Venezuela - a double edged sword

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Venezuela has arguably suffered the most from the crash in crude oil prices, as the country’s heavy grades tend to be priced at a notable discount to Brent. 

 

Despite a recent rise in oil prices, the country remains in economic turmoil. The IMF forecasts 2016 GDP at minus 8% and an inflation rate of 500%. To compound these issues, the country is running short of basic foodstuffs, working weeks have been cut and power outages remain commonplace, with oil operations (both upstream and downstream) suffering as a result, Gibson Research said in a report.

Official Venezuelan crude production was reported at about 2.37 mill barrels per day in May, down from a 2.65 mill barrels per day in 2015. However, many analysts dispute the official figures, arguing that actual production is likely to be lower at around 2.18 mill barrels per day in May.

Whatever the amount, production appears to be falling and could fall below 2 mill barrels per day later this year, as the country struggles to cover the costs associated with sustaining output, in particular paying foreign oilfield services companies.

In the downstream refining sector, disruptions are frequent, owing to power outages and lack of maintenance/investment. Despite having a sizeable refining capacity, utilisation is said to be much lower with many key refineries, such as the 955,000 barrels per day Paraguaná complex suffering from major outages, often running at less than 50% of capacity.

Such disruptions have forced the authorities at times to source additional products from overseas. At the same time the government must continue to import light oils to dilute its heavy grades.

To make fuel supply matters worse, issues such as accessing US dollars have prevented payment for imported cargoes and caused discharge delays, as suppliers hold off unloading until payment has been made.

So what are the implications for the tanker market? For products, more imports to Venezuela comes at the expense of less exports, whether this is bullish of bearish really depends on the net effect, which is hard to gauge, although lower refining runs are likely to support imports from the US and Europe, Gibson said.

For the crude market, a reduction in exports from Venezuela would initially appear negative, reducing the number of Aframax cargoes in the Caribbean/US Gulf region, as well as threatening long haul VLCC exports to the East.

However, at present the impact on crude exports is limited, due to lower refinery runs. In addition, in reality much would depend from where replacement cargoes to US are sourced. One obvious choice is heavy Canadian grades; but refiners may also look to Middle East producers, such as Iraq or Saudi Arabia, with Iran currently off limits.

Thus the overall effect could boost tonne/mile demand, providing increased support to the VLCC sector in particular.

Furthermore, it may prove likely that Venezuela prioritises shipments to China over other customers, given the oil for loans programme that exists between the two nations. So on the one hand, lower exports from Venezuela, would be bearish, but higher import to the US from further afield, notably the Middle East would be supportive for tonne/mile demand, Gibson concluded.