LONDON: US sanctions against Venezuela’s national oil company risk raising crude prices owing to a drop in exports of so-called heavy crude on which the world depends.
Washington’s move against PDVSA on Monday is aimed at crippling embattled President Nicolas Maduro’s power base.
Although crude output by OPEC member Venezuela has slumped in recent years, its heavy oil is sought after by US refineries who mix it with lighter crudes to make petrol.
Prior to the US announcement, oil kingpin Saudi Arabia had already warned of the impact of Venezuela’s political crisis on the crude market.
“Of course, developments in Venezuela may have an impact on the markets... We are watching developments there, and there could be an impact on the oil market balance,” Saudi energy minister Khalid Al-Falih told Al-Arabiya news channel on Monday.
Oil production in Venezuela has slumped in recent months from more than two million barrels per day to around 1.4 million bpd.
The Latin American nation sits on the world’s largest oil reserves of more than 300 billion barrels, most of it heavy crude.
And Caracas, whose coffers depend on its crude reserves, could struggle to find other buyers for the oil it is able to extract.
“China and India might continue to buy crude oil from Venezuela but in our opinion the country is about to turn into another Libya as it will be harder and harder to operate the oil facilities,” Olivier Jakob, analyst at Petromatrix, said Tuesday.
“Other Western countries are also likely to join in the sanctions.”
Outside Venezuela, US refineries in the Gulf of Mexico have the most to lose since they specialize in mixing heavy crude with lighter oil produced in the United States.
“In the first ten months of 2018, the US imported an average of 500,000 barrels of crude oil per day from Venezuela,” Commerzbank said in a client note Tuesday.
“This is primarily heavy sulfurous oil that US refineries on the Gulf Coast need for processing,” it said, adding that heavy-oil producer Canada could help to fill the gap despite its own supply constraints and at a time when Saudi Arabia is reducing its output to help support prices.
According to Jakob, “the US is set to receive much less crude oil from Saudi Arabia, right at the time when crude oil imports from Venezuela will dry.”
Tamas Varga, analyst at oil broker PVM, said the US could turn to Mexico and Iraq for heavy crude, “which would inevitably lead to a price spike, in outright prices as well as in price differentials between US and international benchmarks and also between lighter and heavier crudes.”
For now, prices of the oil market’s benchmark contracts, Brent North Sea and WTI, have avoided sharp movements in reaction to the sanctions since they represent lighter crude than produced in Venezuela.
Meanwhile, “tight supply has already driven prices of heavy oil types,” Commerzbank said.
The Mars oil contract, on which Venezuelan oil is closely priced, has soared in value since the beginning of the year.
The price gap between WTI and the more expensive Mars last week widened to $7.50, the largest amount in five years.
Should political change sweep through Venezuela, however, the country could see improvements to its oil infrastructure and output.
“How long it will take is anyone’s guess but the impact will not be felt in the immediate future,” said Varga.
Maduro and opposition leader Juan Guaido have been locked in a power struggle since Guaido last week proclaimed himself “acting president” amid angry protests over the country’s economic woes.
The standoff has split the international community between nations that recognize Guaido as president, including the United States and a dozen countries in the region, and those that still recognize Maduro, including Russia and China.
