Daily Management Review

No Huge Gap In Global Crude Market Due To US Sanctions On Venezuelan Oil


No Huge Gap In Global Crude Market Due To US Sanctions On Venezuelan Oil
Any loss of crude oil in the international market because of the export sanctions imposed on Venezuela by the United States would not have too much impact on the global crude supply as there is enough spare capacity in other oil producers and strategic reserves which is potentially the reason that there has been little reaction in the global crude prices despite the imposing of the US sanctions on Venezuela about a week back.
About 1 per cent of global production which amounts to about 1 million barrels of oil are is exported by Venezuela every day. Half of that export goes towards the United States.  There are many refineries in the US that are specifically designed to handle and transform heavier and sour grades of crude and a large part of such crude oil is supplied from Venezuelan oil fields.
That volume could be replaced by the largest oil exporter of the world Saudi Arabia simply from its spare capacity of about 1.8 million bpd while more oil can now be pumped by other member countries of the Organization of the Petroleum Exporting Countries such as the United Arab Emirates and Kuwait following a supply cut of crude by OPEC which started in January.
Venezuela was among the earliest members of the OPEC and was one of its top producers at one point in time. However in recent years, production has declined significantly in Venezuela because of the collapse of the economy of the country. Venezuela, along with Libya and Iran, have been allowed to be left out of the latest OPEC-led supply cut.
The decline in the production which Venezuela had already been experiencing makes the impact of the US sanctions aimed at its oil industry is not very significant. On the day that the US sanctions were imposed on Venezuela, - January 29, the Brent crude which is the global benchmark for crude prices, was at $61 a barrel while the current price was below $63 a barrel.
"Cutting out Venezuela from the global oil markets would provide a short term positive strength to oil prices, but its significance would be limited," said Mihir Kapadia, chief executive of Sun Global Investments. "The U.S. would look elsewhere for oil imports, and refiners will adapt to it."
In comparison, the US sanctions against the then President Hugo Chavez's government in Venezuela in 2002-03 by the US and others has significantly cut down on oil supply of the country and had spiked up prices for global crude to over $30 a barrel which was outrageous considering the prices at that time. That had forced Saudi Arabia to increase production to fulfil the gap in the global crude market and preventing a shortage in supply.
The Strategic Petroleum Reserve of the US holds about 650 million barrels of crude in addition to other producers being able to pump more oil. Market experts believe that if there is am increase in oil prices, the reserve can be tapped into by the US to steady prices.
"The market reaction is quite subdued," a senior oil industry official said. "There is plenty of spare capacity plus the SPR if needed. Trump will not allow prices to rise sharply."