Venezuela’s crude oil inventories increased significantly in August as tougher US sanctions make it more difficult for state-owned PDVSA to sell oil overseas.
With fewer customers willing to buy Venezuelan crude, the amount of oil in storage at the main export terminal, El Jose, soared by almost a third over the three weeks ending August 22, according to Ursa measurements.
This build-up at El Jose has lifted crude inventories nationwide.
Total Venezuelan inventories at the sites we monitor jumped in August, marking a higher-high than May when inventories topped levels not seen in the prior 12 months.
In early August, President Trump stepped-up efforts to force President Nicolas Maduro from power in favor of opposition candidate Juan Guaido.
The White House froze all Venezuelan government assets in the United States and threatened to sanction any company that does business with the Maduro government.
The order did not explicitly prohibit foreign firms from buying Venezuelan crude, as is the case with Iranian exports, but the latest round of sanctions included a warning against providing “material assistance” to the Venezuelan government.
The White House then deployed US national security advisor John Bolton to a conference attended by more than 50 countries that support Guaido.
In Lima, Peru, Bolton tried to remove any sense of ambiguity concerning US policy.
“We are sending a signal to third parties that want to do business with the Maduro regime: Proceed with extreme caution,” Bolton said.
“There is no need to risk your business interests with the United States for the purposes of profiting from a corrupt and dying regime,” he said.
These strong words were intended for the ears of Venezuela’s remaining customers outside the United States.
US refiners were some of Venezuela’s biggest customers until the White House imposed sanctions January 25 effectively banning those transactions.
Source: US Energy Information Administration
Venezuela’s exports of crude and refined products fell 40% in February, which had a significant impact on the physical oil market.
Venezuela is a big producer of heavy sour crude, the same type that refiners along the Gulf Coast are configured to process.
As expected, the loss of Venezuelan supply pushed up the value of heavy sour crudes as refiners searched for replacement barrels.
The graph below shows the spike in price for heavy sour grades (Mars, Dubai) versus lighter, sweet barrels (WTI, Brent).
Source: NYMEX via MarketView
The fallout was visible in the islands of the Caribbean where refineries and storage tanks depend on crude tankers coming from Venezuela.
Those replenishments stopped arriving without the second leg of the journey from the Caribbean to the Gulf Coast in place.
As a result, Caribbean crude inventories plunged, a topic we covered back in March. Levels remain low.
PDVSA managed to survive, even without US customers, continuing to sell oil to its other two major buyers, India and China.
However, the cracks were beginning to form. US sanctions also prevented the sale of diluent to Venezuela. That’s crucial because PDVSA needs diluent to turn the country’s extra-heavy crude from the Orinoco Belt into lighter grades.
Upgrading takes place at El Jose, which you can read more about here.
PDVSA suspended production of upgraded crude, switching instead to a heavy crude grade called Merey.
In April, the US government banned US dollars from being used in transactions involving PDVSA.
The question now is whether the latest sanctions will provide the knockout blow. Will anyone run the risk of US sanctions and import Venezuelan oil?
China National Petroleum Corp reportedly stopped August loadings of Venezuelan oil until the US Treasury clarifies whether exemptions would be granted for shipments under an oil-for-loan program between Venezuela and China.
A similar arrangement exists with Russia, which receives oil from Venezuela to pay down debts. Rosneft has become a major reseller of Venezuelan oil.
What do you think will happen? Can Venezuela continue to export oil? Does this change the ability of the Maduro regime to stay in power?