The deepening turmoil in Venezuela is exacerbating a shortfall of crude oil. Venezuela’s oil occupies a special niche to U.S. refiners’ operations


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Venezuela Shortfall Of Crude Oil


By Stephanie Yang and Rebecca Elliott | WSJ.COM

The deepening turmoil in Venezuela is exacerbating a shortfall of dense crude oil, leaving fuel makers in the lurch and underscoring the limitations of U.S. shale.

On Monday, the U.S. imposed sanctions on Venezuela’s state-owned oil giant in an attempt to prevent the proceeds of crude sales to the U.S. from reaching the government of President Nicolás Maduro.

That measure threatens the delivery of more than 500,000 barrels a day of Venezuelan oil to the U.S. Venezuela is the U.S.’s second-largest source of crude imports. While those shipments have roughly halved over the last decade, U.S. producers still will be hard pressed to fill the growing void.

venezuela crude oil
Venezuela Shortfall Of Crude Oil

That is because U.S. shale companies, whose output surpassed expectations and reached record levels last year, produce a crude that is low in sulfur—or “sweet”—and has a low density—“light” in industry parlance. Light, sweet crude is abundant in the U.S., compared with the “heavy,” or dense, oil that countries such as Venezuela provide.

Many American refineries are configured to process a mix of heavy and light barrels and need both kinds to produce fuels like gasoline and diesel efficiently. “The short-term situation could get pretty serious,” said Sandy Fielden, director of oil research for Morningstar Inc. “We’ll see prices for heavier crudes spiking up as any shortage occurs.”

Falling supplies from Venezuela and other exporters, combined with upbeat economic data, pushed U.S. crude-oil futures to a two-month high of $55.26 a barrel last week.

The sanctions on Petróleos de Venezuela SA, or PdVSA, come at a time when heavy crude oil is becoming more scarce. Production in Venezuela has plunged 45% since 2014 amid political and economic turmoil. Canada, another major producer of heavy crude, has experienced severe pipeline bottlenecks that have led to mandated production curbs. Other countries that produce dense crude oil, such as Mexico and Saudi Arabia, have seen their output decline recently as well.

“There are not a lot of countries around that world that have heavy crude,” said Devin Geoghegan, global director of petroleum intelligence at data provider Genscape Inc. By choking off an important oil channel, the sanctions could stifle output from U.S. refiners, which in the past year have churned out record amounts of gasoline supplies, leading to low prices at the pump.

Citgo Petroleum Corp., a PdVSA subsidiary, and Valero Energy Corp. were the two largest U.S. importers of Venezuelan crude last year, according to the U.S. Energy Information Administration, and likely would be hit hardest by a reduction in supplies. They were followed by Chevron Corp. and PBF Energy Inc.

On Thursday, Valero said it was no longer purchasing oil from the country. The company has put alternatives in place and is looking to maximize its intake of lighter, less sulfurous crude, Gary Simmons, a senior vice president, told investors. “But we still have some holes to fill in our supply plan,” Mr. Simmons said. Chevron told investors on Friday that it is pursuing contingency plans.

The Trump administration has played down the domestic impact of the sanctions, with Treasury Secretary Steven Mnuchin saying Monday that the measures would have minimal effect on U.S. gasoline prices. In the near term, plentiful gasoline supplies can help cushion the blow of more-expensive crude. Last week, gasoline futures jumped 2.3%, and diesel futures advanced 1.4%.

“The impact of a Venezuelan crude shortage should have a muted effect on gasoline and diesel prices at least until spring and some of the excess inventory is worked off,” said Charles Kemp, a vice president at energy consulting firm Baker & O’Brien Inc.

But analysts warn that a prolonged shortage of heavy crudes would push refiners to choose between paying a premium for heavy oil and cutting their processing rates. “That will translate necessarily into higher gasoline prices,” Rystad Energy analyst Paola Rodriguez-Masiu said.

As of Thursday, Mexico’s Maya crude, a heavy blend, was trading less than a dollar below Louisiana Light Sweet crude, a Gulf Coast benchmark, compared with an average discount of more than $7.50 last year, according to S&P Global Platts.

Historically, lighter crude has traded at a premium to heavier grades, since it takes less processing to transform it into products like gasoline and diesel. But differences in price between the types have narrowed in recent months as heavy-crude supplies have come under pressure.

Sanctions on Iranian oil sparked worries about dwindling global supplies of heavier crudes last year, before the Trump administration issued waivers in November for countries to continue buying without penalty for 180 days.

Ultimately the sanctions against Venezuelan oil could lead to even steeper reductions in the country’s production, causing a widespread shortage of heavy crude in the global market.


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“The optimistic notion that Venezuelan oil will just go somewhere else is potentially a problem,“ said Robert Campbell, an analyst at research consulting firm Energy Aspects. “There’s an understanding in the industry that the reach of U.S. sanctions goes well beyond U.S. borders.”


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