Trump’s proposed ban on Venezuelan oil to boost beleaguered Canadian heavy oil producers

CALGARY – Canadian oil producers, hit hard by persistently low crude prices and a recent increase in the value of the loonie, could get a boost from a potential U.S. ban on oil imports from Venezuela.

U.S. President Donald Trump’s administration is reportedly considering a ban on Venezuelan crude as part of package of sanctions to punish president Nicolas Maduro desire to change the country’s constitution and crackdown on political dissent.

Analysts say Canadian heavy crude oil prices would improve if a ban on Venezuelan crude forced U.S. Gulf Coast refineries to the replace heavy volumes they source from the South American country. Western Canada Select, the heavy oil benchmark, was trading at $45.04, compared to $39.17 a year ago, according to data from the Petroleum Services Association website.

“The U.S. would have to find substitutes elsewhere,” GMP FirstEnergy analyst and commodity forecaster Martin King said. “If they did enact something like that, it would be undeniably a boost for Canadian heavy crude oil and you’d probably see that differential tighten up even more than it already has.”

King said there would be an impact on pricing for Canadian heavy oil blends should the U.S. impose a ban on Venezuela’s barrels but since Canadian export pipelines to the U.S. are close to full, it would be difficult for domestic producers to ship enough crude to offset the loss of Venezuelan supplies.

The U.S. imported 673,000 barrels of oil per day from Venezuela in June, according to data from the U.S. Energy Information Administration, compared to 741,000 bpd on average last year. The South American country is a member of the Organization of the Petroleum Exporting Countries and has been on the verge of bankruptcy since crude oil prices collapsed in 2014.

“It’s quite a sizeable chunk,” IHS Markit’s director of Canadian oil sands dialogue Kevin Birn said of Venezuela’s share of the roughly 3-million-bpd market for heavy oil refining on the U.S. Gulf Coast.

A ban on Venezuelan blends would be damaging for the South American country and would also boost prospects for Canadian and Mexican heavy oil barrels that compete against Venezuela at certain U.S. refineries, Birn said.

CIBC World Markets analyst Jon Morrison says Venezuela has been in a tough spot for decades, but the last 12 to 18 months have been incredibly challenging.

“You’ve seen heavy oil production (there) decline by about 600,000 barrels per day as there hasn’t been enough activity there to support the growth aspirations that they have.”

Morrison said a change in sanctions against Venezuela aimed at the country’s oil exports would have a big impact on U.S. refineries, which use Venezuelan, Mexican and Canadian heavy crude as blending agents for light oil produced in the U.S., but the Canadian oilpatch has its own capacity woes to contend with.

“It’s going to be structurally challenging for Canadian exports to increase in a material way, but it will tighten up the differentials,” Morrison said, referring to the discounts, or differentials, that Canadian producers accept for their heavy oil in the U.S.

Scotiabank commodity economist Rory Johnston said the differential between West Texas Intermediate benchmark oil prices and Western Canada Select, a price for domestic heavy oil blends, has shrunk from US$16 per barrel earlier this year to US$10 recently.

Johnston said the differential could shrink another US$3 to US$4 per barrel if sanctions on Venezuelan crude were imposed quickly and U.S. refineries had to work quickly to replace their feed stocks or cut their output.

According to the U.S. Department of Energy, the U.S. imported 3.2 million bpd from Canada in June, down from a high of 3.5 million bpd in January.

Financial Post

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