Washington's decision to ease sanctions on Venezuela's oil sector is likely to boost tanker freight rates, with dirty Aframax and clean Medium Range (MR) owners poised to benefit the most, according to shipbroker analysts.
The sanctions relief may not result in a major boost in Venezuelan crude production and exports in the immediate term, given the country's oil industry has suffered years of underinvestment. Expectations within state-owned PdV are that Venezuela will probably be able to raise output by around 200,000 b/d by the end of the year. The restrictions are also only being lifted for six months, at least initially. But tanker rates should still get support from a shift in trade flows and increased use of "mainstream" vessels.
The majority of Venezuela's crude exports in 2021-22 were transported on board 2mn bl very large crude carriers (VLCCs), reflecting the long distance of voyages to China, Venezuela's main crude buyer under US sanctions. But so far in 2023, the use of smaller Aframax tankers has grown with the resumption of Chevron exporting Venezuelan crude to the US. Before the sanctions waiver, Chevron was given permission to ship output from its joint ventures with PdV to the US. With US east coast refineries optimised for sourer grades, the US will likely remain one of the main consumers of Venezuelan oil.
"Considering our expectations of future shifts in Venezuelan crude flows and against a backdrop of higher Venezuelan crude production, it seems likely that regional Aframax demand will receive a boost, which could lift freight rates on routes such as TD9 (Covenas to US Gulf coast)," Paris-based shipbroker BRS said.
This could mean China taking some of the Brazilian and Colombian crude that currently goes to the US, thereby increasing demand for long-haul VLCC voyages. On the flip side, demand for Suezmaxes, which haul around half of Colombian and Brazilian crude exports to the US Gulf coast, could take a minor hit, BRS added.
On the clean tanker side, demand for MR vessels to carry naphtha and other oil products to Venezuela will probably increase. Extra heavy oil production in the Orinoco belt, where much of Venezuela's output growth will come from, has to be upgraded and diluted before it can be shipped by pipeline to refineries or export terminals. Previously Venezuela relied on Iranian condensate for upgrading its heavy crude.
"Even considering payment issues, we anticipate a rapid rise in clean product imports into Venezuela with these either being gasoline or naphtha to be used for diluent. As before the sanctions, we anticipate the US to be the main supplier of these products, and this should add to clean tanker demand in the western Atlantic," BRS said.
The upside may be limited if any increase in US product exports to Venezuela leads to lower shipments from the US to elsewhere in Latin America or west Africa, especially if it results in a decrease in ton miles out of the US Gulf. Furthermore, if Venezuela can upgrade its refineries following the lifting of sanctions to bring throughput closer to nameplate capacity, it would constrain the country's crude exports and cap demand for product imports. BRS considers this a "low probability scenario" though, as Venezuela was already a net importer of oil products before sanctions.
Out of the shadows
A significant consequence of the sanctions waiver is that Venezuela will no longer have to rely on "dark" or "shadow" fleet tankers for its crude exports or product imports, which are more costly and less reliable than the mainstream fleet. At least 169 tankers over 25,000 deadweight tonnes have been involved in Venezuelan oil trade since sanctions were enacted, comprised of over 50 VLCCs, 80 Suezmaxes and Aframaxes and more than 30 Long Range 1 (LR1), MR and Handysize vessels, according to shipbroker Gibson.
The US has explicitly banned individuals or entities based in Russia from getting involved in the shipping of Venezuelan oil, underlining Washington's intention to move Caracas away from Moscow and Tehran, both of which have been actively involved in Venezuela's oil sector since sanctions began and both of which also make use of a global dark fleet of tankers to transport their oil.
At the same time, some tankers, especially those with European or G7 owners, appear to be increasingly wary of lifting Russian crude after the US cracked down on two vessels on 12 October for breaching sanctions. Freight for 140,000t Russian crude shipments from the Black Sea port of Novorossiysk to the west coast of India jumped by $1.8mn to $6.5mn between 13 and 20 October, indicating tighter vessel supply and growing concern over sanctions risks.
"The longer sanctions [on Venezuela] remain off the table, the more vessels previously engaged in that trade will be marginalized and forced out of the market, shifting increased oil volumes for the dark fleet onto non-sanctioned tonnage," Gibson said.
Dark fleet tankers pushed out of Venezuelan oil trade and European-linked vessels leaving Russian trade are likely to weigh on tanker rates globally, although higher Iranian crude exports may absorb a few of the former Venezuelan lifters. In the longer term, a new status quo where Venezuela can use the mainstream fleet and sanctions on Russia are more stringently enforced could see a boom in the scrapping of these older vessels, reducing tonnage at a time of record low additions to the global fleet.
