In an oil market already tighter on heavy crude grades due to OPEC’s production cuts and U.S. sanctions on Iran’s oil, refiners now face an even tighter supply of heavy crude with the sweeping U.S. sanctions on Venezuela’s oil sector.
Refiners around the world are looking for alternatives to Venezuela’s heavy and extra heavy crudes, but Venezuelan grades have few suitable substitutes, Reuters market analyst John Kemp writes. In addition, heavier, higher-sulfur grades are more difficult to process and refiners must first see if their refineries will be suited to process substitutes of Venezuelan grades.
The closest replacement to Venezuela’s Merey grade, for example, would be Brazil’s Marlim, Mexico’s Maya, Canada’s grades Bow River and Cold Lake, or Iraq’s Basra Heavy, according to Kemp.
The sanctions on Venezuela—combined with the U.S. sanctions on Iran and with OPEC’s cuts—have been removing medium to heavy crudes from the market. This has led to the point that the benchmark Middle East prices for higher-sulfur sour grades have recently increased to above the price of Brent Crude in a rare occurrence in the oil market, where lower-sulfur, sweet grades from the Atlantic basin and the North Sea are typically more expensive than the sour grades from the Middle East or Latin America.
Although the U.S. sanctions on Venezuela are creating a heavy crude crunch on the oil market, the EIA says that the sanctions are unlikely to have a significant impact on the refinery runs of the U.S. refiners.
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Those sanctions will essentially eliminate U.S. imports of Venezuelan crude oil as the full effects of the sanctions emerge, the EIA said last week, but noted that it doesn’t expect “any significant decrease in U.S. refinery runs as a result of these sanctions.”
Imports of crude oil from Venezuela are still a significant portion of the U.S. Gulf Coast imports, but they have been falling in recent years due to the collapsing Venezuelan oil production.
“Moving forward, refineries may also choose to run lighter crude oils because transportation constraints may limit the availability of heavy crude oils,” according to the EIA.