China will likely face less competition for Venezuelan crude as India takes a step back from purchasing South American barrels, in the wake of renewed US sanctions on Venezuela's oil and gas sector, trade and refinery sources told S&P Global Commodity Insights.
Not registered?
Receive daily email alerts, subscriber notes & personalize your experience.
Register NowBut the rise in purchases by China, Asia's largest oil consumer, would depend on the trade economics of the country's refiners, who are now spoilt for choice as far as supplies from various sources are concerned, sources said.
"The return of sanctions of Venezuela will alter crude flows to Asia somewhat, with volumes that used to go to India will now mostly likely head to China, although a lot would depend on refinery economics in China. But overall volumes to Asia is unlikely to change much," said Wang Zhuwei, Asia oil analytics manager at S&P Global.
"Indian refiners will start getting cautious about signing deals for Venezuelan cargoes after seeing the latest developments between the United States and Venezuela. That will provide China more options and less competition," he added.
The US announced April 17 it would not be renewing General License 44, which authorized transactions related to oil and gas for six months, after finding that Venezuelan President Nicolás Maduro failed to meet his commitment to make progress toward a free and fair election in July.
The move did not impact Chevron's General License 41 however, and it leaves open the door for other companies to apply for similar individual licenses.
In the December to March period, India imported an average of around 130,000 b/d of Venezuelan crudes, according to data from S&P Global.
Now those volumes will be most likely looking for homes in China, analysts and trade sources reckoned.
Competition from India
As competition with India for cargoes intensified late last year following the removal of sanctions on Venezuela, China's independent refineries reduced their feedstock imports from the South American supplier by about 40% to 1 million mt (6.35 million barrels) a month over the October 2023-March 2024 period, from an average of 1.65 million mt/month over January-September 2023, when sanctions were in place, according to data from S&P Global.
"We expect prices of Venezuelan crude to come down further after the sanctions have been reimposed, since there will be more cargoes that will come to China," said a trade source.
A VLCC cargo of Venezuelan crude was heard concluded early this week to China at a discount of around $12-$13/b against the ICE Brent futures on a DES basis, which was lower compared with a discount of $8-$9/b a month earlier, sources said.
Buying interest from Chinese refineries will improve if prices fall further, which could happen in coming weeks, sources said.
"Compared with other feedstocks like Iranian crudes or ESPO, Venezuelan crudes are relatively cheaper," said another trade source.
As of April 18, Iranian Light was at a discount of around $4.5-$5.5/b on the same basis, while Russian ESPO was being offered at a discount of $0.2-$0.3/b, making them more expensive compared with Venezuelan barrels.
When sanctions were in place, Venezuelan barrels going to China were normally reported as bitumen blend.
Weak margins for producing asphalt
Some independent refineries expect discount of Venezuelan crude to fall to as much as $20/b or more, as Chinese refiners were facing heavy losses while producing asphalt from Venezuelan crudes, they said.
When the sanctions on Venezuelan crude were temporary lifted on Oct. 18, bitumen blend was at a discount of around $22/b against the ICE Brent Futures on a DES Shandong basis, according to trading sources.
"Many asphalt producers have been making losses cracking bitumen blend as feedstock, which capped the demand for feedstocks," said an independent refinery source.
According to local energy information provider JLC, margins for producing asphalt from bitumen blend has been in the negative territory since the second half of 2023. The loss was at around Yuan 790 ($111)/mt as of April 17, narrowing from a loss of Yuan 930/mt a week earlier, JLC data showed.
In the first three months of the year, 2.21 million mt (14 million barrels) of those Venezuelan crudes were imported by China's independent refineries, down 51.1% from a year earlier, S&P Global data showed.
This was due mainly to weak demand for asphalt, which is used for paving roads, sources said. Venezuelan Merey has been one of the most preferred feedstock for producing asphalt.
State-owned PetroChina's Guangdong Petrochemical was one of the Venezuelan crude buyers when sanctions were relieved earlier. But the refinery will refrain from buying any more Venezuelan cargoes once sanctions are restored, according to a source with knowledge of the matter.
"The previous cargoes haven't been cracked yet," said the source.