US imposes new sanctions on Venezuela

The US Treasury Department's Office of Foreign Assets Control (OFAC) announced on 28 January 2019 the imposition of new sanctions against the country’s state oil company PdVSA, writes Ed Zwirn in New York and Keith Nuthall. The sanctions effectively halt US purchases of oil from Venezuela – the Latin American country’s economic lifeblood. The US is the primary destination for PdVSA crude oil shipments, receiving about 41% of its exports, according to the US Energy Information Administration (EIA).

President Donald Trump has backed the action with an executive order expanding the scope of existing US financial and travel movement to any persons and institutions, such as PdVSA, ‘affiliated with the illegitimate Maduro regime’. This means any US bank accounts and property held by PdVSA executives is frozen and cannot be accessed, spent or sold. Also, related money cannot be moved from its current location. These executives are also subject to travel bans to and from the US.

According to Refinitiv, Venezuelan seaborne crude exports averaged 1.3mn b/d in January 2019, down from 1.39mn b/d in December 2019. Looking at the potential impact US sanctions could have on Venezuelan crude exports, the market analyst notes that as of 5 February 2019, some 8.7mn barrels of crude in 15 vessels were waiting to be discharged either at US ports or elsewhere. Taking into account the loading activity post the sanctions announcement, a total of nine vessels had loaded or were currently loading at that date from Venezuela, with a total 9.4mn barrels of crude oil.

The market analyst also reports that the restriction of Venezuelan crude into the US, where heavier crudes are required for refining units to maximise their margins of profit, creates a vacuum that could possibly be filled by importing Middle Eastern crudes, as these consist of more medium-heavy streams. This has shouldered gains in Middle East benchmark crude prices, which typically come at a discount to Brent and WTI, due to quality specifications.

Refiners, particularly in the US, may find their profit margins come under pressure as they would have to buy crude at higher cost, either in the form of higher shipping rates or in the form of compensating with medium gravity crudes, which typically come at a premium versus heavier ones, notes Refinitiv.  It also says that Venezuela may seek to shift its export base towards Asia, practically replacing some volumes the Asian powerhouses buy from the Middle East, as significant shifts in global crude flows could unfold in the following weeks.