Sanctions Versus Sanctions

Too many sanctions, too little time. Which sanctions do oil traders worry about and which ones do they ignore? Officials in the Trump Administration are warning U.S. energy companies that they could be putting sanctions on coveted Venezuelan heavy crude after France's foreign minister announced that a European-backed system to facilitate non-dollar trade with Iran and circumvent U.S. sanctions would be established in the coming days. As if this was not enough, traders are trying to digest a bearish API report that showed a 6.551-million-barrel increase in crude supply, a 3.65-million-barrel increase in gasoline supply and a 2.573-million-barrel increase in distillate supply. Of course, these numbers may not matter if the situation in the failed Venezuelan socialist state continues to spiral out of control.

The Venezuelan economy has been robbed and pillaged by its leadership and while Venezuelan Nicolás Maduro may still have the backing of his military, he has lost the support of the people that are starving and without medicine and relations with the United States. The Trump Administration moved to recognize opposition leader Juan Guaido as the legitimate head of state after Juan Guaido declared himself interim president. Nicolás Maduro then cut ties with the U.S. but may see another hit come to the Venezuelan economy as the Trump administration may use their nuclear sanction option and go after Venezuelan crude exports.

While it is the right move to go after the Venezuelan dictator, it may be hard for U.S. Gulf Coast refiners that are Venezuela’s biggest customer. The U.S. is awash in light shale oil, but they are short of the heavier grades of crude oil they need to produce diesel and other high-margin products. In 2018, Venezuela exported about 500,000 barrels of heavy crude a day to the United States but that has now fallen to about 350,000 barrels a day but is still needed by U.S. refiners. This is raising concerns that we could see some cut in U.S. runs because those barrels won’t be easily replaced and could cause future diesel shortages. The lack of heavier grades of oil could cause a release from the U.S. Strategic Petroleum Reserve so U.S. refiners could stay in business as opposed to cutting back on runs. Reuters reports that Venezuela’s increasing instability, and the prospect of U.S. sanctions on the country’s heavy oil exports. has increased the price of alternative medium and heavy crudes such as Mars (MRS) relative to their lighter sweeter counterparts, such as Louisiana Light Sweet (LLS) and light benchmarks such as WTI and Brent.

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