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Here's What U.S. Sanctions On Venezuelan Oil Would Mean For Markets

By Ellen R. Wald, Ph.D.CommoditiesJan 24, 2019 04:01AM ET
www.investing.com/analysis/breaking-down-the-venezuela-situation-for-oil-markets--the-political-crisis-is-esc-200378688
Here's What U.S. Sanctions On Venezuelan Oil Would Mean For Markets
By Ellen R. Wald, Ph.D.   |  Jan 24, 2019 04:01AM ET
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The political crisis in Venezuela is escalating. Yesterday, the United States, Canada, Brazil and a slew of other South and Central American countries officially recognized Venezuelan opposition leader, Juan Guaido, as the interim president in place of Nicolas Maduro whose regime has driven the South American country to economic collapse.

Guaido had been the president of the Venezuelan National Assembly before ascending to this new, disputed role. In addition, the Trump administration is now openly considering placing sanctions on Venezuela’s oil exports.

The U.S. already has a variety of sanctions in place on Maduro and his supporters, but it has refrained from sanctioning Venezuela’s oil. This could change. President Trump says he is actively considering such sanctions amidst growing protests against Maduro’s increasingly authoritarian rule.

Oil 300 Minute Chart
Oil 300 Minute Chart

Last week, I touched on the potential impact of such sanctions on the Citgo refinery in the U.S. However, there are larger potential implications for for the price of oil and markets that sanctions on Venezuelan oil could cause.

Price of Heavy Sour Crude Could Jump

Venezuela has the largest oil reserves in the world. Easily recoverable oil was first discovered there in 1914 in Lake Maracaibo, but much of Venezuela’s current production comes from the much more expensive and difficult-to-exploit oil resources in the Orinoco Belt. Oil production from Venezuela has been as high at 3.4 million barrels per day, but declined to under 1.2 million barrels per day in 2018. Venezuela is the 3rd largest source of foreign oil for the United States (Canada and Saudi Arabia both export more oil to the U.S. than Venezuela). Slightly less than half of Venezuela’s current production is exported to refineries in the United States, one of which, Citgo, is owned by PdVSA.

The country's oil is primarily heavy sour crude which is often mixed with other types of oil for processing. If Venezuela is removed as a source of heavy sour crude, the price of this type of oil will go up. In fact, according to Reuters, the price of some similar grades of crude oil went up by $6.25 on Tuesday.

Venezuela's Imports of U.S. Petroleum Products Would Cease

Canada also produces similar crude, from its tar sands region in Alberta. However, the effected U.S. refineries, which are mainly located in the Gulf of Mexico region, would have difficulty getting that oil, because Alberta is facing significant transportation bottlenecks. Rerouting oil from the Middle East is not an ideal option, since that would take a significant amount of time.

Therefore, if these sanctions happen, the refineries in the Gulf of Mexico that use Venezuelan oil would face higher costs. If they have to run at less than full capacity, we could even see increases in gasoline prices in some places.

If the U.S. does sanction Venezuelan oil, it is likely that Venezuela will also halt its purchases of American petroleum products even though that decision would hurt Venezuela more than it would impact the U.S. According to the EIA, Venezuela imported over 3 million barrels of petroleum products from the U.S. during October 2018.

Venezuela’s refineries have been devastated and can no longer produce enough gasoline and other petroleum products to meet local needs. Since 2016, Venezuela has been importing diluents from the United States, petroleum products that are mixed with Venezuela’s heavy oil so that the oil can be exported. If trade with the United States breaks down entirely, Venezuela’s oil exports to other customers could drop off significantly until it finds another source of diluents.

Rosneft Might Seize PdVSA Assets in U.S.

The revenue Venezuela receives from the United States market is generally used to fund Venezuela’s budget. The rest of Venezuela’s oil sales go directly to finance interest payments on loans the country has taken from Russian and Chinese interests, among others.

Should Venezuela default on its payments to Russia’s Rosneft (MCX:ROSN), the Russian oil firm might move to seize Venezuelan oil assets in the U.S. In fact, 49.9% of Citgo is currently serving as collateral for PdVSA’s debts to Rosneft.

