Venezuela Plight Has U.S. Refiners Rushing for Heavy U.K. Crude

(Bloomberg) -- Oil refineries in the U.S. Gulf of Mexico are buying the most crude from the U.K. North Sea in more than seven years as they scramble to replace lost supplies from Venezuela.

Plants in the Gulf Coast, the U.S. refining hub, will this month import 112,000 barrels a day of Kraken, Clair and Captain crudes, data from oil analytics firm Vortexa Ltd. show. That’s the highest flow since December 2010, according to Energy Information Administration figures and ship tracking compiled by Bloomberg.

While U.S. refineries enjoy an abundance of light crudes thanks to explosive output from the nation’s shale fields, many were configured to handle a proportion of heavier grades such as those from Venezuela. With the Latin American country pumping the least in years, Gulf Coast plants have had to look elsewhere for those barrels. Even key supplier Saudi Arabia, which can also deliver the necessary cargoes, isn’t a big help: its shipments to the U.S. dropped by almost 1 million barrels a day over the past half a decade.

“It’s evident that U.S. Gulf Coast refiners are willing to pay more for heavy grades than in the past,” said Eugene Lindell, a Vienna-based oil-market analyst at JBC Energy GmbH. “Heavier inflows are needed to offset declining imports from Venezuela.”

A narrowing discount of West Texas Intermediate to Brent, the North Sea grade that serves as the global benchmark, is also helping to drive the flows, said to Mara Roberts Duque, a New York-based analyst for BMI Research.

“Given that the Brent-WTI spread has come in, North Sea cargoes are now more economical,” she said by email. “North Sea oil is a good replacement for Venezuelan heavy crude.” 

WTI was trading at a discount of $3.56 a barrel to Brent as of 12:11 p.m. in London. As recently as late December, it was more than $7 a barrel.

Crude output from the South American country dropped steadily in 2017, plunging to 1.67 million barrels a day in January, according to Bloomberg estimates. That’s the lowest in 15 years. Shipments to the U.S., almost all of which go to Gulf of Mexico refineries, reached the lowest for the time of year since at least 2011 in January. Rosneft PJSC, Russia’s biggest oil company, and PetroChina Co. have first rights to lift Venezuelan crude because of prepayment deals with state-run oil company Petroleos de Venezuela S.A..

Output in Venezuela, a member of the Organization of Petroleum Exporting Countries, has declined amid a domestic economic crisis. The country is also participating a global pact to cut supply and eliminate a global crude glut.

European oil traders say the gap created by Venezuela’s production challenges is aiding North Sea producers who’ve been struggling to find local buyers at a time of seasonal refinery maintenance. Cargoes have traded at widening discounts to global benchmark Dated Brent, they say.

While more U.K. crude is set to arrive in the Gulf Coast in March, some traders question how sustained the flow will be. As the seasonal refinery turnarounds in Europe come to an end, the region is likely to resume buying local supplies.

The flows increased when U.S. benchmark prices moved closer to Brent, according to Lindell.

“It’s no coincidence that the strong rise in interest for these barrels came after a significant narrowing of the WTI/Brent spread,” he said, adding that and any continuation of the trend will depend on how competitive U.K. prices remain.

To contact the reporters on this story: Laura Hurst in London at lhurst3@bloomberg.net, Lucia Kassai in Houston at lkassai@bloomberg.net.

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Brian Wingfield

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