Daily Management Review

Sanctions against Venezuela hit US oil industry


02/08/2019


Refineries in the United States spend billions on heavy grades of oil. Sanctions imposed by Trump against Venezuela forced them to rush to look for other suppliers. However, there are simply not enough raw materials: given reduction in production within OPEC, the market is facing a shortage. As a result, according to analysts, the largest American oil companies will suffer the most.



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Back in January, oilmen asked Trump not to restrict oil imports from Venezuela. India, Russia and China will continue to buy Venezuelan raw materials, and a unilateral ban will put American refiners in a deliberately disadvantaged position, they explained. But the administration stated that sanctions are inevitable, and recommended that alternative sources of heavy oil be sought.

Technology of US refineries does not allow using only light oil coming from the Perm Basin and West Texas. It must be mixed with heavy, imported mainly from Venezuela.

Producers who have invested billions to profit from processing of cheap low-quality raw materials are now paying fabulous premiums for high-sulfur oil. This is more than good for OPEC members like Iraq and Saudi Arabia: not so much light low-sulfur oil is produced there, but there are no problems with heavy grades.

Analysts warned that the crisis in Venezuela, along with the reduction in OPEC production, will only increase the imbalance in the market. The south American republic exports one of the heaviest grades of oil in the world, and the sanctions have practically blocked this channel. Oil refining companies that are left without raw materials really need to urgently look for alternative suppliers.

However, the fact can be unsuccessful. Mexico has already increased shipments to the eastern states last year, surpassing Venezuela. Ecuadorian and Colombian oil goes to the west coast. And now, refineries will have to fight for raw materials with each other.

Market players admit that they do not have enough oil, and there’s nothing to replace Venezuelan supplies.

“There have been significant holes in the plan for the next month. The problem is that we are not getting anything from Venezuela,” said Gary Simmons, head of the largest US oil company, Valero Energy Corp, to investors.
Experts emphasize that all this is a direct result of the White House’s actions. Saudi Arabia, Russia and Canada are cutting production, sanctions are forcing Iran and Venezuela to curb exports, and the market for low-quality crude oil is on the verge of a crisis.

Refineries of the Gulf of Mexico and the East Coast, designed for processing heavy oil, are in the most difficult situation.
"Venezuela is very important for the market. It's not so much about the volumes, but about quality of the oil of American companies. Oil refineries on the coast of the Gulf of Mexico will suffer most from the sanctions," say Rystad Energy analysts.

Among those who suffer the greatest losses are the main players in the US oil industry. First of all, this is the Houston Citgo Petroleum, the American division of the Venezuelan PDVSA, managing refineries, pipelines and terminals.

The International Energy Agency states that Citgo is the largest importer of Venezuelan oil (176 thousand barrels per day according to last year’s results). Valero Energy is one the second place (166 thousand barrels per day), and Chevron Corp is the third (83 thousand barrels per day).

According to Bloomberg, the shortage of Venezuelan crude oil has already led to a sharp rise in commodity prices in the region. In late January, Mars Blend crude went up to a five-year high, while the profitability of refining Mexican oil fell to a minimum of four years.

If American refiners do not find an affordable replacement for Venezuelan raw materials, they will have to drastically reduce production rates. And this, in turn, will cause a fuel price hike, which will hurt Trump's rating.

source: bloomberg.com






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