Diluting Venezuela’s heavy crude just got harder

By Ann Koh, Jack Wittels and Saket Sundria on 1/29/2019

SINGAPORE and LONDON (Bloomberg) -- Venezuela is home to some of the thickest crude on the planet and it can’t be exported without first being diluted. That will become a much tougher task following the latest U.S. sanctions on the Latin American country. 

Much of the country’s output has been diluted for years with heavy naphtha from the U.S., thinning the crude so that it can be piped to export terminals and onto tankers. With American exporters now effectively barred from supplying the diluent, Venezuela needs to look elsewhere. Traders say Europe, including Russia, is one possibility. The question is whether sellers there will be willing to cover the shortfall.

“For now, we are seeing that Venezuela is trying to get naphtha supplies from Europe to meet the diluent demand,” said WengInn Chin, a senior oil market analyst at Facts Global Energy in Singapore. “It will be difficult for sure and probably more expensive. But this is the only way that they will be able to ship the crude over to Asia. "

The Trump administration on Monday dealt its toughest blow yet to the authoritarian Venezuelan leader Nicolas Maduro, issuing new sanctions on the nation’s state-owned oil company PDVSA that effectively block his regime from exporting crude to the U.S.

Worst Case

The measures will also make the country’s imports much harder. European trading houses and oil companies are likely to struggle to supply Venezuela with naphtha as the sanctions will scare banks, shipping companies and insurers from dealing with PDVSA. They won’t be able to use the U.S. financial system to route payments, forcing them to use other currencies. In the past, traders and oil companies have taken a "worst case" scenario when interpreting U.S. sanctions, erring on the side of caution.

Why Venezuelan oil output could take a long time to recover.

Europe’s naphtha market desperately needs a new source of demand. The petroleum product is trading at about $8.70/bbl below Brent crude in Europe, according to data from PVM Oil Associates. That’s the weakest for the time of year since at least 2007.

Venezuela imported almost 90,000 bpd of heavy naphtha for crude oil blending last year with U.S. exporters dominating the trade, according to tanker tracking data compiled by Bloomberg. Those flows reached 113,000 bpd as recently as December.

Traders say one possibility is that Russia, still allied to the regime of Nicolas Maduro, will ship more to the Latin American country, although the freight costs involved in that would be much higher. There’s also a question of whether and how Venezuela could pay for the supplies.

Another, more expensive option, would be to use the light oil produced in Algeria as diluent, something that Venezuela has done occasionally in the past.

Traders are split on how much naphtha from other parts of Europe could be sold to Venezuela in practice. Several European countries have recognized the National Assembly leader Juan Guaido as the nation’s ruler, something that will only complicate shipments from those nations.

Some traders say more European naphtha could flow to Brazil, which in turn would supply Venezuela. Perhaps, but it’s important to note that Brazil’s government has said it disapproves of Maduro’s regime, suggesting such shipments mightn’t be straightforward.

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