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As a large crude producer, and the third largest source of US imports (as of April EIA data), Venezuela plays an important role in the global and US crude markets. This week, the impact of continued unrest in Venezuela on crude markets and prices has ramped up and the market is watching several key events closely.
 

The Issue:

Venezuelan citizens head to the polls on Sunday to elect a constituent assembly who will redraft the constitution.  There are several key issues with this vote that the market is tracking:

  • This election is sponsored by President Maduro and designed to increase his power and control by working around the Opposition-controlled congress.
  • On July 16th, the opposition organized an election. The result was 7.6 million people that voted NOT to redraft the constitution.
  • The opposition (against President Maduro) is calling for its supporters to stay home and opt out of the vote because they never agreed to redraft the constitution in the first place, and the opposition has no representation among the candidates that are running.
  • There is no minimum turnout required for the vote to be legitimate. At this point, the outcome of Sunday’s vote is essentially pre-determined and will increase President Maduro’s powers if it goes forward.
  • The US has recently entered the discussion with President Trump promising to inflict “economic pain” if the election goes ahead as planned. Trump’s administration imposed sanctions on 13 senior Venezuelan officials on Wednesday but also stressed that the action was only a precursor to additional sanctions that will be implemented should the vote go forward.  Additional sanctions would likely limit US imports of Venezuelan crude.
  • This week there have been several meetings behind closed doors to negotiate. Both parties, and several third parties have been included in these negotiations and each has different goals.  The opposition is pushing to stop the redraft of the constitution, and the current administration is promising future elections for President and state-level government positions in exchange for an end to protests.  The next Presidential election is scheduled for Dec 18th, and the state Government’s election is scheduled for Dec 17th.
  • In addition to the two recognized parties (the Opposition and President Maduro’s Administration), there are other independents actively participating in the protests. The main independent group is largely made up of young people and students and is called “The Resistance.”  Because of these independents, even a successful negotiation between the two main parties this week may not be enough to stop the protests.

 

Key US Data Points to Consider:

The US imported 811 MBbl/d from Venezuela in April (latest EIA data). This makes Venezuela the 3rd largest source of US imports behind 1. Canada and 2. Saudi Arabia. Of the 812 MBbl/d imported in April, 795 MBbl/d came into PADD 3 and 16 MBbl/d came into PADD 1.   In addition to the crude imported from Venezuela, the US is linked to Venezuela by the roughly 100 MBbl/d of light crude exports that leave the US and land at Curacao for blending with heavy Venezuelan barrels.  It is not clear what impact any US sanctions would have on these light barrels.
In April, the following refiners imported Venezuelan crude:

  • Citgo: 218 MBbl/d to their refineries in Lake Charles, LA & Corpus Christi, TX
  • Valero: 200 MBbl/d to their refineries in Port Arthur, TX (on behalf of Premcor) & Corpus Christi, TX & Saint Charles, LA
  • Chevron: 103 MBbl/d to the Pascagoula, MS refinery
  • P66: 101 MBbl/d to the Sweeny, TX refinery
  • Paulsboro: 97 MBbl/d to their refineries in Chalmette, LA (on behalf of Chalmette) & Delaware City, DE
  • Marathon: 36 MBbl/d to the Garyville, LA refinery
  • Motiva: 34 MBbl/d to the Port Arthur, TX refinery
  • Houston Refining: 19 MBbl/d to the Houston, TX refinery

 

What Does This Mean for the US:

DrillingInfo believes that if Venezuela crude is sanctioned, there would be a temporary short-term disturbance to some refinery operations in the US that would result in higher WTI prices due to scheduling issues for any waterborne crudes that are already en route.  However, within a couple of months after the sanctions are implemented, the Venezuelan crude would find its way to other markets (likely at a discount), essentially reshuffling what comes to the US.  WTI would normalize to lower price levels based on global fundamentals again, and Venezuela would be forced to offer additional discounts to land crude abroad. US refiners have the ability to import other heavy crudes, so the winners would definitely be Canadian and Mexican crude grades and Middle East heavies during that disturbance period.

  Figure 1. Venezuela Imports to US

 

On the product side, we expect lower distillate exports from the US in the short-term until cargoes are re-routed and US refiners replace their heavy feedstock supplies.

For US refiners, the obvious loser is the PDVSA backed Citgo, but Valero, Chevron, and P66 would also be negatively impacted. Valero and P66, in particular, have units (Cokers) built around the processing of Venezuelan crudes. They could run a lower utilization on the cokers, but their light ends processing capacities may limit this ability.
 

Where Else Can Venezuelan Crude Land:

The key reason Venezuela sends significant volumes of crude to the US is because of the complexity of US refineries and our ability to handle very heavy sour crudes.  Refining heavy sours requires coking and desulfurization units.   There are select refineries in all major refining centers globally that have coking and desulfurization units (example: Reliance Jamnagar Refinery) but no single region is a direct substitute for the overall US refining fleet complexity.   We expect that additional discounts to the already-discounted Venezuelan prices will be necessary to land these barrels outside the US.
 

Conclusion:

If sanctions are implemented in the US that prohibit the import of Venezuelan crude, expect WTI prices to increase in the short-term as a global reshuffling of crude shipments unfolds.  Specific US refiners will be impacted more than others, and pressure on Venezuelan crude prices is likely.

Use DI International keep up with E&P trends in Venezuela and other producing countries.

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Sarp Ozkan & Bernadette Johnson

Sarp Ozkan is a Manager, Energy Analytics for Drillinginfo providing to the modeling, research, and fundamental analysis efforts of the Market Intelligence group. He manages the production forecasting models and leads upstream and crude oil related consulting projects. While having a focus on data-driven modeling, his ability to incorporate the effects of technological and market advances into analysis provides clients a thorough picture of the present and the future in their area of interest within the oil & gas industry. His analysis has been presented at industry and academic conferences alike. Prior to joining Drillinginfo, Sarp was a Senior Energy Analyst with Ponderosa Energy. Sarp holds a MS Degree in Mineral & Energy Economics from the Colorado School of Mines, MS Degree in Petroleum Economics & Management from the Institut Francais du Petrole (IFP School), and a BA Degree in Economics from the University of Chicago. Bernadette Johnson joined Drilling Info through the acquisition of products and services from Ponderosa Energy. She serves as Vice President, Market Intelligence for Drilling Info and is responsible for helping to grow and expand DI’s analytics offerings, building on the work she did at Ponderosa Energy leading consulting engagements and research efforts. With nearly 10 years experience in the energy industry, Bernadette has earned the reputation of industry expert with extensive experience providing crude, natural gas, and NGL fundamentals analysis and advisory services to various players in the North American and Global energy markets. A regular commentator for and speaker to the energy industry, her specific market involvement spans: financial trading, production forecasts, infrastructure analysis, midstream analysis, storage value analysis, and price forecasts. Prior to joining Ponderosa, and now DI, Bernadette was Senior Research Analyst for Sasco Energy Partners in Westport, CT where she provided analytics and research support for a team of financial traders active in natural gas, power and oil futures markets. Bernadette began her career with BENTEK Energy, LLC as a Senior Energy Analyst, Natural Gas Market Fundamentals and consulting project team lead. Bernadette holds a MS Degree in International Political Economy of Resources and a BS Degree in Economics, from the Colorado School of Mines.

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