The Trump administration is considering major sanctions on Venezuelan oil exports into the US, a policy move which could exacerbate the current heavy crude supply tightness, and cause a months-long dip in US refining margins.
A senior administration official said this week that a ban on Venezuelan imports was one of the options being considered, but views on the practicality and effectiveness of such a ban remain divided with the administration.
While specifics remain largely unclear, here’s a look at the issues at play, the possible sanctions routes the White House is considering and the expected impacts:
On Monday night, President Donald Trump said that if Venezuelan President Nicolas Maduro follows through on his pledge to rewrite the country’s constitution on July 30, the US “will take strong and swift economic actions.”
A senior administration official said these actions may be imposed before July 30 and that “all options are on the table.”
Analysts expect that the Trump administration will likely focus on sanctions targeting individuals, at least initially, but said the most effective sanctions would likely target petroleum exports considering that energy accounts for roughly 95% of Venezuela’s export economy.
The impact on US refiners will depend on how quickly the potential sanctions are put into place and how broadly they are imposed, according to Rick Joswick, managing director for oil with the PIRA Energy Group, a unit of S&P Global Platts.
If, for example, the administration announces it will impose a $2 to $3/b duty of Venezuelan imports within three to six months, “then people will adapt,” Joswick said.
If the administration imposes a full ban on Venezuelan crude on August 1, the impact will be much more severe, he said.
If Venezuelan oil sanctions were imposed US refiners, particularly along the Gulf of Mexico, would need to find new sources of heavy crude. While the US now imports about half of the amount of Venezuelan crude than it did 20 years ago, Venezuela remains a key supplier of the US Gulf refining market.
At 795,000 b/d, Venezuela was the single largest supplier of imported crude into the USGC in April, according to the US Energy Information Administration, followed by Saudi Arabia at 714,000 b/d.
The Phillips 66 Sweeny Refinery in Old Ocean, Texas, imported nearly 46.2 million barrels of Venezuelan crude in 2016, the most of any US refinery last year, according to the EIA.
Citgo’s Lake Charles, Louisiana, refinery took in the second-most with nearly 44.7 million barrels of Venezuelan crude in 2016, according to the EIA. Citgo is owned by PDVSA.
In total, 13 US refineries imported Venezuelan crude in 2016, according to the EIA.
Ongoing reductions in Saudi medium sour crude exports to the US have already tightened medium crude supplies. While USGC refiners also regularly import medium and heavy crudes from Canada, Mexico and South America, Canadian heavy exports face transport capacity constraints, Mexican heavy crude output has stagnated and Colombia heavy crude production appears in decline, PIRA’s Joswick said.
Supply of US domestic medium grades like Mars are also limited, as recent US production increases have come from light sweet shale crudes.
“We’re out of balance right now and [sanctions] would make us more out of balance,” Joswick said.
If sanctions were imposed gradually, Joswick said that some refiners situated to run heavier crude may start using more medium crudes, while medium-situated refiners may run more lighter crudes than they are now.
“You’d get a cascade effect,” he said. “The net effect would be a modest disoptimization of US refining.”
Crude prices for refiners may climb about $1/b as a result, causing refining margins for medium and heavy crude to fall a bit. It would be a change, but not a drastic one, he said.
If the sanctions were imposed immediately, however, the impact would be “very disruptive,” Joswick said.
“Those refiners would be scrambling, buying up whatever they can, probably cutting back their runs,” he said, estimating that runs would be cut by about 400,000 b/d for two months as they market reacted.
STATE OF PDVSA
The Trump administration is considering sanctions amid a US probe of bribery and money laundering allegations involving PDVSA.
The Treasury Department’s Committee on Foreign Investment in the US is currently investigating a deal which would give Russia’s Rosneft 49.9% ownership of US refiner Citgo if PDVSA defaults on its loans, further complicating any potential US sanctions on Venezuela.
PDVSA production has collapsed by two-thirds since Hugo Chavez became president in 1999, followed by an oil strike and the firing of about 20,000 employees from the oil company, including top management and engineers, according to Francisco Monaldi, a fellow in Latin American Energy Policy at the Baker Institute for Public Policy at Rice University.
Foreign partners are now producing about half of Venezuela’s oil, but the current Venezuelan government has considered eliminating private participation in the oil sector, Monaldi said.
Venezuela produced 1.91 mil b/d in June, according to the latest S&P Global Platts OPEC survey. That is down from 2.01 mil b/d in January and 2.34 mil b/d two years ago.
“The situation could get dire,” Monaldi said in an interview with the S&P Global Platts OPEC Outlook podcast. “Investment has been frozen in the last few weeks because companies are in a wait and see mode to see what will happen.”
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