RIYADH: The Brent crude oil price rose slightly to $62.75 per barrel and WTI advanced to 55.26 per barrel at the end of last week, amid concerns over tight supplies of medium and heavy crudes as a result of OPEC output cuts and uncertainties over the implications of US sanctions on Venezuela that have further tightened availability of medium and heavy sour crudes.
Such tightness concerns have pushed the price of the Dubai benchmark slightly above Brent for the first time since August 2015 as reported by Platts S&P Global.
Venezuela produces about 1.4 million barrels a day (bpd) of extremely heavy sour crude that attracts sophisticated refineries in order to maximize refining margins.
Venezuela’s crude oil exports to the US fell from 840,000 bpd at the end of 2015 to about 506,000 bpd in October 2018. Hence, the US is the primary destination for Venezuelan crude and receives about 41 percent of Venezuela’s total heavy oil exports. Despite the US sanctions, low shipping rates might stimulate the sophisticated Asian refiners, who are already hungry for such heavy crude.
On the other hand, Venezuela imports naphtha from the US to dilute its own heavy crude and help it flow through the pipelines for export.
With the slump in naphtha prices and extremely low shipping rates, diluting Venezuela’s heavy crude is not getting any harder amid ample low-priced naphtha supplies from Europe, Russia and elsewhere.
Since Venezuelan heavy crude is a difficult feedstock to substitute, it will be much easier for Caracas to substitute US naphtha imports, while it will be extremely difficult for the US to replace the Venezuelan heavy crude amid the tight market for this grade.
Most US refineries are located in the US Gulf of Mexico, and are sophisticated with deeper conversions that run medium and heavy crude from the Arabian Gulf, Venezuela and from the offshore oil fields in the US Gulf of Mexico.
However, the US still face significant technical challenges with some other deepwater fields in the Gulf of Mexico that raises concerns about potential supply growth.
Another resolution to replace the Venezuelan heavy crude is releasing cargoes from the US strategic petroleum reserves (SPR), which the US government might be considering to compensate the upcoming supply shortfall from Venezuela.
This step might help to replace the Venezuelan crude supply, but concerns over crude quality that might be contaminated won’t be welcomed by the sophisticated US refineries.
This is a crude quality problem that could make the US SPR crude less attractive and less useful since refiners would still need to spend time and money removing contamination before the refining process.
Regardless of any SPR contamination possibility, it is uncertain that these barrels will exactly match the refining configuration of the US Gulf refiners to process the exact quality of Venezuelan crude.
This will be another dilemma that refiners must go through, which might affect their economics.