Blow to China from loss of Venezuela oil blunted by hoard at sea

[SINGAPORE] The US’s shock intervention in Venezuela will likely choke oil flows to China, although the short-term impact will be softened by large volumes of sanctioned crude being stored at sea.

China is the major buyer of crude from the South American country, but that trade now looks in jeopardy after the seizure of Venezuelan leader Nicolas Maduro over the weekend. US President Donald Trump said that the US would run the country and American companies would rebuild its oil industry and sell a “large amount” to global buyers, including current customers and new ones, without specifically mentioning China.

Venezuelan shipments made up only 4 per cent of China’s oil imports last year, but the South American nation provides a unique type of sludgy, high-sulphur crude that’s used to produce bitumen, which is vital for construction and road building. The oil is also deeply discounted, making it popular with China’s independent refiners, known as teapots.

While the future of Venezuela and its oil sector is still very murky, a hoard of sanctioned crude in floating storage will cushion Chinese buyers in the coming months. Almost 82 million barrels is currently on tankers in waters off China and Malaysia, according to data intelligence firm Kpler. More than a quarter is Venezuelan and the rest is Iranian, it said.

Bitumen futures traded in Shanghai jumped on Monday (Jan 5), but were still not far above a four-year low reached last month, reflecting the ample short-term supplies. Separately, the market is also watching Chinese demand for fuel oil, a possible alternative to Venezuelan crude.

Before Maduro’s capture, the US imposed a partial blockade of vessels calling at Venezuela. Trump said at a press conference on Saturday that the sanctions on the country’s oil industry would remain in place. It’s unclear how easy it will be for China to buy any unsold Venezuelan cargoes that have already loaded, due to issues surrounding payment and ownership of the crude.

Venezuela has the world’s largest proven crude reserves, but production has fallen sharply over the last decade and now accounts for less than 1 per cent of global supply. US sanctions on state producer Petroleos de Venezuela saw most nations, apart from China, shun the country’s oil, although Chevron was allowed to keep operating in Venezuela.

Chinese oil majors Sinopec and China National Petroleum also have legacy claims to develop Venezuelan oil reserves, Morgan Stanley said in a note that cited Wood Mackenzie. However, Trump’s pledge that US companies would rebuild the country’s oil industry raise major doubts over whether the Chinese firms will have any role to play. BLOOMBERG