Oil markets are on edge as the U.S. escalates its seizures of sanctioned oil tankers off the coast of Venezuela, boarding a second tanker on Saturday before pursuing a third out into the Atlantic on Sunday. These actions, coming on the back of Trump’s announcement of a blockade of all sanctioned oil tankers entering and leaving Venezuela, have ratcheted up tensions between the two countries.
At the same time, the U.S. is continuing to strike boats that it claims are smuggling drugs in the eastern Pacific Ocean, with more than 100 people having been killed in these strikes since September.
In response to the seizures and broader geopolitical tensions, oil prices have rallied from near multi-year lows, with WTI rising toward $58 and Brent trading at around $62.
For physical oil markets, there are three factors driving that price increase, two of which are easily overlooked. The first, and most obvious, of these factors is the supply that is currently being taken off the market or could be taken off the market in the future. The second is associated with the type of oil that is being removed from the market. Finally, the way in which this oil is being removed from the market represents a broader structural risk for barrels of oil on the other side of the world.
On the supply side, there are an estimated 75 tankers idling off the coast of Venezuela, with roughly half of them on the U.S. sanctions list. Reuters claimed that roughly 11 million barrels of oil and fuel were stuck in Venezuelan waters after the U.S. seized the first oil tanker. If that oil continues to be disrupted, then Venezuela could ultimately be forced to shut in production as it will run out of storage. In a worst-case scenario, that could mean up to 500,000 barrels per day of oil being taken offline. While we remain far from that scenario, the supply side risk remains very real.
Then there is the type of oil. Venezuela produces a heavy, sour crude that is used for specific market segments and cannot simply be replaced by any other barrel on the market. Its crude feeds complex refineries, which are designed to convert it into middle distillates like diesel and jet fuel. When this type of crude is removed from the market, buyers have a limited choice of other producers they can turn to, with Canada, Mexico, and Russia being the most prominent. This phenomenon is similar to what happened when Russian barrels were first sanctioned following its invasion of Ukraine in 2022.
Finally, the way this oil is being taken off the market will not only impact barrels from Venezuela. The ‘shadow fleet’ that has been moving Venezuelan, Iranian, and Russian oil in recent years is made up of many of the same tankers. Seizures of these tankers, or even the fear of seizures, will add costs and friction to the movement of sanctioned oil around the world. While these flows of crude are, by definition, harder to track, they will eventually feed into global markets and alter the world’s oil balance.
As tensions between Venezuela and the U.S. continue to rise, it is a reminder of the complexity of global oil markets. Traders must first price the immediate impact of the barrels being taken offline by seizures, then consider the type of oil being removed, and, finally, look at the broader structural impact on the global oil trade.
In today’s oversupplied market, these disruptions can be relatively minimal at first, but the longer it goes on, there are multiple corners of the market that could see long-term impacts from these developments.
By Charles Kennedy for Oilprice.com
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