It is most likely that the U.S. government would block Rosneft’s acquisition of Citgo on national security grounds, but that could lead to a dispute and standoff between Venezuela, Russia and the U.S. If PdVSA defaults, and if the U.S. government forbids Rosneft from taking a stake in Citgo, we might see a sale of those shares to an mutually agreed-upon more neutral firm (likely at a discount).

Sanctions: Bad for Venezuela, Equally Bad for the U.S.

Clearly, sanctions would be very damaging for Venezuela. However, the immediate impact of sanctions would also be significant for the U.S. Right now the U.S. is flush with petroleum products. Refineries are running at full capacity and product inventories are building up in storage.

Mexico has halted imports from the U.S. while it sorts out theft problems along its pipeline infrastructure. If Venezuela also suspends all imports from the U.S. we could see larger builds of petroleum products.

Most analysts expect Venezuela’s oil production to decline to under 1 million barrels per day during 2019. However, if the process is accelerated by sanctions, then come May we could also see a sharp rise in oil prices.

The confluence of sanctions on Venezuela, the start of the driving season in the U.S., the end of some or all of the exemptions given to importers of Iranian oil and the OPEC+ production cuts could make for a much tighter oil market this spring.

Here's What U.S. Sanctions On Venezuelan Oil Would Mean For Markets
 

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Here's What U.S. Sanctions On Venezuelan Oil Would Mean For Markets

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Comments (12)
Klay Naija
Klay Naija Jan 26, 2019 8:59PM ET
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just with this news watch the charts go up....
HouseofJenga Tiger
HouseofJenga Jan 24, 2019 11:55AM ET
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Another US intervention.  Destabilize their economy and govt.  Then allow US and ally corporations to raid their oil and exploit their people.  Modern colonialism.
Steve Welch
Steve Welch Jan 24, 2019 11:07AM ET
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Does California import any Venezuelan Oil ?
Steve Welch
Steve Welch Jan 24, 2019 11:05AM ET
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Of course California Gasoline would go up even if we don't use the heavier crude from Venezuela.. just because we are California. For a State that claims to want "GREEN" Energy we sure tax the *****out of a gallon of Gas. Fed Tax per gallon is about .18 per Gallon. State Tax on a Gallon of Gas is around .41 per Gallon. Somehow I doubt that Green Energy can supplant that kind of State Tax Revenue.
ana amah
ana amah Jan 24, 2019 11:05AM ET
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haha, you analyse the situation well
Mein Ki
Mein Ki Jan 24, 2019 9:58AM ET
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trump is making a way for pukin's oil to go higher. this is not the first instance.
Maximillion Wolf
Maximillion Wolf Jan 24, 2019 9:58AM ET
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so when should we buy crude oil futures?
Rafaël Guyon
Rafaël Guyon Jan 24, 2019 9:58AM ET
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When it was @ 40-46 or around :p
Mark Stewart
Mark Stewart Jan 24, 2019 9:56AM ET
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Venezuela is 4th largest supplier after Canada, Saudi Arabia, Mexico. https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm
Mein Ki
Mein Ki Jan 24, 2019 9:55AM ET
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take a look at rosneft boss. you'll be surprised.
john hincapie
john hincapie Jan 24, 2019 8:59AM ET
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thanks for your expo
Timochin Khan
Timochin Khan Jan 24, 2019 7:37AM ET
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Well explained...Thanks a lot...
Harold Happemout
Harold Happemout Jan 24, 2019 6:38AM ET
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Please learn the difference between affect/effect.
Stephen Fa
Stephen Fa Jan 24, 2019 6:38AM ET
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Teacher's pet.
Abishek Raju
Abishek Raju Jan 24, 2019 4:17AM ET
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Always look forward to reading your brilliant analysis. When can we expect your next book and what is it focussing on?If Juan Guaido takes formally takes control of the govt. how many weeks do you estimate before oil prices would crash (if you even agree), considering a US friendly govt. could in principle get production back up to 3mbpd in 12 months (possible?)Also do you think China and Russia will allow such a swift change in regime to happen cosidering theyre invested with Maduro?Many thanks professor wald.
 
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