Venezuela sanctions alter crude oil flows from Latin America to US Gulf

Imports of Latin American crudes into the US Gulf Coast from January to date have plummeted 30% versus the same period in 2017, to 280 million barrels. This is mostly due to a lack of imports from Venezuela, US Customs Bureau and Platts Analytics data showed.

The removal of Venezuelan barrels from regional trade due to US sanctions has created openings for other Latin American producers in the US, driving demand for grades similar to the heavy sour crudes Venezuela produces, in particular. However, competition with Canadian crudes is likely to intensify, given soaring freight rates.

Replacing Venezuelan crude

Six months after the last cargo of Venezuelan crude was imported into the US, the volume imported by US refiners of crudes produced by Mexico, Colombia, Ecuador, Brazil and Argentina have been insufficient to replace the barrels lost due to the US sanctions imposed on Venezuelan state PDVSA in late January.

Imports of Venezuelan crude from January to early October in 2018 totaled 143.5 million barrels while in 2019 only 55 million barrels were recorded from January to April 24, the day when Chevron imported the last cargo of Hamaca crude into Pascagoula, Mississippi.

No Venezuelan crude has been imported into the US since. During the nearly six months since then, imports of crudes produced by Colombia, Brazil and Argentina have increased year-on-year, while purchases of Mexican and Ecuadorean grades have dropped, according to the US Customs data.

Although Mexico remained the top supplier of crude for USGC refineries with 159 million barrels of heavy sour Maya, Talam and Altamira crudes from January to date, that volume was 11% lower than the 179 million seen in the same period of last year, as Mexican crude production continues declining due to aging oil fields.

US Gulf Coast imports of Ecuadorean heavy sour Napo plummeted 24% to 6.3 million barrels so far in 2019, from 8.3 million barrels in the same period of 2018. Buyers in Asia have pulled many of those barrels away from the US as Chinese and Japanese refiners have aggressively bought this grade to replace Venezuelan and Iranian crudes, which are also under US sanctions.

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In contrast, imports of Colombian crudes heavy sour Castilla and medium sour Vasconia into the USGC increased 30% after reaching 59.4 million barrels so far in 2019, from 45.7 million in the same period of last year.

US Gulf Coast refiners also are looking to Brazil for to possibly replace missing Venezuelan barrels.  Brazilian crude production is expanding due to new discoveries in the subsalt and presalt oil fields.

Although most of those barrels have been sent to Asian refiners, USGC refiners purchased 22 million barrels of Brazilian grades in the period of reference, which is 29% higher from 17 million barrels in the same period of 2018.

Market sources have said that most Brazilian crudes are desirable as many have low sulfur content and they can comply with the International Maritime Organization sulfur cap regulation to be effective in January 1, 2020.

In addition to that, USGC refiners have tested new light sweet Brazilian grades for blending purposes, because Venezuelan diluent crude oil is non-existent in the US market.

Light and heavy sweet crudes produced by Argentina also are in high demand as USGC refiners doubled their imports to 4.6 million barrels so far in 2019, from 2.4 million barrels in the same period of last year.

As the diet of USGC refineries changed in the aftermath of Venezuelan sanctions, for the first time in 10 years, three rare cargoes of Argentina's light-sweet Medanito crude totaling 2.4 million barrels were imported in the USGC this year.

Competition from Canada

Looking ahead, however, imports of heavy sour Latin American grades are expected to continue slow down towards the year's end.

USGC refineries have been importing fewer waterborne crude cargoes as freight rates have skyrocketed and availability of heavy Canadian crudeis ample, while prices are low.

The US imported 4.13 million b/d of crude from Canada in July, which was the highest amount on record, according to the US Energy Information Administration's latest full-month data.

While the EIA does not break out US imports from Canada by PADD region, trading sources estimate Gulf Coast refiners receive between 600,000 b/d to 1 million b/d of Canadian crude by pipelines and rail.

Prices for heavy Canadian crude on the US Gulf Coast also are lower than competing Latin grades. Between January 1, 2019 through the first week of October, the average outright price of Western Canadian Select in Nederland, Texas has been $47/b, which is $6/b lower compared to an average of $53/b for Maya and Castilla Blend, according to S&P Global Platts data.

Seasonal maintenance at some US refineries in the last quarter of the year is an additional factor on expectations of lower purchases of Latin American grades.

USGC refinery outages for the season peaked last week, reaching 3.797 million b/d offline for planned and unplanned work, about half of which is in the US Gulf Coast, according to S&P Global Platts Analytics data.

USGC refiners will have 1.921 million b/d of crude processing capacity offline as of October 11. Refinery downtime typically increases in the fall as plants go into planned maintenance ahead of heating season and, this year, due to the start of the IMO fuel oil spec change.