citgo Petroleum, the Houston-based refiner owned by PDVSA, has put a $ 685-million renovation on a refinery in Aruba on hold because of US sanctions, Reuters reported on Monday.

The free fall of Venezuela will continue

The oil world is preparing for a historic collapse of Venezuela's oil production because of the crisis and US sanctions.

"Maduro is unlikely to survive without a fight – setting the stage for a prolonged power struggle that will likely lead to a lasting decline in production if history is a guide," said Fitzmaurice. "We remain very condemned prices are undervalued due to the uncertainty of the current supply ",

Rystad Energy predicts that Venezuelan oil production will grow from 1.34 million barrels per day in 2018 to only 1 million barrels this year and to 890,000 barrels in 2020. If Venezuela fails to compensate for the oil price, it is expected that oil will rise. impact of US sanctions and to obtain new financing, production could drop 680,000 barrels per day in 2020, said Rystad.

This is an amazing decline because Venezuela has more proven oil reserves than any other country on the planet.

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