Venezuela’s national oil company has efficiently stepped on the unrivalled collapse of its oil output and set forth a domino effect in the global energy market.
The sanctions which were recently announced dated on January 28 in a bid to escalate Nicolas Maduro’s exit, have sent US Gulf Coast refineries taking dedicated attempts to search alternative sources for the heavy crude they once relied on from Venezuela.
Venezuela which was officially was on the No. 4 crude importer to the United States behind Saudi Arabia, Canada, and Mexico has been pushed harder to search for new customers and fresh ways to dilute its very heavy crude to settle it for export.
"Sanctions are already having a crippling effect on oil supplies," Ryan Fitzmaurice, energy strategist at Rabobank, wrote to clients in a report last week.
Heavy crude is generally cheaper than light crude, but it holds a crucial sense as it is unknowingly trading at a premium to lighter barrels. US Gulf Coast refiners, led by Valero, Citgo, and Chevron and blend heavy crude with lighter barrels found in US shale oilfields to churn out gasoline, diesel, and jet fuel.
Meanwhile, Venezuela’s government, which relies on oil exports for 90% of its revenue searching for other customers for its crude. Venezuela’s oil minister Manuel Quevedo traveled to India last week in an apparent bid to drum up support.
"They're scrambling to find buyers for their crude," said Matt Smith, director of commodity research at ClipperData.
There are millions of people who are unable to get basic supplies, which has led to starvation and illness.
The national oil industry main source of income is in declination. According to research firm Rystad Energy, Venezuela’s oil production plummeted from 2.4 million barrels per day in 2015 to just 1.34 million at the end of 2018.
"This freefall is poised to carry over into 2019," Rystad analysts wrote in a recent report.
United States is believed to be one of the prominent customer of Venezuela, moreover it was also named as the country’s main source of naphtha, the liquid hydrocarbon mixture used to dilute crude. According to the direct sources from Rystad Energy forecasts, some operators in Venezuela may run out of diluent by March.
Since the sanctions were announced, US oil prices are hiked from 5%. The global benchmark, Brent is also witnessing a rise by 8%.
"The rally has mostly been driven by the OPEC-plus cuts," said Artyom Tchen, Venezuela expert at Rystad Energy. "Most of the Venezuelan risk had already been priced in a long time ago."
Another prime source of heavy crude, Saudi Arabia has been especially aggressive in slashing shipments to the United States.
"That's where they get the most bang for the buck," said Smith.
However, US Gulf Coast refiners are working on to find ways to replace Venezuela’s barrels. In the early days of February, Chevron (CVX) CEO Mike Wirth prompted that the company activated contingency planning to maintain supply at its Pascagoula, Mississippi, refinery which ran on an average of 70,000 barrels per day of crude from Venezuela.
"We are actively working to ensure we continue to supply top quality fuels and lubricants to our customers in the United States," Chevron said in a statement to CNN Business.
Valero (VLO) has stopped bringing in crude from Venezuela altogether, and has been substituting it with oil from other North American locations. Prior to the sanctions, Valero received one-fifth of its heavy crude from Venezuela.
"We're certainly hopeful that we'll see prompt resolution to the crisis, not only for the benefit of the crude markets, but for the welfare of the people of Venezuela," Gary Simmons, senior vice president of supply and international operations, told analysts January 31.