Trump Could 'Punish' Venezuela With Oil Sanctions Immediately After Presidential Vote

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Venezuela's oil industry could be directly targeted by the U.S. immediately after the crisis-hit nation's upcoming presidential election, oil experts warned,  as global energy markets braced for a further spike in crude futures. Venezuela's export troubles have intensified ahead of the country's snap presidential election on Sunday, as incumbent Nicolas Maduro prepares for a second term in office what the U.S. has condemned as a sham. At the same time citizens  are struggling to cope with widespread food shortages, the collapse of its traditional currency and relentless hyperinflation. Any thoughts how will the U.S. react after the official election results? 

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4 minutes ago, Sofia said:

Venezuela's oil industry could be directly targeted by the U.S. immediately after the crisis-hit nation's upcoming presidential election, oil experts warned,  as global energy markets braced for a further spike in crude futures. Venezuela's export troubles have intensified ahead of the country's snap presidential election on Sunday, as incumbent Nicolas Maduro prepares for a second term in office what the U.S. has condemned as a sham. At the same time citizens  are struggling to cope with widespread food shortages, the collapse of its traditional currency and relentless hyperinflation. Any thoughts how will the U.S. react after the official election results? 

US refineries are still using Venezuelan crude, so I'm not sure what the US play is here.  Although imports are far less than they were a year ago today, we are still taking 13 million barrels monthly from Venezuela as of February. That's compared to about 23 million barrels a year ago. We'd have to get that from somewhere else. I'd say Canada but they are having a bit of an issue with transportation bottlenecks. 

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If they do sanctions immediately following the elections then I'd hope it would just be for imports into Venezuela. Banning crude from Venezuela would hurt US refiners as much as it hurts Venezuela

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1 hour ago, Refman said:

Banning crude from Venezuela would hurt US refiners as much as it hurts Venezuela

Well, maybe not quite as much. A year ago, maybe. But clearly US refiners have taken steps toward finding other sources of heavy crude, because the volumes have halved. I guess some refiners could also ask for waivers. UK north sea crude is also heavy and makes for a great substitute. 

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I do not see an economic block of crude import right away from Venezuela after 20 may elections. Perhaps more of political threats on Maduro´s new cycle. Maybe adding a financial closed barrier to force negotiations.

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8 hours ago, Rodent said:

US refineries are still using Venezuelan crude, so I'm not sure what the US play is here.  Although imports are far less than they were a year ago today, we are still taking 13 million barrels monthly from Venezuela as of February. That's compared to about 23 million barrels a year ago. We'd have to get that from somewhere else. I'd say Canada but they are having a bit of an issue with transportation bottlenecks. 

We may be experiencing an interesting 12-18 months going forward. The potential loss of a million barrels a day of heavy Venezuelan crude might cause some refinery consternation. Then beginning about the middle of next year, the impact of the IMO sulfur regulation for bunker fuels will descend upon the industry, reducing demand for heavy crude by more than 2 million barrels a day. From famine to uncontainable feast. My expectation is that the impact of the challenge of making the surplus heavy oil disappear will be much more disruptive than the adjustments to cover a shortfall. And Canadian Oil Sands will be in the target zone. At least the resulting shut-in of Canadian heavy oil production will permanently solve their pipeline problem.

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8 minutes ago, William Edwards said:

We may be experiencing an interesting 12-18 months going forward. The potential loss of a million barrels a day of heavy Venezuelan crude might cause some refinery consternation. Then beginning about the middle of next year, the impact of the IMO sulfur regulation for bunker fuels will descend upon the industry, reducing demand for heavy crude by more than 2 million barrels a day. From famine to uncontainable feast. My expectation is that the impact of the challenge of making the surplus heavy oil disappear will be much more disruptive than the adjustments to cover a shortfall. And Canadian Oil Sands will be in the target zone. At least the resulting shut-in of Canadian heavy oil production will permanently solve their pipeline problem.

