Key Takeaways:
- The impact of the US seizure of a Venezuelan tanker on the Chinese market is expected to be limited in the near term due to a glut of crude in storage and weak demand.
- Venezuelan oil arrivals to China are expected to rise in December and January due to a surge in exports over the previous four months.
- The main buyers of Venezuelan oil in China are independent "teapot" refiners, who may face costs for supply losses and securing alternatives.
- The price of Venezuelan oil is expected to remain competitive due to deepening discounts on crude.
- The Chinese market is expected to feel the impact of the tanker seizure and any additional sanctions or seizures in February.
Introduction to the Situation
The volume of Venezuelan oil already headed to China before the US seized a Venezuelan tanker last week, plus a glut of crude in storage and weak demand, will limit the near-term impact of the move in the Chinese market, traders and analysts said. Exports from the South American producer have fallen sharply since the US seized a tanker off Venezuela’s coast and imposed new sanctions on shipping firms and vessels doing business with it, with the prospect of further seizures deterring shipments. China, the world’s number one oil importer, is the biggest buyer of Venezuelan crude, though Venezuelan supply accounts for only around 4% of its total crude imports.
Venezuelan Oil Arrivals to China
Venezuelan oil arrivals to China are on track to rise this month and next, traders and analysts say, thanks to a spate of exports over the previous four months, deepening discounts on crude that can take up to 60 days to reach the independent refiners that are its main buyers. "The surge in Venezuela flow to China increased in anticipation of sanctions," said Mukesh Sahdev, founder and CEO of energy consultancy XAnalysts. He predicted that the impact of the tanker seizure, and any additional sanctions or seizures, would be seen in February. December China arrivals of Merey crude, Venezuela’s main export grade, are expected to exceed 600,000 barrels per day, according to analysts at tanker tracker Vortexa.
Mounting Volumes of Oil in Floating Storage
The Venezuelan supply comes on top of ample deliveries from other sanctioned producers Russia and Iran, which have led to mounting volumes of oil in floating storage in Asia. Asian floating oil storage hit 71 million barrels last week, rising from 53 million barrels at end-October and about 33 million barrels in early September, Kpler data showed, adding to pressure that had deepened discounts on Venezuelan crude. At least one-third of the estimated 650,000 bpd of Merey discharged in November in China is still looking for end-buyers, said Vortexa analyst Emma Li. Two trade sources said plentiful Russian and Iranian supply, along with barrels on the way to China from Venezuela, had limited market worries for now.
Impact on Chinese Refiners
While the slice of the Chinese market supplied by Venezuelan crude is relatively small, for those that do buy the Merey grade – chiefly independent "teapot" refiners – alternatives can be costly and not immediately available. Only about half a dozen of these small refiners are regular buyers of Venezuelan oil, industry sources have said, but these could incur costs for supply losses and securing alternatives. China’s demand for Merey is at a seasonal low, with the most-traded bitumen futures on the Shanghai Futures Exchange trending downward since late October. The contract has risen for three sessions since Thursday, but total gains were less than 1%. The extra-heavy Merey is much cheaper than similar grades such as Canada’s Access Western Blend and Colombia’s Castilla.
Market Outlook
The impact of the US seizure of the Venezuelan tanker is expected to be felt in the Chinese market in February, according to analysts. The market is expected to remain volatile, with traders and analysts closely watching the situation. The price of Venezuelan oil is expected to remain competitive due to deepening discounts on crude. The Chinese market is expected to continue to be supplied by a mix of Venezuelan, Russian, and Iranian oil, with the independent "teapot" refiners being the main buyers of Venezuelan oil. The situation is complex, with many factors at play, and the outcome is uncertain. However, one thing is clear: the US seizure of the Venezuelan tanker has added to the uncertainty and volatility in the global oil market.
