Crude test: Higher oil prices challenge US sanctions policy


Which region in the world do you think has had the biggest decreases in crude inventories so far this year?

Here’s a hint: Its biggest supplier is Venezuela. And the answer is…the Caribbean.

We recently wrote about the decline in Caribbean crude storage, which began last summer and accelerated when Washington imposed sanctions late January against Venezuela’s state-owned oil company PDVSA.

The topic is worth rehashing as it relates to the global picture and the impressive price rally underway.

The first quarter of 2019 ended with crude futures posting the biggest quarterly increase in a decade.

On Friday, March 29, ICE Brent settled at $68.39 per barrel, up 27%, while NYMEX WTI settled 32% higher at $60.14/b.

ICE Brent has faced resistance around $70/b this week, but make no mistake, the talk of the town has been whether even higher prices could be in store.

And that brings the conversation back to crude inventories, the best indicator for global supply-demand balance.

We measure crude inventories globally on a weekly basis using satellite imagery that comes from synthetic aperture radar (SAR).

Our data showed global crude inventories were lower in late March versus the end of December, a telling statistic for this time of year.

The first quarter of the year is typically a period of weak refinery demand because of seasonal maintenance that results in higher inventories.

The difference has been less OPEC production, which includes coordinated cuts with Russia, as well as involuntary supply reductions by Iran and Venezuela.

The 14 members of OPEC pumped 30.4 million barrels per day (bpd) in March, down 280,000 bpd from February, and the lowest total since 2015, a Reuters survey found this week.

Our coverage of OPEC members shows inventories dropping since February. That suggests production estimates could be overstated unless storage changes were taken into consideration.

Source: Ursa

Apart from sanctions, Venezuela has dealt with blackouts at the country’s main export terminal El Jose, Reuters noted.

According to some estimates, Venezuelan supply to the market (~800,000 bpd) exceeded production (~650,000 bpd) in March, the Reuters story said.

That would imply some barrels came out of Venezuelan storage, which was consistent with our data.

Venezuelan inventories drew in March after having been remarkably stable, despite all the upheaval.


Source: Ursa

Before March, the impact of Venezuela’s collapse on crude storage levels was more visible in the Caribbean where tanks emptied as a result.

On a percentage basis, some of the biggest crude inventory draws during the first quarter occurred in Caribbean countries. The table below shows a breakdown:


Source: Ursa

Individual sites in the Caribbean aren’t large in terms of storage capacity, but collectively, the region is significant.

That point was on display in the first quarter of 2019. Total stocks outside the OECD fell year-to-date, and the reason why was the Caribbean.

The Caribbean, as a whole, had the biggest Q1 decline versus other countries we cover.

Care to guess which country ranks number two? Here’s a hint: It faces US sanctions of its own.

Yes, Iran.

Iran’s inventory draws also imply that domestic production was less than the amount supplied to the market.


Source: Ursa

That makes sense when you consider Iranian exports have remained around 1-1.5 million bpd since January.

That’s down from 2.5 million bpd in April 2018, a month before President Trump pulled the US out of the Iran nuclear deal, but the drop hasn’t been nearly as dramatic as anticipated.

Trump first gave buyers of Iranian oil 180 days to wind down purchases before reinstating sanctions early November 2018.

But the White House, surprisingly, announced a few days before sanctions began that it granted waivers to eight countries, allowing them to keep buying Iranian crude for a six-month period.

Why make exemptions? The Trump administration didn’t want to anger US motorists by driving up gasoline prices as a consequence of erasing Iranian supply entirely from the global market.

This trade-off between sanctions policy and prices at-the-pump hasn’t gone away.

Quite the opposite, in fact, now that Washington has also taken aim at PDVSA’s connections with the Maduro regime.

Senior US officials said this week oil prices remained low enough to accommodate even tougher measures against Iran and Venezuela.

That assertion will certainly be put to the test by President Trump, who has tweeted 12 times about his displeasure over high oil prices, the last one coming March 28 with Brent crude climbing toward $70/b.

Which argument do you think will prevail?




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