American refineries will feel the unintended consequences of Trump's Venezuela crackdown
Posted January 29, 2019 12:50 p.m. EST
CNN — The United States and Venezuela are going through a painful divorce that will have sweeping consequences for the global oil industry.
US oil prices surged 3% on Tuesday after the Trump administration imposed sanctions on PDVSA, Venezuela's state-owned oil company. The penalties are meant to speed the demise of Venezuelan President Nicolas Maduro's regime by starving his government of cash.
But President Donald Trump's crackdown on Venezuela will also hit close to home because the OPEC nation is America's No. 4 oil importer.
The PDVSA sanctions will likely lift oil and gasoline prices. At the same time, they're expected to squeeze American refiners that rely on a steady dose of Venezuela's heavy and cheap crude.
"This is certainly an unintended consequence of Trump's foreign policy," said Michael Tran, director of global energy strategy at RBC Capital Markets.
Despite soaring tensions between Washington and Caracas, the two nations have up until now been intertwined through the energy market. The United States is Venezuela's No. 1 customer. The Latin American country shipped 506,000 barrels of oil per day to the United States in October, according to the most recent Energy Department statistics. Only Canada, Mexico and Saudi Arabia sent more crude to the United States.
Monday's sanctions complicate that relationship. Calling the state oil company a "vehicle for embezzlement" and "corruption," Treasury Secretary Steven Mnuchin said that US companies must make payments to PDVSA into "blocked" accounts to prevent the cash from going to Maduro.
"I don't expect people will see an impact at the gas pumps," Mnuchin said.
Yet US oil prices soared as much as 3.7% on Tuesday to $53.93 a barrel as traders absorbed the shock to the market.
"This is obviously bullish news," said Tran.
The problem is that even though the United States has turned into the world's leading oil producer, it still relies on foreign oil from OPEC and other nations.
The complex US refinery system can't rely solely on the very light blend of crude getting pumped out of the Permian Basin and other shale hotspots. It must be mixed with heavy crude — and these days, that often comes from Venezuela.
Where will the crude come from?
Mnuchin downplayed this problem, pointing out that crude can be sourced elsewhere.
"I'm sure many of our friends in the Middle East will be happy to make up the supply," Mnuchin said.
Analysts are less sure.
Saudi Arabia certainly has the firepower to make up for sidelined Venezuelan barrels. But Saudi Arabia has promised to cut production in a bid to mop up the supply glut that sent crude into a bear market last year.
The United States obviously won't turn to Iran for its heavy crude. Last year, Washington levied sanctions on Iran that created shockwaves in the oil market.
And Canada and Mexico face constraints that could block their heavy crude from reaching the US Gulf Coast.
"Canadian and Mexican flows to the US are essentially maxed out," analysts at JBC Energy wrote in a report Tuesday.
Barrels from Canada are having trouble escaping because of infrastructure limits.
"Virtually all of the pipelines running from Canada are full," Tran said. "There just aren't many places to turn for heavy crude."
The Trump administration estimates that the PDVSA sanctions will cause a loss of about $11 billion in exports for Venezuela over the next decade.
However, Rystad Energy said in a report Tuesday that figure will be "substantially lower" because Venezuela's oil will find a home, albeit one further away. China and India, two fast-growing economies in need of more oil, should be able to pick up Venezuela's crude on the cheap.
"For countries like China and India, yesterday's news was akin to Black Monday," wrote Paola Rodriguez-Masiu, head of Rystad Energy's global refinery and infrastructure.
Refineries are losers in the US-Venezuela battle
Meanwhile, American refineries are caught in the crossfire between Maduro and Trump.
According to Rystad, the biggest US importers of Venezuelan crude last year were Valero, Chevron, Paulsboro Refining and Houston Refining. The leading importer was Citgo, which is majority owned by PDVSA and is now also facing US sanctions.
Mnuchin said he's been working "closely" with US refiners and anticipates "very modest impacts" for the industry.
Analysts warned that US refiners will now have to import heavy crude from the Middle East at a significant markup. The increased costs will likely eat into razor-thin margins for refiners.
"US refiners will be amongst the biggest losers," Rodriguez-Masiu wrote.
In a statement, Valero said it plans to comply with the sanctions and "re-optimize" its crude supply to "minimize" any impact.
The American Fuel and Petrochemical Manufacturers, a trade association, said in a statement that it supports the Trump administration's goal of "bringing positive change in Venezuela."
"We will work with the administration to minimize any unnecessary disruptions or negative impacts to the market and American consumers," the trade group said.
Chevron declined to comment.
Oil industry in 'shambles'
It's possible that the crackdown on Venezuela speeds the ouster of Maduro, clearing the way for friendlier relations with opposition leader Juan Guaido.
But no matter who is in charge, RBC's Tran warns it will take years to repair Venezuela's crumbling oil industry. It's under serious strain from years of underinvestment, corruption and the loss of talent.
"We're not convinced there is any silver bullet that can turn Venezuela around in the near term," Tran said. "The industry is clearly in shambles. Things will get worse before they get better."