USGC likely to source more heavy crude from Canada as Venezuela, Mexico supplies decline

US Gulf Coast refiners will likely need to source more heavy crude from Canada as US sanctions cut flows from Venezuela, while imports from Mexico will tighten as that country's refinery capacity increases, according to analysts.

Heavy and medium crude price differentials have been strengthening in response, with Canadian Cold Lake averaging at a $9.45/b discount to WTI so far in May, tightening from a $9.76/b discount in April and a $13.57/b discount in February, according to Platts assessments.

Platts is part of S&P Global Commodity Insights.

Chevron's exit from Venezuela, triggered by stronger US sanctions, is expected to pull up to 200,000 b/d of heavy crude from the USGC, deepening Venezuela's dependence on China as its main oil customer.

Venezuela exported 117,000 b/d of crude to the US in April, down from a recent peak of 250,000 b/d in December, S&P Global Commodities at Sea data shows. Venezuela's crude exports to China have risen to 520,000 b/d in April from 242,000 b/d over the same period.

Venezuela's crude output in April averaged 1.055 million b/d, up from 760,000 b/d in October 2023, when the US loosened sanctions on the country. Investments by Chevron in the Orinoco Belt have played a critical role in sustaining output in recent years.

Output is expected to fall as Chevron withdraws, observers say.

"Venezuela is unlikely to maintain production without the aid of private investment," said Phil Flynn, an analyst with the PRICE Futures Group.

"Without those dollars, production is likely to decline rapidly," he said, noting that there is a risk of a "supply issue" of heavy oil in the near term.

For the 12 months ending in February 2025, USGC refiners imported roughly 40 million barrels of heavy crude each month, with 15 million barrels of that coming from Venezuela and Mexico, the latest US Energy Information Administration monthly data shows. Canada was the number one single supplier of heavy crude at an average of 13.6 million barrels per month over that period.

According to S&P Global Commodity Insights analysts, although Venezuelan production is expected to drop, the fall will not be immediate, and those barrels will likely continue to flow to China. As much as 600,000 b/d could be sent to China from Venezuela, said Nicholas Blanco, a senior analyst at Commodity Insights.

Canada to fill the void

While Canada's heavy crudes are well-suited to replace Venezuelan barrels in US refineries, a production ramp-up will take time.

"Canadian producers can fill the void, but not overnight," said Celina Hwang, a senior analyst at Commodity Insights. "There could be tightness, but that will depend on how fast Venezuela's crude production declines," she said.

Most of the capacity for the expanded Trans Mountain crude pipeline, known as TMX, which has increased Canadian flows to the Pacific Coast, is committed, limiting available heavy barrels for USGC refiners, Hwang said. "The TMX is currently running at almost full capacity," she said.

Any crude to compensate for Venezuela's exit in the USGC would have to come from new capacity, which takes time to build, Hwang said.

TMX started full operations in the second quarter of 2024, expanding the system's capacity by 590,000 b/d to 890,000 b/d, of which 80% is under long-term commitments.

Canada exported 517,000 b/d of crude in April from the Pacific Coast, up from just 24,000 b/d in April 2024, prior to the TMX expansion, CAS data shows.

No help from Mexico

Mexico, the third-largest contributor of heavy crude to the USGC, is currently in no position to step up exports.

"Mexico has problems of its own," Blanco said.

Newer upstream projects, which started only a few years ago as part of the President Andres Manuel López Obrador administration's strategy to stabilize production, are already showing decline rates that are outpacing the decline of mature fields, Blanco said.

Under López Obrador, the government instructed Pemex to reduce exploration and concentrate on a group of fields that would yield production fast, like Quesqui, Ixachi and Tupilco Profundo. These fields are already in decline.

Mexico recently reformed its constitution to grant the state oil, gas and power companies more control of the market, which could allow more private company partnerships with Pemex.

Blanco noted it is still not clear how the new type of upstream projects will perform. According to Commodity Insights, Mexico's crude production will remain close to 1.6 million b/d for the next five years.

"We're also seeing issues with non-payment to contractors, which will likely continue and contribute to further declines," he said.

Furthermore, crude exports are expected to fall as a result of Mexico's new refining strategy.

As the new Olmeca refinery ramps up in 2025 and production continues to fall, exports could fall to zero, Blanco said. If production falls further, it could force Pemex to begin importing crude to meet local demand, he said.