(Oilprice.com, Tsvetana Paraskova, 15.Apr.2019) — The U.S. sanctions on Venezuela’s oil industry have tightened the global heavy to medium crude oil market, sending oil buyers scrambling for alternatives to the heavy Venezuelan oil.
Refiners in the United States and Europe have started to replace Venezuela’s oil with some of the crudes produced closer to their home, while the world’s largest oil importer and key demand growth driver, China, has been also looking to Venezuela’s Latin American neighbors to fill in some of the gap. Brazil is emerging as a big winner from the sanctions on Venezuela—it boosted its oil exports to China in the first quarter of 2019 and is expected to further increase its sales and market share in the world’s top crude importer, since Brazil, together with the United States, is one of the few non-OPEC members capable of increasing production significantly in the near term, IHS Markit says.
The fly in the ointment, however, is that Brazil has shown volatility in its oil production and exports in recent months, with figures for some months coming in below analyst estimates.
If Brazil were to deliver on the production growth that major organizations continue to predict, it could gain a foothold on the most prized market for every oil producing nation—China.
With sanctioned Venezuelan oil, the first alternative for buyers would naturally be more medium and heavy crude from OPEC, mostly from its Middle Eastern producers. However, Middle Eastern producers are cutting mostly those grades as part of the OPEC+ production cuts, while Iran’s heavy oil remains stymied under U.S. sanctions. Canada has its own production issues with the takeaway capacity constraints and can’t fully capitalize on the shortage of heavier grades amid the U.S. sanctions on Venezuela.
So China has increased imports from Brazil.
Brazil’s state-held oil firm Petrobras has said that China absorbed two thirds of its crude oil exports last year, IHS Markit recalls.
According to data from IHS Markit, Brazil exported more than 500,000 bpd directly to China in Q1 2019, Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, at IHS Markit, writes.
Including shipments to other parts of Asia later re-exported to China, total Brazilian exports to China reached around 660,000 bpd in the first quarter. Brazil’s exports to China are estimated to have jumped by nearly 50 percent on the year in Q1, according to IHS Markit. Considering Brazil’s expected production growth, Brazilian oil exports to China could “strengthen much more in the second half of 2019,” Katsoulas said.
China, however, will have to compete with other importers of Brazil’s Lula grade, which is popular among buyers, including the United States after the sanctions on Venezuela, IHS Markit’s analyst reckons.
The Lula grade has been in high demand recently, and Chinese refiners, although preferring Lula among the Brazilian crudes, are increasingly buying the new medium heavy Buzios grade.
Going forward, it is Brazil’s game to lose in the race to boost its share on the Chinese market.
Brazil has failed to deliver the expected high production growth in recent years due to various project delays, but this year both the International Energy Agency (IEA) and OPEC see the Latin American producer boosting oil supply.
Recent estimates by the IEA and OPEC show that Brazil’s production will grow by more than 300,000 bpd this year, and Brazil will see the second-highest supply growth from non-OPEC countries, second only to the United States.
However, Brazil’s production in January and February this year slipped, as maintenance and declines from mature fields was more than new production start-ups.
“However, there are market experts expressing their skepticism around Brazil’s ability to maintain its growth projections, as the country’s shipments fell in January before recovering in February and marginally decreasing in March once again. Performance during the last year provides us with an understanding of how volatile Brazilian loadings can be,” IHS Markit’s Katsoulas notes.