The EU is setting up a way for Iran to get paid for oil in a way the U.S. can’t get their hands on the money and Saudi Arabia plans to invest in U.S. Nat Gas interests, reports Phil Flynn, Senior Energy Analyst The PRICE Futures Group.
Too many sanctions, too little time.
Which sanctions do oil traders worry about and which ones do they ignore? Officials in the Trump Administration are warning U.S. energy companies that they could be putting sanctions on coveted Venezuelan heavy crude after France's foreign minister announced that a European-backed system to facilitate non-dollar trade with Iran and circumvent U.S. sanctions would be established in the coming days. As if this was not enough, traders are trying to digest a bearish API report that showed a 6.551-million-barrel increase in crude supply, a 3.65-million-barrel increase in gasoline supply and a 2.573-million-barrel increase in distillate supply. Of course these numbers may not matter if the situation in the failed Venezuelan socialist state continues to spiral out of control.
The Venezuelan economy has been robbed and pillaged by its leadership, and while Venezuelan President Nicolás Maduro may still have the backing of his military, he has lost the support of the people that are starving and without medicine. He has also lost recognition by the United States. The Trump Administration moved to recognize opposition leader Juan Guaido as the legitimate head of state after Juan Guaido declared himself interim president. Nicolás Maduro then cut ties with the U.S. but may see another hit come to the Venezuelan economy as the Trump administration may use their nuclear sanction option and go after Venezuelan crude exports.
While it is the right move to go after the Venezuelan dictator, it may be hard for U.S. Gulf Coast refiners that are Venezuela’s biggest customer. The United States is awash in light shale oil, but they are short of the heavier grades of crude oil they need to produce diesel and other high-margin products. In 2018, Venezuela exported about 500,000 barrels of heavy crude a day to the United States, but that has now fallen to about 350,000 barrels-per-day that is still needed by U.S. refiners. This is raising concerns that we could see some cut in U.S. runs because those barrels won’t be easily replaced and could cause future diesel shortages. The lack of heavier grades of oil could cause a release from the U.S. Strategic Petroleum Reserve so U.S. refiners could stay in business as opposed to cutting back on runs. Reuters reports that Venezuela’s increasing instability, and the prospect of U.S. sanctions on the country’s heavy oil exports has increased the price of alternative medium and heavy crudes such as Mars (MRS) relative to their lighter sweeter counterparts, such as Louisiana Light Sweet (LLS) and light benchmarks such as WTI and Brent.
So the EU is setting up a way for Iran to get paid for oil in a way the U.S. can’t get their hands on the money and allow those who cross the Trump administration the ability to buy and pay for the crude. The oil market broke on the news, but it probably over reacted as it won’t really be operational for many months (see chart). Besides, many buyers of Iranian crude will still try to look elsewhere because they still don’t want to risk getting hit with retaliation by the Trump Administration. It was expected that the EU would offer this vehicle, but many buyers of Iranian crude are still looking for alternatives.
The current sanction waivers by the Trump Administration expire in March, and chances are that Japan, India and South Korea will not risk angering Washington unless it expressly extends the waivers. The Saudis are buying not selling. Reuters is reporting that Saudi Aramco, the world's top oil producer, is looking to acquire natural gas assets in the United States and are willing to spend "billions of dollars" there as it aims to become a global gas player, the company's CEO said on Tuesday.
Saudis want to be Nat Gas Player
Amin Nasser told Reuters in an interview that his company wants to increase its U.S. investments. It already owns Motiva, the biggest U.S. oil refinery. "We have agreed to bring an additional $10 billion in the Motiva refining complex," said the chief executive, attending the World Economic Forum in Davos, Switzerland. "We do have an appetite for additional investments in the United States. Aramco’s international gas team has been given an open platform to look at gas acquisitions along the whole supply chain. They have been given significant financial firepower – in the billions of dollars."
Aramco’s gas expansion strategy needs $150 billion of investment over the next decade as the company plans to increase output and later become a gas exporter, Nasser said in November. Aramco is pushing ahead with its conventional and unconventional gas exploration and production program to feed its fast-growing industries, freeing up more crude oil to export or turn into chemicals.
Investing in the U.S. gas and petrochemical sector has become "very lucrative" due to the large availability of ethane resources, Nasser said. "In gas, we will be one of the main global players," he added. Aramco is a major gas player but much of its production is used domestically. The firm plans to boost its gas production to 23 billion standard cubic feet (scf) per day over the next decade, from 14 billion scf now.
Saudi Arabia, the world's largest crude oil exporter, wants to diversify its energy mix and increase the share of its gas capacity to 70% from around 50% now in the coming decade.
