"Sanctions are already having a severe impact on oil supplies," said Ryan Fitzmaurice, Rabobank's energy strategist, in a report to clients last week.
Heavy crude oil is usually cheaper than light crude oil, but the demand for it has become so strong that it suddenly comes at a premium to lighter barrels. Citgo, Chevron and Valero's US Gulf Coast refinery blends heavy crude oil with lighter barrels found in US shale oil fields to produce gasoline, diesel and jet fuel.
The Venezuelan government, which relies on oil exports for 90% of its turnover, is looking for other customers for its crude oil. Venezuelan Oil Minister Manuel Quevedo traveled to India last week to seek obvious support.
"They are trying to find buyers for their crude oil," said Matt Smith, director of exploration at ClipperData.
Double strike for Venezuela
The country's oil industry, its main source of income, is falling sharply. Venezuela's oil production dropped from 2.4 million barrels a day in 2015 to only 1.34 million by the end of 2018, according to research firm Rystad Energy.
"This free fall is about to be broadcasted by 2019," wrote Rystad analyst in a recent report.
US sanctions are a double strike for Venezuela.
Not only was Venezuela the first customer, but also the country's main source of naphtha, the liquid hydrocarbon mixture used to dilute crude oil. Without them, Venezuela's heavy crude oil can not be easily transported. Rystad Energy predicts that some operators in Venezuela will run out of diluents by March.
The US oil price has risen by nearly 5% since the sanctions were announced. Brent, the global benchmark, gained 8%. But the analysts do not believe that Venezuela is the main reason for the start of crude oil. Instead, they point to OPEC's lower-than-expected production cuts, the turmoil in Libya, and the bullish tone on the global financial markets amid the waning recession.
"The rally has been largely driven by the cutbacks in OPEC-Plus," said Artyom Tchen, Venezuelan expert at Rystad Energy. "Most of the Venezuelan risk was priced in long ago."
Saudi Arabia, another major source of heavy crude oil, has been particularly aggressive in reducing supplies to the United States. Analysts say this is because the US's transparent and timely data make these cuts immediately clear to oil traders.
"They get the most money there," Smith said.
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US Gulf Coast refiners are looking for ways to replace Venezuela's barrels.
"We are working actively to ensure we continue to deliver world-class fuels and lubricants to our customers in the United States," said Chevron in a statement to CNN Business.
"We hope to find a solution to the crisis immediately, not just for the benefit of the crude oil markets but also for the benefit of the people of Venezuela, "said Gary Simmons, senior vice president of supply and analysts, reporting on international business on January 31.
Western oil companies that have worked with PDVA have been caught in the middle.
Chevron said that its activities in Venezuela will continue and that the company "is committed to the country's energy development in compliance with all applicable laws and regulations".
Venezuela's Free Fall Continues
The oil world is preparing for the historic collapse of Venezuelan oil production, which is deepening due to the crisis and US sanctions.
"Maduro is unlikely to get by without a fight – setting the stage for a long-running power struggle that is likely to lead to sustained declines in production if history is a guide," said Fitzmaurice. "We are still very much condemned that prices are undervalued given the current supply uncertainty"
Rystad Energy expects Venezuelan oil production to drop from 1.34 million barrels per day in 2018 to just 1 million barrels in If Venezuela can not compensate for the impact of US sanctions and ensure new funding, production could drop to 680,000 barrels per day in 2020, according to Rystad.
It's an amazing drop as Venezuela has more oil reserves than any other nation on earth.