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Oil Prices Jump On Major Crude Draw

Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Struggling Venezuela Buys U.S. Crude, But Who Will Pay for It?

The United States and Venezuela may be ‘enemies’, but when it comes to crude oil, unofficial relations are light and sweet.

The first U.S. oil exports set out for sea on the last day of 2015—officially ending the four-decade ban on U.S. oil exports, and a good share of U.S. oil exports will likely go to Latin America, where demand is highest, and most significantly to Veneuzela, because there are no such things as enemies when you need to buy oil.

Though Venezuela has the largest known reserves in the world at around 298 billion barrels; and though its reserves are eight times those of the U.S., for the first time in a century, the floundering Latin American country finds itself forced to import.

Since 2014, Venezuela has had to import light sweet crude from Nigeria, Algeria and Angola. Then, in January this year, it bought its first U.S. oil when state-owned Petroleos de Venezuela (PDVSA) purchased 550,000 barrels of West Texas Intermediate (WTI) through its U.S.-based Citgo Petroleum affiliate. Related: In Spite Of Its Vast Oil Reserves, Cuba Fails To Woo Investors

Like Mexico’s, Venezuela’s crude is extremely heavy, and the U.S. crude is used to dilute the heavy crude at a PDVSA refinery on the Caribbean island of Curacao. Heavy crude takes a lot more refining than light crude.

For Venezuela, the oil ride has been much like a snake swallowing its own tail, dating back to 2007 during Venezuela’s onshore drilling frenzy, which gave it a bit too much confidence. That over-confidence led later that year to the government’s move to forcibly take over foreign-owned assets. Drilling soon fell 80 percent by 2014, and the lawsuits against PDVSA from Western supermajors started piling up.

Another boost of confidence came in 2011 when the government announced that the reserves in Venezuela’s Orinoco Belt were twice those of Saudi Arabia’s.

Maybe so. Most of Venezuela’s production comes from this belt, but this is extra heavy crude and the country lacks the infrastructure to deal with it, which reduces the refining options. This leaves Venezuela with two choices: selling low-value crude, which hits hard at the PDVSA coffers; or diluting its heavy oil with light sweet crude. Related: Rig Count Plunges Yet Again, Down Another 30

And now it’s asking its partners—including Chevron, Repsol and ONGC--to foot the bill for imports of light sweet crude, according to a Reuters report, citing a PDVSA letter.

So for now, at least the U.S. can count on Venezuelan demand for its light sweet crude—assuming PDVSA will be able to pay for it or convince its partners to pick up the tab.

If the export ban had been lifted when oil prices were at $100 per barrel and U.S. crude was trading for some $12 cheaper than Brent, it would have allowed U.S. crude to explode on the scene. Today, U.S. crude is only marginally cheaper than Brent, so it’s not quite as appealing. At least not enough to have Europe jumping all over it to get it across the Atlantic.

Related: Computerized Trading Creating Oil Price Volatility

Europe and Asia are flooded with oil from Russia and the Middle East, though the first two shipments to leave the U.S. post-export ban went to Europe: one to Germany and the other to France, to be used in a refinery in Switzerland. In Asia, even China’s state-run Sinopec—the world’s second-largest refiner¬—has imported a consignment of U.S. oil, according to a Reuters source.

This hasn’t been a fast and furious ride by any means. In fact, the US Energy Information Administration (EIA) says that during the week ending 22 January, the U.S. had exported just shy of 400,000 barrels of oil— 25 percent less than what they had exported the same week in 2014, when the ban was still in place.

But this is a long-term game and what everyone should be looking at is potential demand. For now, it looks like the biggest demand will come from Latin America. It’s closer to home, is easier logistically, and there is a prevailing hunger for it.

By Rakesh Upadhyay for Oilprice.com

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