US Fuelmakers Tap Venezuela Oil to Hedge Canada Wildfire Risk

Vessel Poliegos, carrying Venezuelan crude, is off the coast of India. It has been looking for a home since mid-June. Source: Bloomberg

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(Bloomberg) — American fuelmakers are gorging on the most Venezuelan oil in almost a decade as the threat of wildfires in Canada risks disrupting supplies at a time when refineries from Texas to Louisiana are running at full tilt. 

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Imports from Venezuela are on pace to hit 804,000 barrels a day for cargoes arriving in July, the highest level since 2017, data compiled by Bloomberg show. US sanctions effectively shut off imports in 2019 before ramping up this year following the US ouster of the country’s former president. 

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Demand for Venezuelan crude has lifted prices in the US Gulf Coast market from the doldrums. It was sold for a discount of $15 to benchmark ICE Brent in May and is now at a discount of about $10, according to people with knowledge of the situation. 

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Refiners are tapping more Venezuelan oil as insurance against potential supply disruptions triggered by wildfires in Canada, which produces a heavy, thick crude of similar quality. Hot and dry conditions can spark fires, forcing drillers to evacuate workers, curtail operations and, in some cases, declare force majeure as they are unable to deliver oil to refineries.

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US fuelmakers are enjoying the strongest refining margins in years thanks to a combination of low inventories and supply disruptions created by a flare-up in the Iran war and Ukrainian drone attacks against Russian refineries. The US Gulf Coast 3-2-1 crack spread — a proxy of profits from converting three barrels of crude oil into two barrels of gasoline and one of diesel — reached the highest since at least 2012 last week.

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The uptick in demand provides some relief for Venezuelan crude, as inventories in the Caribbean have been clearing at a slower pace as China, once the largest buyer, hasn’t taken any oil this year. Meanwhile, vessels laden with oil float off the coast of Africa and Asia in a sign of oversupply following the brief reopening of the Strait of Hormuz. Renewed hostilities between the US and Iran could reverse the trend. 

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Most of the Venezuelan oil is now marketed by commodity giants Trafigura Group and Vitol Group, who were entrusted with helping to sell Venezuelan oil in the aftermath of the capture of strongman Nicolas Maduro.

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