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US sanctions on Venezuela could enrich Asia

By Patrick Higgins  |  16/08/2017 11:14
Further US sanctions placed on Venezuela could drive Venezuelan oil exports increasingly towards Asian markets.
 
With the introduction of more stringent sanctions on Venezuela's oil industry - which produces 95% of all Venezuelan exports - sales on oil originally meant for the US market (up to 740,000 barrels) could be barred.
 
Venezuela, led by Socialist President Nicolas Maduro, is currently embroiled in severe civil unrest and plagued with an unpredictable economy.  Maduro's government has been criticised for becoming increasingly authoritarian in response to opposition accusations of government mismanagement of Venezuela's economy and democratic bodies.  Venezuela's parliament, the National Assembly, is filled with opposition party members.  To bypass this, Maduro created a constitutional assembly, which has taken on the increasing role of legislator.  This move brought about worldwide condemnation, and the first direct application of US sanctions on Maduro himself.  President Trump is currently contemplating immediate sanctions on PDVSA, Venezuela's state-oil firm, and he has also been floating the idea of military intervention to depose Maduro's government.
 
Venezuela's, as an OPEC member, has been taking part in the OPEC cuts of the last couple of years, albeit somewhat unwillingly.  These deals have slashed oil output, but oil production continues to constitute an overwhelming chunk of Venezuelan national revenue.  In the case of the imposition of US sanctions and the loss of market access, China and India (the two largest buyers of Venezuelan oil after the US) would be keen to increase imports.
 
Furthermore, both Russia and China (as Venezuela's foremost creditor sources) have priority over Venezuelan oil exports in the instances of sanctions, although India is seeking to expand its role as a primary importer of Venezuelan crude as well.  For example, Venezuela delivered 480,000 bpd (barrels per day) to Chinese oil firms in Q1 of 2017 by the repayment of loans dating back to 2007, according to internal memos released by PDVSA.  Likewise, Rosneft and Lukoil, two of Russia's most preeminent oil companies, are currently receiving 250,000 bpd towards loan repayment.  Rosneft, in particular, is interesting, as it is seeking to have some of its Venezuelan crude refined at its Essar Oil refinery in Gujarat, India; much of which could be re-sold to various other Asian buyers.
 
Though doomsday reports have been forecasting the collapse of Nicolas Maduro and his government for months, the Venezuelan authorities continue to persevere.  Regardless of the daily protests and the accusations of a transition towards dictatorship, Venezuela continues to rely on oil exports as its principal source of earnings, and will eagerly continue to export worldwide.  Any oil barred from sale or refinement to the US and potentially its allies will find willing buyers elsewhere abroad, principally in Asia.  The void left by US sanctions will quickly be filled by eager Asian buyers, as Asia is a rapidly-expanding region, hungry for cheap and reliable sources of energy.  However, this realignment towards an Asian market predominance would create the need for serious logistical rearrangements, given the distance between Venezuela and Asia.  This could be potentially bullish for logistics firms and Asian crude markets, but most likely would not have much effect on worldwide crude prices.  All of this is entirely dependent on how the political and economic situation in Venezuela plays out, and day by day it seems that the chaos could go in any direction.
 

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