Petroleum and Politics: A Combustible Mix in Venezuela

U.S. environmental law requires that almost all of the high-density population centers from Boston to San Diego burn the less-polluting reformulated grade (RFG) of gasoline from March through October. Refineries have had trouble meeting demand in the past few years since RFG was mandated. This summer looks no different. Last week, the Energy Department said RFG stocks dipped by 10% to 33.3 million barrels as production fell. This occurred as inventories of the regular-grade unleaded gasoline rose.

Not Making the Grade

The volatile situation in Venezuela creates a lot of uncertainty and risk about supplies from that country. It also is taking a toll on supplies of refined RFG destined for the U.S. Normally, the country ships more than 2 million barrels of RFG a month. That's 6% of the current U.S. stockpile.

But for the past few months, PDVSA has consistently failed to get gasoline cargos certified as RFG. To move the refined product, PDVSA has resorted to selling cargoes as regular-grade unleaded gasoline rather than the cleaner-burning RFG grade.

Why? Thousands of PDVSA employees were fired and replaced by loyalists. Among the fired were employees skilled in production and quality control methods that helped ensure consistent product. Political loyalty does not guarantee high quality.

The unleaded gasoline contract traded at the New York Mercantile Exchange conforms to the specifications for RFG and should reflect the fundamental situation of tightening supplies. The June contract (HUM3:NYMEX) closed at a one-month high Friday and broke the bearish symmetry that had helped define its downtrend. Look for this contract to test resistance at 0.9350 and possibly 0.9750.