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Venezuela's Imminent Oil Collapse

Written by Keith Kohl
Posted March 13, 2019

Forget U.S. sanctions on Venezuela.

There’s absolutely nothing President Trump can do that can harm Venezuela’s oil industry more than it already has been.

The crippling blackouts that have gripped much of Venezuela for nearly a week have been a catastrophe waiting to happen.

This crisis was inevitable, and make no mistake: There’s no clear solution ahead.

The issue surrounds the country’s primary hydroelectric plant. Reuters reported that the cause of the problem with this power plant is still unknown, but we can certainly rule out any quick fixes.

At last count, 16 states, or roughly 70% of the country, were completely without power.

The horrific effects of this outage go beyond spoiling meat and looters plundering local stores for whatever food they can scrape away with.

Hospitals are forced to treat patients without electricity, and the death toll is rising.

Truth is, the situation is far, far worse than anyone can imagine.

Sour Oil, Heavy Profits

The blackouts also mean Venezuela’s beleaguered oil industry is on the verge of collapse. The country’s main export terminal and largest processing complex are completely shut down.

Is this blackout the final nail in the coffin that we’ve seen coming for the last two years?

The complete loss of Venezuelan exports wasn’t unforeseen, but there’s an interesting dynamic going on if you look a little closer.

They say crisis breeds opportunity, and it certainly does in this case.

Today, Venezuela only has three main oil buyers: China, India, and the U.S.

Last December, Venezuela’s oil output had fallen to 1.2 million barrels per day. Approximately 500,000 barrels per day of that supply was exported to the United States, or about 41% of its total crude exports.

Due to the fact that Venezuela’s crude oil is of extremely poor quality, it’s perfect for the heavy oil refiners that lie along the coast of the Gulf of Mexico. You see, many of the refineries down in the Gulf Coast (PADD 3) are geared to handle heavier crudes.

In fact, there are about 56 operable refiners located in PADD 3, and last year the district accounted for over half of the country’s refining capacity.

What do you think will happen when Venezuela’s exports hit zero?

Those Gulf refiners don’t have many options, especially considering the flood of light, sweet crude that has made up virtually all of U.S. production growth since 2008.

Now enter the Canadian oil sands.

Ever since the shale boom exploded onto the scene, Canadian oil producers have been under immense pressure.

I’ll note that throughout the shale boom, Canadian oil exports to the U.S. have grown to over 3.6 million barrels per day — nearly 1.5 million barrels per day MORE than all of OPEC!

Are things finally turning around for the oil sands?

Well, things are certainly getting better now that Venezuela is quickly falling out of the picture.

Since last November, the price for Western Canadian Select (the heavy blended crude oil made up of bitumen from the oil sands area and synthetic crude) has exploded 253% higher!

As Venezuela’s future exports fall into chaos, heavy Canadian crude will become much more attractive for heavy refiners in the U.S., which is enough for individual investors like us to take a second look at those battered-down oil sands producers ready to make a comeback.

Some have even started to rally.

Take a second look at major players in the oil sands, like Cenovus Energy (NYSE: CVE). Shares of Cenovus have run more than 30% higher during the first two months of 2019.

And as the WCS–WTI price differential continues to narrow, you can bet more bitumen from Alberta will make its way to the Gulf Coast.

That, of course, is assuming those oil sands producers can overcome one serious hurdle... but we’ll talk more about that next week.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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