Not sure I agree with your hypothesis about the new IMO Regs reducing demand for heavy crude. If the refinery is geared for heavy crude, they're not just going to start buying lighter crude because the bunker regs changed. They are more likely to install more cokers or find other ways to use heavy oil

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4 hours ago, Refman said:

Not sure I agree with your hypothesis about the new IMO Regs reducing demand for heavy crude. If the refinery is geared for heavy crude, they're not just going to start buying lighter crude because the bunker regs changed. They are more likely to install more cokers or find other ways to use heavy oil

If you can detail a means for making a million barrels a day of high sulfur, asphaltenic resid disappear, the refining industry will pay your majestically for the information. So far the "experts" say the it will be burned at the value of coal -- $15/B -- a price too low to justify production and transportation from Alberta, Canada, to the water.

Here is a rather detailed description of the issue as an excerpt from another publication's interview of me on this subject.

When William mentioned to us last week that he has identified another shoe to drop in the oil markets, our ears perked up. Your garden variety bear cases these days are mostly predicated on rising US tight oil production or OPEC quota failure. When William said his warning was worth $10-$20/barrel and had nothing to do with either of these risk factors, we picked up the phone and called him. Here is what we learned.

 Bunker Fuel Specs At Sea Are Changing

 William’s new concern centers on a structural transformation in an end market for the heavier end of the barrel. He believes the change could weigh on the entire global crude pricing complex to the tune of $10-$20/barrel.

 It all starts with new International Maritime Organization (IMO) regulations. The UN gives the IMO jurisdiction over environmental issues in international waters, thus governing the global shipping industry. In October 2016, the IMO set January 1, 2020 as the implementation date for a significant reduction in the sulfur content of the fuel oil used by ships at sea (see announcement here).

 The IMO will cap sulfur content in global shipping fuel oil at 0.50% m/m (mass/mass). The current global limit is 3.5% m/m, and the average sulfur content of residual fuels on ships tested during 2015 was 2.45%.

 The current 3.5% rule was implemented in 2012 (the previous limit was 4.5%). Further restrictions have been discussed for several years now, but we finally have a firm go live date (the IMO has been debating going live in 2020 vs. 2025).

The global shipping industry has used high sulfur bunker fuel for decades. It has provided the BTUs ships need to steam across the ocean at the lowest possible cost. Sulfur regulation has been closing in on the oil consumers in mature markets for half a century, but only recently (relatively speaking) have regulators focused on sulfur emissions on the open seas.

 The sulfur being released from ships at sea is considerable. The change from 3.5% m/m to 0.5% m/m will take out 25 times more sulfur from the air than the change in gasoline requirements on land produced per William Edwards’ estimates.

 The maritime industry has two options for compliance:

1.                    ships can burn high sulfur bunker fuel if they equip vessels with scrubbers (exhaust gas cleaning systems which clean emissions before release into the atmosphere), or

2.                    ships will have to switch fuel sources to low sulfur fuels like gas, methanol, or LNG instead.

Scrubbers are costly and complicated, so most shippers will simply change the fuel they buy to lower sulfur grades. The primary replacement fuel of choice will most likely be diesel, and shippers have the next three years to figure out how to pay for the higher costs.

 To the ship owners’ benefit, current diesel fuel prices are actually lower today than the price of high sulfur bunker fuels was three years ago. So the ship owners can accommodate a switch to diesel without major cost ramifications by historical standards (another reason more will opt to switch rather than scrub).

 Scary Implications For Heavy Crude Producers

 This change creates the worst kind of problem for high sulfur bunker fuel producers and the heavy crude producers from whom they obtain their feedstock. These producers are already making a product with limited uses. Now a key end market is evaporating. So what happens when you deprive 2-3 mmbbls per day from its long-time end market?

 The analogy William Edwards uses to describe the impact is that of a broken garbage disposal. For years, the shipping industry was the garbage disposal for the oil industry. Ships burned the dirty, heavy stuff that no one else wanted.

 The IMO’s new regulations just broke the oil industry’s garbage disposal. So where does the garbage go starting in 2020? It starts to pool up. This will put heavy price pressure on high sulfur oil blends. Oil price is the mechanism that shuts in production, and until it falls severely, supply-side fundamentals will continue to deteriorate.

 Some may speculate that excess barrels could go to power plants, say for example in India. This would put a floor under bunker fuel at a parity price with coal, maybe something like $15/barrel on the water.

 If bunker fuel is selling for $15/barrel on the water, what is the price of crude at the source considering that some of the world’s crudes are 2/3rds bunker fuel by content when they come out of the ground?

