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Sanctions on Venezuela oil may cause problems for American refiners - IEA

Oil storage tanks near Houston, TX.
Oil storage tanks near Houston, TX. Photo by Flickr user Reinhard Link; used under Creative Commons license.

Sanctions against Venezuela's state oil company by the United States are one of numerous potential challenges to the supply of crude oil moving forward through the first part of 2019, according to a report by the International Energy Agency.

According to the IEA, the sanctions levied against Petroleos de Venezuela (PDVSA) are a reminder of how political events can impact the oil industry. It, along with sanctions against Iran, OPEC reductions and supply cuts in Alberta are all impacting the supply of heavy, sour oil - potentially having a negative effect on refiners along the U.S. Gulf Coast.

"Long before the US shale revolution took off, Gulf Coast refiners had invested in equipment to process barrels expected to get heavier and sourer. Instead, Venezuelan supplies dwindled, as did Mexico's, and Saudi exports to the US fell sharply as they turned their attention to fast growing Asian markets. Meanwhile, Canadian exports, mainly of heavier, sourer crude, poured into the Gulf to partly fill the gap. In addition, despite the preference of refiners for heavier crudes, huge volumes of cheap shale oil became available because exports were not allowed and stocks built up to record levels," the IEA stated in a release. "In time, the US export ban was lifted and producers could sell oil abroad at significantly higher prices. Therefore, Gulf Coast importers would continue to need the kind of crude produced by Venezuela and some Middle Eastern countries."

In 2018, about 450,000 barrels per day were shipped from Venezuela to the U.S., down significantly from previous numbers; much of that oil is used within PDVSA's U.S. refining system run by subsidiary Citgo. Additional sanctions have made it more difficult for PDVSA to export oil. Despite that, stocks in many markets remain strong and markets have been able to adjust, keeping crude prices stable.

However, the reduction in heavy oil barrels is expected to impact the Gulf Coast refiners.

"With heavy barrels being removed from the market, refiners have to pay more. The premium of Light Louisiana Sweet crude over Mars crude has fallen to below $1/bbl from more than $4/bbl in November. Since the US sanctions against Venezuela were announced, the premium of Mars over WTI has soared from $4.50/bbl to over $7.50/bbl," the release states.

PDVSA produces mostly oil of the heaviest quantity and requires addition of imported diluents, or domestic blending. Diluents have been sanctioned by the U.S., and with PDVSA's lighter crude oil production issues, it may not be able to produce enough barrels for export - if they can find someone to buy them.

"So far, there are no signs that other producers, e.g. Saudi Arabia, are intending to push more barrels into the market to offset shortfalls. Oil prices have not increased alarmingly because the market is still working off the surpluses built up in the second half of 2018, when global supply is estimated to have exceeded demand by 1.3 mb/d," the IEA stated. "In quantity terms, in 2019 the U.S. alone will grow its crude oil production by more than Venezuela's current output. In quality terms, it is more complicated. Quality matters."

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