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Oil Markets React Lukewarm To Venezuela Supply Outage

Irina Slav

When Washington announced its latest sanctions against Venezuela, targeting specifically state oil company PDVSA, there was worry—and hope, depending on perspective—that this will push crude oil prices higher. What happened in fact was a lukewarm price reaction to the news that effectively suspended Venezuelan heavy crude shipments to U.S. refiners.

The reason for this lukewarm reaction, according to Reuters’ Amanda Cooper and Alex Lawler, is that there is abundant heavy crude production capacity elsewhere in the world and any gap in supplies caused by the sanctions against Venezuela will be only temporary, to be quickly filled by producers ranging from Canada to Saudi Arabia.

To date, Venezuela exports about 1 million barrels of crude daily, the Reuters reporters note. However, Saudi Arabia alone has spare capacity of 1.8 million bpd that it could tap to help fill in this gap. Canada’s production could rise too, despite a provincial cap aimed at stabilizing the prices of local crude grades.

By the way, prices for Canadian crude have risen substantially; so much, in fact, that it is becoming less attractive, with the discount of Western Canadian Select to West Texas Intermediate narrowing to less than US$10 a barrel this week. Yet even with such a narrow discount, Canadian heavy remains one of the most accessible alternatives to Venezuelan crude for Gulf Coast refiners.

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Besides the spare production capacity, there is also heavy crude in the U.S. strategic petroleum reserve that can also be used to replace Venezuelan heavy at local refineries. In other words, the drama anticipated by some industry observers following the announcement of the sanctions may have been a little premature.

The implications from this situation for the Venezuelan government are quite serious. If it can’t export crude to the United States, then the Maduro government does not have a lot of leverage in the fight for power with the opposition, led by Juan Guaido who declared himself interim president as per the Venezuelan constitution, and called for new elections.

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Now, it seems, the most important thing is whether the army will remain loyal to the Maduro government or whether it will switch allegiance to Guaido. The Associated Press reported yesterday several South American countries plus Canada, calling themselves the Lima Group, have urged the Venezuelan army to allow food and medicine to enter the crisis-stricken country but also to swear allegiance to Juan Guaido. The prevailing opinion seems to be that whoever the army supports will win in the fight for power.

While what media like to call the international community seems to be firmly with Guaido, the Maduro government still has the support of Russia and China, including military support. Russia has already criticized the EU and the United States for embracing the opposition leader and while China has been more measured in its response to the latest developments, it has a vested interest in Venezuela’s oil wealth, not just for practical consumption purposes, but also as part of its strategy for growing its international influence. This situation suggests any resolution to the Venezuelan crisis will not be easy to achieve.

By Irina Slav for Oilprice.com

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