Oil market maintains strength amid Venezuela turmoil

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The API reported late Wednesday afternoon that USA crude oil inventories rose by 6.6 million barrels for the week-ended January 18. The loss of Venezuelan barrels could drive up crude prices and squeeze American refineries that take in hundreds of thousand of barrels of Venezuelan oil each day.

Traditionally, Canada and Venezuela produce heavy oil that compete for space in the USA market.

Despite the increase in shale oil, most of it is domestically consumed and transported by trains and lorries which are much more fuel efficient than supertankers, thus depriving the Oil industry of an important demand driver: the number of vessels carrying Venezuelan crude oil has declined by 20% in the past two years. Worldwide benchmark Brent crude, which is less affected by Venezuela than the US grade, slipped 5 cents to $61.09 on the London-based ICE Futures Europe exchange and commanded a $7.96 premium to WTI.

Venezuela's opposition leader Juan Guaido declared himself interim president on Wednesday, winning backing from Washington and parts of Latin America and prompting socialist Nicolas Maduro, the country's leader since 2013, to break relations with the United States.

Furthermore, there are also worries that the Trump administration could impose new sanctions on Venezuela's oil sector as soon as this week if the political situation in the country deteriorates further.

Since the USA imposed financial sanctions against Venezuela and PDVSA in 2017, Royal Dutch shell Plc and Philips 66 haven't processed Venezuelan crude.

In 2017, the most recent year that data was available, Venezuela accounted for about 6 percent of US crude imports.

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Refining output pulled back in the most recent week after a period where refineries have been running at high capacity to meet seasonal needs for diesel and heating oil and to feed export demand. Prices could plunge to $48.50 if this support level fails. They've come to rely on the cheap and extra heavy crude found in Venezuela.

Refineries along the Gulf Coast are set up to process heavy crude and they may end up spending more money buying it elsewhere. The primary importers of Venezuelan crude are Citgo, Valero Energy, and Chevron.

When production cuts and trade talks are out of sight, US crude inventories will matter.

The biggest USA importers of Venezuelan crude a year ago were Citgo, Valero and Chevron, according to Rystad Energy.

"While the current state of affairs is price constructive for oil, the market is hesitant when it comes to the global outlook", Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, told the Reuters Global Oil Forum. Any major piece of news regarding further production slowdowns is expected to have more of a psychological rather than an actual effect on Oil, thus making the impact transitory.

Analysts also pointed to a surprise increase in USA crude stocks after refineries cut output, according to industry data. While a cutoff of Venezuelan imports would raise prices for refiners in the Gulf Coast, the market is competitive enough that producers are unlikely to pass along much of the cost to consumers, experts said.

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