End of Iran waivers blunts US action on Venezuela

Washington's decision to scrap waivers on Iranian oil exports could indirectly blunt its offensive toward Venezuela, where US hints at imposing a secondary component to existing sanctions now look less likely to materialize.

The largest beneficiaries of the waivers — which allowed some buyers of Iranian crude to continue limited purchases through early May — are China and India, the same countries that account for almost all Venezuelan crude exports after the White House imposed sanctions on Venezuelan national oil company PdV on 28 January. The new US campaign to zero out Iranian oil exports, announced by US secretary of state Mike Pompeo today, would raise the cost for Washington and the global economy of leaning on third party countries to drop purchases from Venezuela as well.

From the perspective of the oil market, the US would risk accelerating a rise in oil prices if it seeks to tighten the screws on Iran and Venezuela at the same time. Global supply of medium and heavy sour crude, such as the Orinoco blends produced by Venezuela, is already constrained by the US sanctions, Opec/non-Opec production cuts and Canadian restrictions on production in Alberta province.

Pompeo said the US has received assurances from Saudi Arabia and the UAE that they will make up any shortfall in supply from Iran. But in a statement this morning, Riyadh sounded less committal. "Over the next few weeks, The Kingdom will consult with other oil producing countries and the main oil consuming countries to maintain market balance and its stability," the government said.

A senior US state department official said the commitments that Washington says it has secured from Riyadh provide sufficient confidence that the US can enforce its sanctions on Iran even with the ongoing crisis in Venezuela. "We are working to mitigate any impacts we have," the official said.

The official declined to confirm whether Washington has asked for any assurances from Saudi Arabia to offset Venezuela production losses, citing confidentiality of the discussions. But he said that the discussions involved the "general state of the market," including the Venezuela situation.

US refiners had been taking around 500,000 b/d of Venezuelan crude exports — about half of the total — before the sanctions kicked in. But onerous conditions, including redirecting Venezuela's US oil sales revenue into escrow accounts and PdV's unwillingness to supply more oil, effectively cut off US purchases even before they were scheduled to end completely on 28 April.

The loss of the US market prompted PdV to redirect more barrels to its Asian buyers. Venezuela shipped 299,000 b/d to India in February, up from 241,500 b/d in January but down from 312,000 b/d a year earlier. India's largest private-sector refiner, Reliance Industries, has said it is limiting its crude purchases from Venezuela, and ended its sales of diluent to PdV altogether. Nayara Energy, the Indian refining arm of Russia's state-controlled Rosneft, continues to buy Venezuelan crude, in part to cover oil-backed debt from Caracas. China's imports from Venezuela are similarly tied to repayment of oil-backed loans.

Spain's Repsol, an outlier in Venezuela's sanctions-limited export portfolio, is under pressure from Washington to drop its Venezuelan oil trade. The company has been importing Venezuelan crude to cover arrears in payments from PdV for its oil and natural gas production in the country. The Spanish firm has also been exporting gasoline to Venezuela, where motor fuel is scarce. Around 73,000 b/d of Venezuelan crude discharged in Spain in February, and 20,000 b/d of Spanish gasoline moved to Venezuela, according to Spanish state-owned oil reserve Cores.

From a political perspective, Washington's decision not to renew the waivers on Iran when they expire on 2 May further limits its options to force the ouster of Venezuelan president Nicolas Maduro in favor of opposition leader Juan Guaido. For weeks, Washington has dismissed suggestions by some members of Venezuela's opposition to intervene militarily, opting instead to step up diplomatic and economic pressure aimed at isolating Maduro. The approach has so far failed to dislodge the Venezuelan president or flip the armed forces to Guaido's side.

The US and most other western countries recognise Guaido as Venezuela's legitimate interim president. Russia, China, Iran, Turkey and Cuba continue to back Maduro.

As of this morning, Venezuela's opposition was still digesting the impact of Washington's decision to end the Iran waivers, but the initial reaction was disappointment. "The US can't sanction both Venezuela and Iran at the same time. That would be complicated and drive up oil prices as high as $80-$100 a barrel," an oil adviser to Guaido told Argus, adding that sanctions on all sides would be "inconsistent" with the White House's effort to keep oil prices in check.

For now, the opposition is starting to worry about the longer-term economic consequences of the US oil sanctions. The longer they remain in place, the harder it will be for Venezuela to claw back market share in the future, as some refiners may begin to reconfigure their plants to process supply from steadier sources, the adviser said.