 To answer that, location of production comes into play, and Canada will be ground zero for the garbage disposal problem. The Canadian bitumen industry is the ultimate balancing source for much of the bunker fuel supply consumed by the shipping industry today – the high sulfur stuff. Canadian exports are about 3-3.5 mm bpd, and about 2/3rds of that is bitumen. If Canadian bitumen has to be moved to a coal burning location to be sold at a price that backs out coal, then you probably add $10-$15/barrel in transportation costs plus another $10-15/barrel for the cost of diluent to meet viscosity requirements. If your end price is $15/barrel (parity with coal), then the price as it comes out of the ground in Canada is a negative number. Canadian Oil Sands producers would have to pay for their garbage removal instead of getting paid for production.

 With current production costs trending around $30-$40/barrel, the IMO regs have the potential to shut down most Canadian bitumen production other than what is going to a local upgrader or a local facility that’s already invested in the capacity to utilize the oil.

 The remaining barrels will flow out and down, maybe to the Midwest, but even in the Midwest, where there is pipeline to the Gulf Coast, they’ll face competition from international sources.

 What price do you have to get down to in order to cut down 1 mmbbls/d from current Canadian production? It’s hard to say precisely, but it is significantly lower than where the price is today. So IMO regs will drag Canadian bitumen prices down significantly, maybe more than $25/bbl, into negative netback territory.

 More Than A Canadian Problem, This Has Global Implications

 The drag into negative netback territory for Canadian bitumen gets William Edwards concerned about global oil prices. If you have Canadian oil competing in the market considerably lower (say half of its current price), then the rest of the world must lower their prices to stay competitive – at least to the extent that they have the heavy component in their blends. So what happens in Canada as high sulfur fuels are phased out will impact oil prices around the world. This is another shoe to drop in new oil price paradigm.

 The significance of the logic we’ve just described cannot be overstated. The thesis put forth by William Edwards means Canada won’t have oil to supply competitively on the global market after 2020. It means they will dump excess barrels on the global market, forcing everyone else’s price lower too. The rest of the world can get along just fine without Canadian oil, but Canada needs the rest of the world to purchase their oil if they want to maintain a healthy oil industry.

To this point, we’ve seen several analyses of the pending IMO regs by various analysts, including guesses on how many vessels will add scrubbers vs. move to diesel and some assessments of demand. But critically, the oil market is not yet thinking about the global price impact here, perhaps because the go-live date is still three years away or perhaps because the perception is it just impacts the heavy end of the barrel.

 Shipper behavior will start to change well before the January 1, 2020 deadline, and as it does, we’ll see much earlier if William Edward’s global concerns are warranted.

Edited by William Edwards
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The IMO 2020 sulfur cap is supposed to limit SOx emissions from ships, improve air quality and protect the environment.  But if you burn the high sulfur oil in a powerplant instead of using it for powering a ship the goals are not reached. You just move the pollution from the seas to the land.

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I think I need an IMO sulfur reg primer (cliff notes version)

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Arguments about crude imports to the US aside, Venezuela's leadership has got the country into such deep trouble already it is difficult to see what sanctions would do apart from add to the suffering of ordinary people. The place should be a land of plenty but its a basket case, with those in power apparently immune to any suggestion that their policies might not be working. There should be a international version of the bankruptcy provisions for companies, where the old management  is thrown out and administrators appointed to clean up the mess.. but failing that it is difficult to see what can be done. 

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6 hours ago, Rodent said:

But clearly US refiners have taken steps toward finding other sources of heavy crude, because the volumes have halved.

mind that US light oil production also increased hence they need more heavy crude to blend with ultra-light shale oil (or retool refineries which is starting but lower margins there and not going fast)

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11 hours ago, Sofia said:

Venezuela's oil industry could be directly targeted by the U.S. immediately after the crisis-hit nation's upcoming presidential election

Venezuela is already punished itself by "electing" Maduro. US may need to step in at some point to avoid complete collapse and mass casualties but it is not in their interest to cut imports of Venezuelan heavy crude or fortify regime by consolidating "pueblo" around "el Presidente"

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Good point @DanilKa, there is no bigger punishment for Venezuelan people than Maduro.

Knowing Trump  for this time since he's sitting in the Presidential armchair, we shouldn't be surprised if he decide to pull out sanctions. On the other hand, sanctions will mostly affect Venzuelan people them Maduro himself. 

