Oil makes for a sticky situation in Venezuela

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Recognition of opposition leader Juan Guaido as the interim president of Venezuela by the United States, Canada and several right-leaning Latin American powers shows the tenure of Nicolas Maduro and the durability of Chavismo is under threat. Guaido and the opposition-led National Assembly, however, so far lack the structural and legislative tools to run the country. Notably, a parallel government would not have control over PdVSA.

From a financial perspective, Maduro’s government has been immensely compromised. The inflation rate for 2018 closed at a record-breaking level of more than 1 million percent, according to the National Assembly, and economic measures introduced by Maduro’s government in August failed to provide any relief.

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Meanwhile, after defaulting on roughly $8 billion in debt last year, Maduro’s government and PdVSA still face challenges in protecting its US subsidiary Citgo from the hands of bankrupt Canadian gold miner Crystallex, ConocoPhillips and others.

Crude oil exports, which overwhelmingly represent the main source of revenue for the state, have been in sharp decline in recent years. Venezuela’s crude exports last year averaged 1.12mn bpd, 40 percent lower than the 2015 average. Three countries accounted for 84 percent of last year’s exports: the US, India and China:

Venezuelan crude exports ClipperData

India imported an average of 300,000 bpd of Venezuelan crude last year, down about 9 percent from 2017. China’s imports of Venezuelan crude declined 28 percent from 2017 to average 277,000 bpd last year, pushing India into the No. 2 spot in terms of importers of Venezuelan crude oil.

But it is the US that receives the lion’s share of Venezuela’s crude exports, even though volumes dropped by about 16 percent from 2017 levels to around 503,000 bpd last year. Meanwhile, a number of US refiners on the Gulf Coast are geared to process the heavier type of oil that Venezuela produces, creating a sticky situation in the current political climate.

As part of this, naphtha imports have seen a significant jump in the last two years. Naphtha is essential for Venezuela as it is mixed with the country’s heavy crude as a diluent to facilitate transport. The vast majority of this naphtha comes from the United States. While the increase in naphtha imports could be in response to falling domestic refinery runs, it also indicates that PdVSA is blending a higher amount of naphtha into its crude – to either offset further deterioration in the quality of its crude, or to inflate its crude export numbers.

Venezuela naphtha imports ClipperData

A lack of maintenance and investment in Venezuela’s refineries has led to the collapse of refinery utilization in the country. Lower domestic output of refined products has led to a record level of gasoline and middle distillates imports so far in January. Imports of light and middle distillates to Venezuela in 2018 were overwhelmingly shipped from the US, representing 83 percent and 57 percent, respectively.

The United States continues to hold out the threat of imposing oil sanctions on the Maduro regime. At this point, however, the situation may be too complex for either side to unravel. But halting US exports of light and middle distillates to Venezuela could be the first step toward making life even more difficult for Maduro.