(Barron’s, Evie Liu, 29.Jan.2019) — New U.S. sanctions on Venezuela’s state-owned oil giant not only place more pressure on Venezuelan President Nicolás Maduro’s regime, but also on some U.S. refiners that rely on crude imports from the country.
The Trump administration said late Monday the U.S. will impose sanctions on Petróleos de Venezuela SA, or PdVSA, just one week after the U.S. recognized opposition leader Juan Guaidó as the country’s legitimate president.
Under the sanctions, payments for U.S. imports of Venezuelan crude will need to be placed into blocked accounts, a de facto embargo that essentially forces PdVSA to ship crude to the U.S. for free.
The move could block about 500,000 barrels a day of U.S. imports, estimated Brian Scheid from S&P Global Platts. Brent crude futures surged 2.9% to $61.7 per barrel Tuesday morning on the news, while West Texas Intermediate futures rose 3.4% to $53.9 per barrel.Venezuela, Mexico, Canada, Iraq and Saudi Arabia are the top five crude shippers to the U.S. Gulf Coast refiners, making up nearly 80% of the area’s imports, according Michael Tran, commodity strategist from RBC Capital Markets. If sanctions are fully imposed, Venezuela’s market share will be up for grabs. Mexico and Iraq will likely be the primary beneficiaries because of their extensive customer network in the Gulf Coast, he says, while Canada has a limited footprint in the region.
But U.S. refineries that buy large amounts of Venezuelan oil could suffer.Aside from the PdVSA-owned Citgo Petroleum Corp., the two major importers of Venezuelan oil are Valero Energy (ticker: VLO) and Chevron (CVX). It accounted for 37% of Valero’s total imports in 2018 and 17.6% of Chevron’s, according to Panjiva data.
Chevron has been increasing its imports from the country, with shipments surging 123.8% in the fourth quarter of 2018 compared with a year earlier, Panjiva says. Venezuela was the refiner’s third-largest provider after the U.S. and Mexico.
“A loss of access to Venezuelan oil could prove to be a significant challenge for the firm,” Panjiva analysts wrote Tuesday.Valero said in an email that it plans to comply with the sanctions and will re-optimize its crude supply to minimize any resulting impacts. Chevron didn’t immediately respond to a request for comment.
Another risk for these companies: Although the sanctions allow a three-month wind-down period, it is possible that Maduro cuts exports to the U.S. even earlier. That would force U.S. refiners to bid early for heavy crude at premiums because of increasing logistics costs, analysts with ClearView Energy Partners said in a note on Monday.Crude prices have been rising since late last year facing a series of global supply challenges, including the Iran sanctions, OPEC production cuts, and cuts in Canadian output. A further rise could factor into already slowing global economic growth.
“Applying sanctions [on Venezuela] could meet both geopolitical and economic objectives, though the latter is a balance between improving the prospects for U.S. crude oil exports globally against the risk of increased fuel costs,” Panjiva analysts said.
Treasury Secretary Steven Mnuchin said Monday, however, that the sanctions, aren’t expected to have a significant impact on oil or gasoline prices, claiming that “our friends in the Middle East will be happy to make up the supply.”U.S. imports of Venezuelan crude were already in decline for a few years, amid the country’s political turmoil, lack of investment, and falling oil production. The imports averaged about 574,000 barrels a day last December, down 40% from July 2016, according to U.S. Customs and Border Protection data.
The sanctions announced Monday also prohibit U.S. exports of diluent to Venezuela—a thinning agent that allows dense and viscous crude to flow through pipelines to be refined and sold. S&P 500 Platts estimates roughly 120,000 barrels a day of U.S. diluent would be cut off immediately, which could hinder Venezuela’s ability to produce and transport crude and further accelerate the decline in the country’s oil output.
“Any meaningful interruption in the Venezuelan oil trade could…lead to production faltering farther,” Tran wrote.Write to Evie Liu at evie.liu@barrons.com
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