Surging Freight Costs Stall Venezuelan October Crude Sales

Sales of Venezuelan crude for October loading have stalled as sharply higher freight costs complicate negotiations between state oil company Petroleos de Venezuela SA (PDVSA) and prospective buyers, according to people familiar with the matter.

Shipping costs, an important component of delivered crude pricing, have more than doubled since the end of August. The increase is reducing the competitiveness of Venezuelan barrels for US refiners when compared with Canadian supply.

Buyers are being offered Venezuelan crude for October loading at a discount of about $14 per barrel to ICE Brent, the people said. However, freight costs for deliveries to the US Gulf Coast have risen to nearly $7 per barrel. This would leave the crude arriving in Texas and Louisiana at an effective discount of around $7 per barrel, which is at least $5 per barrel less favourable than competing Canadian supplies, according to the people.

Operational context

Commodity traders including Vitol Group and Trafigura Group have arrangements with US authorities to assist in marketing Venezuelan oil, although they are not obligated to purchase crude from PDVSA. Vitol and Trafigura declined to comment, while PDVSA did not immediately respond to requests for comment.

The situation could affect an important source of crude for US refiners. Venezuela has become one of the leading foreign suppliers to US fuel producers, behind Canada, following the removal of Nicolas Maduro.

Demand has also been weakened by outages at US refineries that process the heavy, sulphurous grades produced in Venezuela. Facilities affected include ExxonMobil’s Joliet refinery in Illinois and Valero Energy’s Port Arthur refinery in Texas.

As some traders and refiners opt against Venezuelan cargoes, unsold volumes may be placed into storage or bought by other participants seeking to enter the market. Trading Venezuelan oil requires substantial financial capacity because buyers must make advance payments into a US government-held account before receiving or potentially reselling cargoes. A 1 million-barrel cargo priced at $100 per barrel would require an upfront payment of $100 million.

PDVSA has broadened its customer base in recent months, conducting business with companies including BP, Phillips 66, Novum Energy Trading, George E. Warren, BGN and Indian refiner Reliance Industries. Whether this expanded buyer base can absorb cargoes affected by the rise in freight costs remains uncertain.