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Despite output freefall, US imports of Venezuelan crude oil may have hit floor: analysts

Highlights

As Venezuelan oil output falls to 1 million b/d, exports to US climb

Analysts expect US refiners to continue imports even as production tumbles

US imports now account for 45% of Venezuela's total output

Washington DC — In February, US imports of Venezuelan crude oil averaged less than 409,500 b/d, a nearly 50% decline in less than a year that brought Venezuelan import levels to lows not seen by US refiners since a 2003 oil strike. But rather than being another notch in the slow disappearance of Venezuelan crude from US Gulf Coast refineries, February may have set the floor. Imports of Venezuelan crude into the US have been on the rise through this summer, climbing to nearly 587,200 b/d in June, a 43% jump since February, according to US Customs data. The US imported about 530,300 b/d of Venezuelan crude in July, according to preliminary Customs data.

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This relatively modest recovery, which is entirely taking place in the US Gulf Coast, is happening even as Venezuelan oil production fell to 1.3 million b/d in June, a 1.1 million b/d production drop since December 2015, according to the latest S&P Global Platts survey. The US Energy Information Administration forecasts Venezuelan oil production to fall below 1 million b/d by the end of this year and then to tumble to about 700,000 b/d by the end of 2019.

But even amid this decline, analysts believe US imports of Venezuelan crude, which in June accounted for more than 45% of the country's total production, will remain relatively stable.

"The US is currently the ATM cash machine for Venezuela," said Joe McMonigle, an analyst with Hedgeye Risk Management.

With proximity to a Gulf Coast refining market largely geared to run heavier crude, Venezuela has no more attractive market for its oil exports. And with Mexican crude output stagnant and current pipeline and rail limits to getting more heavy Canadian crude to US Gulf refiners, the amount of Venezuelan crude sent to the US could continue to climb, even as the country's output sinks to historic lows.

US imports of Venezuelan crude "will decline, but it's not going to drop off the map," said John Auers, executive vice president of Turner, Mason & Company.

Auers speculated that US imports of Venezuelan crude could fall below 400,000 b/d within a year, but said they may not fall off at all. "There is certainly an appetite for that crude in the US and that's not going to go away," Auers said.

Still, Venezuelan crude exports will continue, but only to the Gulf Coast. Venezuelan crude made up nearly 20% of all crude imported by Gulf Coast refiners in May, according to EIA.

Meanwhile, US West Coast refiners, which imported more than 2.3 million barrels of Venezuelan crude in 2015, have not imported a Venezuelan barrel since November 2017, according to the EIA. US East Coast refiners, which imported nearly 13.8 million barrels of Venezuelan crude in 2016, have not imported Venezuelan crude since October 2017, EIA data shows.

Valero is currently the biggest US buyer of Venezuelan crude, importing more than 201,700 b/d of total crude for its Port Arthur, St. Charles and Texas City refineries in May, according to EIA. Valero imported more than 40% of the more than 489,600 b/d of Venezuelan crude imported in May, according to EIA.

Top 6 US Importers of Venezuelan Crude (May 2018)

Citgo Lake Charles 156,581 b/d
Valero Port Arthur 82,258 b/d
Valero St. Charles 71,355 b/d
Citgo Corpus Christi 49,548 b/d
Valero Texas City 48,097 b/d
PBF Chalmette 47,516 b/d
Source: US EIA

"Personally, I am not surprised at the relatively large share of Venezuelan exports being destined for the US," said Lejla Villar, an EIA analyst. "After all, US refiners are among the few customers that still remit cash payments for Venezuelan crude oil."

But there are some factors which could cause Venezuelan oil exports to the US to dip.

For one, there have been recent concerns among Gulf Coast refiners about Venezuelan crude quality, with more water being found in the crude.

"The quality of that crude is degrading," Auers with Turner, Mason said.

Venezuela may also be forced to send additional crude to China and Russia to pay off its mounting debts.

In addition, the US has repeatedly threatened to impose sanctions on Venezuela's oil sector, an outcome which could bring US imports of Venezuelan crude to zero, analysts said.

"If the administration were to impose sanctions on imports of Venezuela crude, it would likely starve the Maduro regime of one of their last sources of revenue and potentially lead to the collapse of the government," said McMonigle. "But I think the administration is also concerned about further deepening the humanitarian crisis."

If US refiners did stop purchasing Venezuelan crude, analysts said they expected it would be shipped to Asian markets, primarily China and India, likely at steep discounts.

"I would expect to see an adjustment in well-established trade patterns, but not necessarily a removal of crude oil barrels from the market," said Villar with EIA.

Michael Cohen, the head of energy commodities research at Barclays, said without the US market, Venezuela would need to find other Latin American refiners able to take heavier grades and ship more crude to China and Europe.

"Obviously that would hurt PDVSA's netback further, but it's still preferential to no exports at all," Cohen said.

--Brian Scheid, brian.scheid@spglobal.com

--Edited by Maurice Geller, maurice.geller@spglobal.com