Two weeks have passed since the US imposed sanctions against Venezuela’s state-owned oil company, yet the fallout remains the biggest story in the oil market.
Where will US Gulf Coast refiners find heavy sour barrels to make up for Venezuelan supply that have been a staple of their diet?
That question shows the primary concern hasn’t been over the quantity lost as much as the quality lost.
Top sour crude producers, like Saudi Arabia, Kuwait, UAE, Iraq and Russia cannot fill the void for now. OPEC + Russia agreed in December to restrain output for first six months of 2019.
Saudi oil minister Khalid Al Falih told the Financial Times this week that Saudi production would fall to 9.8 million barrels per day in March, down from more than 11 million bpd in November.
Another top producer, Iran, faces sanctions of its own from Washington.
That’s why attention has turned to Latin America because Brazil, Colombia, Ecuador and Mexico also produce sour crude.
Popular export crude grades include Lula (Brazil), Marlim (Brazil), Castilla Blend (Colombia), Vasconia (Colombia), Napo (Ecuador), Oriente (Ecuador) and Maya (Mexico).
The financial incentive to increase exports is high. The price for sour crude is soaring (more below).
One early mover has been Mexico.
Mexican exports of sour crude have averaged 1.6 million bpd so far in February, up from 1.087 million bpd in January and 1.092 million b/d in 2018, according to ClipperData.
Most of the increased sour crude exports have left from Dos Bocas, a major port on the southern shore of the Gulf of Mexico, ClipperData showed.
Dos Bocas can be found in Paraiso municipality, the name of the site where Ursa measures crude inventories once a week. Figure 1 shows the complex.
Paraiso storage tanks & Dos Bocas port
Image credit: Google, DigitalGlobe
With more tankers loading at Dos Bocas, the amount of crude held in Paraiso tanks has been falling the last few weeks (See Figure 2).
Inventories in Esmeraldas (Ecuador) and Covenas (Colombia) -- which Ursa also covers -- will be worth tracking moving forward. Both places are associated with major crude export facilities.
The market response to US sanctions against PDVSA has sent a clear message for producers to pump more sour crude, if possible.
A sour crude rally is certainly underway. The price for Mars against WTI has increased since sanctions began (Figure 3), with the differential hitting its highest level since 2013 (Figure 4).
Source: NYMEX via MarketView
Source: NYMEX via MarketView
Not convinced? Take your pick of indicators telling the same story. Mars traded above Light Louisiana Sweet crude, a rare occurrence.
And Middle East benchmarks Oman and Brent (both medium-density, sour) were more expensive than ICE Brent (light sweet) futures, another unusual event.
Do you think those strong prices might entice some Middle Eastern producers to increase exports, even if it means violating the OPEC production agreement? Does this decrease the odds of the deal being extended past June?
And what about Latin America? Does the region have the capability to offset the drop in Venezuelan exports?