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45 minutes ago, Rodent said:

I think I need an IMO sulfur reg primer (cliff notes version)

Currently bunker fuel has a max of 3.5% sulfur. in 2020 ships have to lower their sulfur emissions, and there are 3 main ways to do this.

1) Install scrubbers which will scrub the emissions from burning 3.5% sulfur fuel. Installing scrubbers is expensive and requires a dry dock to accomplish. Plus you still have to find a way to dispose of the sludge from the scrubber.

2) You can burn 0.5% low sulfur fuel oil, or even Marine Gas Oil which is basically dirty diesel. This is the easiest fix, but the low sulfur fuel is predicted to be 30% (or more) expensive then the old 3.5% high sulfur fuel.

3) Convert vessel to run on LPG/LNG. Again this is expensive and there are not many places that currently offer LPG/LNG refueling, so it might be hard to find. This option is probably more suited to brand new vessels.The big advantage to LPG/LNG is that not only does it have very little sulfur, but also has no dirty particulates. 

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26 minutes ago, DanilKa said:

mind that US light oil production also increased hence they need more heavy crude to blend with ultra-light shale oil (or retool refineries which is starting but lower margins there and not going fast)

US refiners were in the middle of retooling to run on light US shale, because the price was much cheaper than foreign crude. Then they allowed US crude to be exported and the price difference disappeared almost overnight. So now you see it being exported instead of refiners converting to use it.

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1 minute ago, Sofia said:

Knowing Trump  for this time since he's sitting in the Presidential armchair, we shouldn't be surprised if he decide to pull out sanctions.

contrary to popular belief, I do see him as a rational player. Being a rational player, he would understand best action is to wait for Maduro government to collapse on its own (poor people...). I would not completely discount US getting involved - to stop China or Russia gaining influence there.

 

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2 minutes ago, Refman said:

So now you see it being exported instead of refiners converting to use it.

Good point, spread would be much worse if not for exports (just need to remember US still imports net of ~6.5Mbopd; energy independence, my a$$). I've heard of Exxon - who else is retooled and what is UL capacity?

My understanding Permian become pipeline constrained.

 

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3 hours ago, Guillaume Albasini said:

The IMO 2020 sulfur cap is supposed to limit SOx emissions from ships, improve air quality and protect the environment.  But if you burn the high sulfur oil in a powerplant instead of using it for powering a ship the goals are not reached. You just move the pollution from the seas to the land.

If you displace burning of coal at the same sulfur content, then it is a wash on SO2.

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According to some news releases today, crude oil sanctions mighrt be off the table for now against Venezuela, but in my personal view, as venezuelan oil production and exports continue to fall, as a consequence of lack of investments on maintenance of aging facilities and oil wells, in refining if trustworthiness is not recovered in the country by major foreign oil companies, i dont see Venezuela producing more than 700.000 barrels a day next year if more skilled workers continue to leave the country and the industry, and i really really highly doubt that russians and chinese will continue to sustain a government involved in such a mess financially speaking and if the current directive of PDVSA continues unchanged then things will only get worse. 

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1 hour ago, jose chalhoub said:

and i really really highly doubt that russians and chinese will continue to sustain a government involved in such a mess financially speaking

do not underestimate the mighty russkis:) (or shall I say power of another corrupt government stupidity) but Chinese may see is a small investment into their own energy security - I guess you are familiar with Orinoco belt heavy oil reserves, Estimado Jose.

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14 hours ago, DanilKa said:

do not underestimate the mighty russkis:) (or shall I say power of another corrupt government stupidity) but Chinese may see is a small investment into their own energy security - I guess you are familiar with Orinoco belt heavy oil reserves, Estimado Jose.

estimada danilka @DanilKa si estoy al tanto de lo que respecta la Faja del Orinoco, tuve cierta experiencia directa con esto during my experience at venezuelan oil company for more than a decade. But i still think that chinese and russians will surely run out of patience if things dont change dramatically in venezuela, since they dont want to see their massive tons of money vanishing either just like its happening with other foreign companies. 

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If we have harsh sanctions on both Iran and Venezuela I would suggest to get used to to three digit oil price for some time.

Edited by Tomasz
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