The recent US seizure of a tanker off Venezuela’s coast will have a limited immediate effect on the Chinese market.
A significant amount of Venezuelan oil was already headed to China with the country having a current surplus of crude in storage amid weaker domestic demand, according to a Reuters report.
Exports from the South American producer have dropped significantly.
This decline follows the US seizure of a tanker off Venezuela’s coast and the imposition of new sanctions on shipping companies and vessels involved in trade with the country.
The possibility of additional seizures is discouraging further shipments.
As the world’s leading oil importer, China is the primary purchaser of Venezuelan crude, although this supply constitutes only about 4% of China’s total crude imports.
Imports likely to rise
China is anticipated to see an increase in Venezuelan oil imports this month and next.
This projection is based on a recent surge in exports over the past four months, coupled with significant discounts on the crude, according to the news report.
These factors make the oil particularly appealing to independent refiners in China, the primary purchasers, despite the fact that delivery can take up to 60 days.
“The surge in Venezuela flow to China increased in anticipation of sanctions,” Mukesh Sahdev, founder & CEO of energy consultancy XAnalysts, was quoted in the Reuters report.
He also predicted the consequences of the tanker seizure—and any subsequent sanctions or seizures—are expected to materialise in February.
Analysts are projecting a significant increase in the arrival of Merey crude, Venezuela’s primary export grade, in China for December.
Tanker tracker Vortexa estimates these arrivals will surpass 600,000 barrels per day.
Kpler’s initial projection is even higher, at 664,000 bpd, a figure subject to revision, which they note would set a new record.
Rising volume in floating storage
Increased deliveries from Venezuela, along with substantial shipments from other sanctioned producers like Russia and Iran, have contributed to a growing surplus of oil, which is increasingly being held in floating storage across Asia.
According to Kpler data, Asian floating oil storage escalated to 71 million barrels last week, a significant jump from 53 million barrels recorded at the end of October and 33 million barrels in early September.
This substantial increase in storage has exacerbated the pressure on Venezuelan crude, leading to deeper discounts.
According to Vortexa analyst Emma Li, at least a third of the estimated 650,000 barrels per day (bpd) of Merey oil discharged in China during November is still seeking end-buyers.
The immediate concern about supply shortages has been mitigated by abundant crude oil available from Russia and Iran, as well as Venezuelan barrels heading to China, according to the report.
However, one trading manager from a frequent buyer noted that it is too soon to fully assess the impact of the seizure on oil supplies.
As a precautionary measure against geopolitical risks, the company has begun purchasing “small amounts” of Canadian TMX crude.
Teapot refineries purchase Venezuelan crude
For the Chinese buyers of Venezuelan crude—predominantly independent “teapot” refiners—the Merey grade, though representing a small overall market share, is important.
Finding immediate, cost-effective alternatives to this specific type of oil would be difficult for these buyers.
According to the report, only approximately six of these teapot refiners regularly purchase Venezuelan oil.
However, these facilities face potential costs from supply disruptions and the need to source alternative supplies.
Demand for Merey in China is currently at a seasonal trough.
This is reflected in the Shanghai Futures Exchange, where the most-traded bitumen futures have been on a downward trend since late October.
Although the contract has seen minor gains over the last three sessions since Thursday, the cumulative increase remains less than 1%.
Merey, an extra-heavy crude grade, is significantly more economical than comparable grades like Castilla from Colombia and Access Western Blend from Canada.
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