What The Venezuelan Oil Sanctions Mean For Supply

The US has imposed sanctions on Venezuelan state-owned oil company PDVSA, effectively bringing US purchases of Venezuelan oil to an end. The announcement has had little impact on price, with expectations growing in recent days that such action would be taken. Furthermore, Venezuela will likely increase sales to buyers outside of the US.

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What was decided?

The US Treasury announced yesterday that it is imposing sanctions on Venezuelan state-owned oil company PDVSA, which would effectively close the US as a market for Venezuelan crude oil. Volumes currently being shipped will be exempt from sanctions whilst Venezuela will be allowed to sell oil to US refiners, however, payments will have to go to a blocked account so that proceeds cannot be remitted to Venezuela.

The sanctions also prohibit the sale of diluents to PDVSA- usually blended with the heavier crude oil that Venezuela exports. The US exports around 120Mbbls/d of lighter oils to Venezuela for this purpose. Furthermore, US companies currently transacting/engaged with Venezuela have been given three months to wind down operations. Whilst Venezuelan refiner Citgo, currently operating in the US will be allowed to operate as normal but is not allowed to remit funds to Venezuela.

What is the impact on oil supply?

EIA data shows that the US imported on average 514Mbbls/d of Venezuelan crude oil over 2018. This supply is key for a number of refiners in the US Gulf Coast, who blend it with domestic light oil, making an optimum blend for US refineries. These refiners can switch to other origins for heavier crude oil though it may be fairly difficult for the time being.

The obvious choice for the industry would be to turn increasingly to Canadian oil. However, as a result of mandated production cuts in Alberta, the additional supply from Canada is likely to be limited. The other issue is logistics- the reason Canadian oil producers cut output was due to a lack of takeaway capacity and this is an issue that is likely to linger for quite some time.

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