US may reimpose Venezuela oil sanctions

The US' lifting of sanctions against Venezuela's oil sector may prove to be rather brief, as Washington is threatening to reimpose some of the economic restrictions it waived barely six weeks ago.

Washington is keeping Caracas to a 30 November deadline to meet political conditions associated with a waiver from US sanctions that have been in effect since 2019. President Joe Biden's administration has demanded the release of three US citizens held in detention in Venezuela and the lifting of restrictions that prevent key opposition leaders from contesting next year's presidential elections.

Venezuelan president Nicolas Maduro so far appears to have shrugged off the US threat. In a speech on 27 November, Maduro made no mention of the US conditions and instead called for the US to lift all sanctions against Venezuela "permanently and definitively, and that we begin a new time, a new era of relations of respect and collaboration, at the highest level, between the US and Venezuela."

Venezuela released five political prisoners soon after the agreement, but no more since then, and the US is particularly keen to force the release of US citizens and permanent residents held in Venezuela. A Venezuelan court on 30 October suspended results of the political opposition's primary, which selected former lawmaker Maria Corina Machado as the main opposition contender for the 2024 presidential election.

The sanctions waiver, issued on 18 October, was meant to last until 18 April 2024, with a promise of extension if the Maduro government made good on its agreement with the opposition to allow a truly competitive presidential and parliamentary elections by the end of 2024.

The White House has already warned US and foreign companies not to get their hopes up about possible return to Venezuela. The sanctions waiver should not be seen as encouragement to resume full operations in that country, US sanctions enforcers said earlier this month, noting that oil companies can choose to have a more limited footprint.

Market impacts

Even in the best-case scenario of continued sanctions relief, Venezuela's near term output was not expected to increase by more than 200,000 b/d, from about 800,000 b/d currently. In practice, foreign producers that already had separate waivers to maintain limited operations in Venezuela, including Chevron, Italy's Eni and Spain's Repsol, would have been best positioned to take advantage of the thaw in US-Venezuela relations.

France-based upstream oil and gas producer Maurel and Prom said earlier this month that it would resume operations in Venezuela following the lifting of US sanctions. Other US and European producers that were not already up and running in Venezuela may be reluctant to make significant investments, given the uncertainty as to whether the sanctions relief will be extended.

Brazil's state-controlled Petrobras said it was weighing investment in Venezuela following the lifting of US sanctions, without announcing specific projects. Bolivia and Venezuela likewise announced unspecified plans for joint refining, oil production and petrochemical projects.

The sanctions waiver also allowed Trinidad and Tobago to proceed with plans to receive natural gas from Venezuela's offshore Dragon field.

Revoked waiver may slow flows, raise rates

Venezuelan crude shipments to Europe picked up since the waiver of US sanctions, as Eni and Repsol appear to be taking more cargoes under existing oil-for-debt swaps. The pace of US-bound shipments has not changed since mid-October.

The reimposition of US sanctions most likely would preserve a previously granted waiver that allowed only Chevron to lift US-bound Venezuelan cargoes, and only those produced from Chevron's joint venture with PdV. US crude imports from Venezuela averaged 120,000 b/d in January-August, according to the US Energy Information Administration.

The latest Venezuelan crude shipments to China have been hauled on the mainstream global very large crude carrier (VLCC) fleet, in a departure from the pre-sanctions waiver practice of using "shadow fleet" vessels. A revocation of the waiver could pressure VLCC rates in the US Gulf coast, Caribbean, Brazil and west Africa.

A possible revocation of the US waiver likely would push up WCS/Castilla differentials for delivered China crude, which have fallen since mid-October because of competition from Merey. Merey differentials could again widen, after narrowing to $11/bl from $20/bl in mid-October (see chart).

By Haik Gugarats, Tray Swanson and Carlos Camacho

Heavy sour crude delivered China ($/bl)