China’s private refineries to import less Venezuelan crude in April amid sanctions

China's independent refineries are expected to sharply reduce Venezuelan crude oil imports in April as US secondary sanctions take effect, with some already turning to alternative supplies like Canadian heavy oil, trade and refinery sources told Platts, part of S&P Global Commodity Insights, on April 7.

In April, only one VLCC cargo of Venezuelan crude is likely to call China, according to data from S&P Global Commodities at Sea(opens in a new tab). The expected volume is likely to fall sharply from 443,000 b/d, or 1.875 million mt, in March, according to Platts data.

The decline follows the US announcement of a 25% additional tariff on all countries importing Venezuelan oil on March 24, which became effective April 2.

"Some independent refineries were still taking a watch-and-see approach, while some shifted to other Canadian crudes," a trade source said.

Some independent refineries have turned to purchasing Canadian heavy crude, which is relatively higher priced, amid the uncertainties surrounding Venezuelan crude, sources said.

One independent refiner was heard to have bought cargoes of Canadian Access Western Blend crude at a discount of high $2s/b to ICE August Brent, on a delivered basis into Shandong.

Inflows of Canadian heavy sour crude into Asia have continued, with Canada's Cold Lake Blend traded at a discount of around $1.50/b to ICE August Brent, DAP Asia.

Additionally, June-arrival Cold Lake Blend and Access Western Blend were being offered at discounts in the mid-$1s/b and low $2s/b, respectively, against the same benchmark, on a delivered basis into Shandong, market sources said.

Lower prices

Venezuelan Merey crude offers were at a discount of around $5.30-$5.50/b on a DES Shandong basis against ICE Brent futures in early April, sources said.

This was slightly lower than the discount of around $5/b on the same basis when the secondary tariff was introduced at the end of March.

The lower prices came at a time when some independent refineries were hesitant to continue with their procurement following the 25% additional tariff, seeking alternative feedstock, sources said.

Crudes from Venezuela are often ship-to-ship transferred in Malaysian waters before heading to China with Malaysia-origin certification, and Merey crude has been a preferred feedstock for producing asphalt, according to market sources.

Demand for asphalt for paving roads has been rising since late March amid climbing temperatures in North China, leading to higher operation rates at infrastructure projects, analysts said.

March imports

In March, imports from Venezuela reached 443,000 b/d, an 18-month high and up sharply from 192,000 b/d in February, according to Platts data.

Notably, approximately 85.1% of total imports were classified as crude oil, a significant rise from the 60.8% of February's imports that fell into this category. This shift reflects the changes in tax regulations implemented since January.

The new tax regulations, which took effect on Jan. 1, imposed a 20%-60% increase in the consumption tax on imported bitumen blends, in addition to an existing 8% import tariff. As a result, more cargoes are now being declared as crude oil rather than bitumen blends.

Despite the tax change, some refineries with limited crude import quotas have continued to import Venezuelan cargoes as bitumen blends, totaling 280,000 mt (2.1 million barrels) in March. However, the overall trend indicates a clear shift toward classifying Venezuelan crude as crude oil to circumvent the higher taxes.

Production in Venezuela

In March, average production by state-owned PDVSA and its foreign partners rose to 1.018 million b/d, up 8,000 b/d from February, according to preliminary data in a Ministry of Hydrocarbons production report reviewed by S&P Global Commodity Insights.

"In the rest of the fields, production remained stable, but with uncertainty, especially in the joint ventures whose license to operate and export Venezuelan crude was revoked in March," according to an official of the Ministry of Hydrocarbons who spoke on condition of anonymity.

"Production could fall progressively if Venezuelan crude cannot be placed on international markets, as storage capacity is limited," the official added.