Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
[William Watts, MarketWatch]
Gasoline prices could jump if U.S. bans crude imports
The U.S. hasn’t hit Venezuela’s oil industry with new sanctions, but such a move remains a strong possibility as the country’s president, Nicolas Maduro, retaliated against opposition leaders after prevailing in a disputed weekend referendum.
That referendum paved the way to a rewrite of the nation’s constitution and tighten Maduro’s grip on power, action that had sparked deadly protests.
Venezuelan oil production outages would likely send ripple effects through the oil market, a bullish factor, at least short term, across the crude market, analysts said.
Treasury Secretary Steven Mnuchin on Monday announced the Trump administration had sanctioned Maduro, freezing any of his personal assets held within the U.S. Maduro seemed unfazed, with Venezuelan authorities on Tuesday dragging two opposition leaders from their homes after Maduro vowed to jail opposition politicians who had accused him of electoral fraud.
Oil futures rallied last week, in part on concerns about the potential for Venezuela chaos, with the U.S. benchmark CLU7, +0.90% topping $50 a barrel. Oil has consolidated this week, however, amid renewed doubts over the ability of major oil producers to stick with agreed production cuts.
Mnuchin didn’t rule out broader sanctions, which could include banning U.S. imports of Venezuelan crude or restricting exports of U.S. oil to Venezuela. Of the two, the former could give administration officials some pause given the uncertainty surrounding its impact on U.S. gasoline prices and other factors, analysts said.
“Venezuela is the third largest supplier of oil imports to the U.S., accounting for 10% of U.S. oil imports,” said Phil Flynn, senior market analyst at Price Futures Group, in a note.
Oil production has fallen amid Venezuela’s longrunning economic and humanitarian crisis. That’s left U.S. refiners to adapt to a slower flow of Venezuelan crude—exports to the U.S. have been halved over the last decade, according to RBC Capital Markets. But many U.S. Gulf Coast refiners still remain geared toward “Venezuela’s unique brand of heavy, tar-like crude,” Flynn said.
Citgo, a refiner owned by PDVSA, Venezuela’s state-backed oil company, is the biggest importer of Venezuelan crude. Citgo operates the Lake Charles, La., and Corpus Christi, Texas, refineries in the Gulf, as well as the Lemont, Ill., refinery.
A handful of other refineries in the Gulf also rely on Venezuelan crude, noted RBC commodity strategist Michael Tran (see table below).
In addition to sanctions, Venezuelan oil output is threatened by the country’s internal turmoil. In fact, Tran said the main threat to Venezuelan output is the potential for PDVSA workers to walk off the job as the country’s fiscal situation continues to deteriorate.
Any ripple effects through the oil market are likely to impact producers of heavy oil, such as Canada and Mexico, the most. They stand to pick up the most market share among U.S. refineries given that their barrels currently compete with Venezuelan crude, Tran said.
“In other words, further deterioration of Venezuelan production is undoubtedly bullish for all crudes, but incrementally more constructive for North American balances and unquestionably most bullish for Canadian and Mexican crudes,” Tran said. “We expect Western Canadian Select and Mayan crudes to outperform the rest of the oil complex on a relative basis.”
Still, the transition probably wouldn’t be seamless. A ban on Venezuelan oil imports to the U.S. could potentailly create a supply shortage for several key U.S. Gulf refineries, Tran said, noting that the Citgo Gulf facilities source 38% and 44% of their imports from Venezuela while aggregate U.S. imports total around 725,000 barrels a day.
“Any interruption in sourcing crude could temporarily spike U.S. Gulf Coast gasoline pricing if the supply chain is disrupted even in the slightest given that we are in the midst of peak gasoline demand season,” Tran wrote.
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