If the Trump administration imposes major sanctions on Venezuelan oil exports to the US, Canadian heavy oil producers might see a narrower differential and potentially an uptick in exports to the United States—but don’t expect a major change in the market.
“If you stopped the import of almost 800,000 bbls/d of crude oil [from Venezuela] into the U.S. Gulf Coast—a lot of it heavy—that is generally good for Canadian crude,” said Robert Skinner, executive fellow in the University of Calgary’s School of Public Policy.
“Now can we get [our crude] down there?”
Sanctions would force U.S. Gulf refiners to find new sources of heavy crude, but the options are limited. As S&P Global Platts notes, Mexican heavy crude output has stagnated. Colombia heavy crude production appears in decline. Saudi Arabia continues to export less medium sour crude to the U.S. And Canadian crude is constrained by a lack of infrastructure.
“We’re moving around 400,000 bbls/d to the Gulf already on the various [pipeline] systems that are open,” Skinner said. “So that means any incremental volume would have to go by rail. But the benefit of an uptick in heavy oil price might be partially withered away by the higher transportation cost of rail.”
Skinner also noted that a ban on Venezuelan oil imports into the U.S. would likely only benefit Canadian producers in the short term. Markets would adjust. OPEC producers subject to current production agreements would likely reconsider if oil prices improved.
Francisco Rodriguez, chief economist at New York-based Torino Capital has also noted the social cost of a full ban on Venezuelan crude, saying that it would escalate a humanitarian emergency in Venezuela into a “humanitarian catastrophe.”
Other implications of a Venezuelan oil ban include an adverse impact on U.S. companies operating in Venezuela, such as Chevron, Schlumberger and Halliburton, while exasperating the current crude supply tightness to U.S refiners, further driving down U.S. refining margins.
"We're out of balance right now and [a Venezuelan oil ban] would make us more out of balance," Rick Joswick, managing director for oil with PIRA Energy Group, a unit of S&P Global Platts, said in a statement.
So, even though a senior U.S. administration official warned last week that "no option is off the table" to dissuade Venezuela’s President Nicolas Maduro from adopting controversial election rules that appear to be intended to institutionalize dictatorship in the South American OPEC nation, analysts expect that the Trump administration to initially focus on sanctions targeting individuals.
If sanctions were imposed more gradually—for example if the U.S. administration announces it will impose a $2 to $3 per barrel duty on Venezuelan imports within three to six months, "then people will adapt," Joswick said.
A less draconian scenario could see some U.S. refiners that run heavier crude shift to using more medium crudes, while medium-situated refiners might run lighter crudes.
“You'd get a cascade effect," Joswick said. "The net effect would be a modest disoptimization of US refining."