I'll Be Alright Without You - U.S. Gulf Coast Refiners Adjust to the Venezuela Sanctions

In February 2019, the U.S. Treasury Department announced new sanctions on Petróleos de Venezuela SA (PDVSA), the national oil company of Venezuela, which halted imports of Venezuelan crude oil into the U.S. Since then, refineries that relied on Venezuelan crude have had to backfill their import requirement with alternative sources of oil. This adjustment has had ramifications not only on the refiners that processed Venezuelan crude, but also on the entire U.S. Gulf Coast crude oil market. Today, we discuss the quality adjustments made to the U.S. crude oil diet.

When we last looked at crude imports from Venezuela nine months ago, the U.S. sanctions on PDVSA had just been announced. In that blog, we reviewed the quantity of Venezuela crude oil imported into the U.S. in 2018 (~420 Mb/d), the qualities of the types of crude oil being imported from Venezuela (primarily heavy-sour), and the U.S. destinations for the PDVSA-sourced crude (primarily the Gulf Coast, with Citgo and Valero refineries being the largest consumers). We then considered alternative grades of crude oil that could be utilized as substitutes for the Venezuelan varieties, assuming supplies could be made available.

We’ll begin today by looking at pricing for major crude oil streams on the Gulf Coast. The decline in heavy crude supply since the Venezuela sanctions kicked in has had a predictable effect on heavy crude prices in the region. The price differential between West Texas Intermediate (WTI, the light-sweet benchmark) at Magellan East Houston (MEH) and Maya (a heavy-sour crude oil from Mexico) for Gulf Coast delivery (blue line in Figure 1), had been on a narrowing trend in recent years. However, in anticipation of the sanctions in December 2018 through a short period after the sanctions were announced, the price differential collapsed. This happened as absolute prices for heavy crude oils strengthened relative to their premium-priced light-sweet counterparts due to a perceived heavy-crude shortage. The differential has widened again in recent months but is still below the 2017 and 2018 average spreads. Similarly, the differential between WTI MEH and Mars, a medium-sour crude from the offshore Gulf of Mexico (orange line), actually turned negative multiple times this year (reflecting a Mars premium to MEH) and remains below $2/bbl on average.

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