Refiners Stung by Venezuela Sanctions Face U.S. Gulf Oil Exodus

(Bloomberg) -- Crude exports from the Gulf of Mexico are picking up at the worst time for American refiners.

Rising production and falling freight rates are behind a surge of overseas shipments of Mars crude, a medium sour oil produced in the U.S. Gulf of Mexico. This comes as sanctions on Venezuela and OPEC’s production cut agreement are limiting the availability of similar types of oil that U.S. refiners are optimized to process.

At least 6 million barrels of the crude will load in February for shipment to South Korea and Europe, according to people who asked not to be identified because the shipment data is proprietary. This compares with about 2 million that left for foreign markets this month, they said.

Canada also produces comparable crude but production plans implemented by Alberta in January may have resulted in some suppliers experiencing steeper cuts than the originally targeted 325,000 barrels a day.

Production from the Gulf of Mexico is set to increase by 200,000 barrels day this year compared with last year after 11 new projects came online, according to the U.S. Energy Information Administration. Six more projects are expected to come online this year.

“Gulf of Mexico crudes like Mars are logically placed for export with connections to Louisiana Offshore Oil Port,” said Elisabeth Murphy, an analyst at ESAI Energy Llc.

Mars exports planned for next month would amount to about a third of the barrels that flowed in November on the system operated by Mars Oil Pipeline Company, according to latest data from the Louisiana Department of Natural Resources. Daily throughput on the system rose about 30 percent from January to November last year as new production started in the Gulf of Mexico.

Despite rising production, Mars Blend prices have strengthened as demand seems to be outpacing supply. Last week, the Mars premium to West Texas Intermediate futures hit a four-year high. “Medium crude is in demand in Asia, and Mars crude would be a substitute for reduced OPEC crudes such as Arab Light and medium crudes from Saudi Arabia, Kuwait, and even some Iranian crude,” Murphy said.

The sanctions on Venezuela and the potential force majeure the country is considering on U.S. oil shipments jeopardize nearly 12 million barrels of crude that would have gone to U.S. refiners in February. They will likely replace just over half of the 500,000 barrels a day of Venezuela oil the plants receive with Canadian crude by rail and potentially some crude from the Arab Gulf, Murphy said.

A recent decline in freight rates is also enabling U.S. crude exports. The cost of renting a very large crude carrier, or VLCC, to move oil between the Middle East and China has declined 21 percent since the year began, Baltic Exchange data show. That typically indicates lower transport costs for shipments from the U.S. Gulf Coast to Asia as well, according to Court Smith, a senior analyst for maritime market intelligence provider VesselsValue Ltd.

To contact the reporter on this story: Sheela Tobben in New York at vtobben@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Mike Jeffers, Joe Carroll

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