As Sanctions Lift on Venezuelan Oil, China’s Refiners Will Face Stiffer Competition

The rollback of American sanctions on Venezuelan oil could rob Chinese buyers of one of their cheapest sources of crude.

(Bloomberg) — The rollback of American sanctions on Venezuelan oil could rob Chinese buyers of one of their cheapest sources of crude.

Venezuela’s Merey crude is currently being delivered to China at a discount of as much as $20 a barrel compared to Brent, according to traders. That’s cheaper than sanctioned Iranian oil, which is available at a discount of about $13. Other comparable grades, such as Canada’s Cold Lake, trade around parity to the international price.

Although the adjustment will take time, it’s likely that the easing of restrictions will lead to the return of customers in India and the US, which were big buyers from Venezuela before sanctions were implemented, the traders said. More competition for Venezuelan barrels should raise prices, including for Merey, the most popular grade among China’s independent refiners.

China is the world’s biggest oil importer and its purchases have boomed this year as the country has emerged from the pandemic. At the same time, it’s been able to keep a lid on prices by skirting or ignoring international sanctions on producers like Venezuela, Iran and Russia by taking their crude at discounted rates. 

The independent refiners, known as teapots, clustered mostly in Shandong province have been among the most resilient buyers of Venezuelan oil since sanctions were imposed in 2019. The Merey variety is highly sulfurous and dense, and widely used for tarmac on roads.

If their refining margins get squeezed, teapots may choose to lower operating rates, traders said.

Read More: Traders Suspect Venezuela Oil in China as Bitumen Flows Soar

But even if Venezuelan supplies become too costly for the teapots, China’s oil majors could still step in. PetroChina Co.’s new mega refinery in Jieyang, for example, was originally designed to process Venezuelan crude. 

The US has suspended sanctions on a variety of Venezuelan enterprises, including its oil industry, as the Biden administration looks to reward President Nicolas Maduro’s embrace of democratic processes. While that’s likely to expand the customer base for the South American nation’s crude, it could also lift supply, which would moderate any price increases.

Venezuelan production could jump by as much as 25%, according to analysts, which would offer some relief to global oil markets that have tightened after major producers led by Saudi Arabia and Russia curbed supply.

(Updates with comment on refining margins in sixth paragraph)

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