Sanctions Risks Upend Oil Prices in US Gulf Coast Market

The US Gulf Coast (USGC) market for heavy crude oil has been upended by geopolitical risks and market uncertainty, with sanctions on Russian and Venezuelan oil exports significantly impacting the availability and pricing of heavy crude. The recent decision by Mexico's state-owned energy company, Petróleos Mexicanos (Pemex), to cancel up to 436 Mb/d of crude exports for April has added to the uncertainty, as heavy crude-focused refineries in the USGC grapple with potential disruptions in their operations.

The reduced availability of heavy crude, coupled with the reinstatement of US sanctions on Venezuelan crude, has led to increased pricing in the USGC market. The lifting of sanctions on Venezuela's energy sector in October 2023 allowed for increased exports of the heavy, sour crude oil the country produces, which has had significant price increases in recent months. However, years of underinvestment and mismanagement of Venezuela's energy sector will likely limit crude oil production growth to less than 200,000 b/d by the end of 2024, according to the US EIA.

The doubling of tankers sanctioned for moving Russian barrels could serve as a major logistical headwind to post-invasion crude flows, further increasing the pricing of heavy crude in the USGC market. This uncertainty surrounding Mexican crude exports, combined with the potential reduction in heavy crude supplies from Venezuela, poses challenges for USGC refiners. These refineries are designed to process heavy crude, and the loss of these feedstocks could impact their profitability and operational efficiency.

To mitigate these risks and maintain a positive long-term investment outlook, oil and gas companies in the USGC region should consider diversifying their crude oil supply sources, investing in infrastructure to accommodate different crude qualities, and implementing robust risk management strategies. By doing so, these companies can better navigate the complex and uncertain geopolitical landscape and ensure the long-term sustainability of their operations.