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​Venezuela sanctions update

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Following the US imposed sanctions on state owned Venezuelan oil company PDVSA in order to prevent current president Nicholas Maduro from benefitting in revenues from US crude in order to cling to power.

The situation so far

This week, high level crisis talks were held between the US and Russia in an attempt to resolve the ongoing political situation and humanitarian crisis in Venezuela. However, both sides remain at odds with the legitimacy of Nicholas Maduro as president with Russia and China continuing to back him. Earlier this month, the nation was hit by a devastating blackout affecting at least 18 of its 23 states. Maduro has accused the US and the right-wing of sabotage, however the opposition has spoken out and blamed power cuts on years of neglect and underinvestment in the power network.

How does this affect crude production?

With the US off limits and other countries reluctant to trade with Venezuela, the nation continues to have trouble selling its crude, the sanctions have cut 500,000 bpd of heavy crude to the US Gulf Coast. In the meantime, Venezuela has suspended oil exports to India, one of its main export countries, in order to prioritise Russia & China as the main destinations for crude exports.

The sanctions are a further blow to the heavy oil producing Orinoco region of Venezuela following years underfunding, poor management and maintenance with output in this area is expected to decline by 400,000 bdp. The sanctions prevent imports of US diluents necessary to dilute the heavy domestic crude oil. Some naphtha is being exported to Venezuela from Russia through Rosneft, expected to arrive later this month but in the long- term this situation is unsustainable.

Where is the crude coming from now?

Mexican crude has been suggested to fill the demand shortfall created by the sanctions, but this is it is looking unlikely. There is a big question mark around Mexico’s ability to ramp up production, as the crude oil production has been declining for a number of major offshore fields are coming to the end of their lifespan. Newer fields that are coming online are producing lighter crudes which would not be a viable substitute for Venezuela’s heavy crude.

There are opportunities for Canadian producers to step in here, but they are struggling to meet the demand. Capacity is limited due to pipeline bottlenecks and production curtailments in Alberta, they do however have rail capacity available to the US.

What does this mean for tankers?

We will see more volumes of crude going to Russia & China instead of the US, which up until the sanctions were put in place, was the main destination for Venezuelan crude, increasing the tonne mile demand for tankers. Strong US exports will continue to support the VLCC market but aframaxes in the Caribbean may suffer from a lack of demand. In the short-term, until the political situation is resolved it is likely that owners and chartered will avoid Venezuela.

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