Global oil prices turned higher Tuesday as investors reacted to a move by the U.S. State Department to sanction the sale of Venezuelan crude to the United States in an effort to pressure President Nicolas Maduro to cede power to rival Juan Guaidó, whom international observers deem the rightful winner of that country's disputed elections.
U.S. Treasury Secretary Steven Mnuchin said proceeds of the sale of crude by state-backed PDVSA and its better-known U.S subsidiary, Citgo, would need to be placed in 'blocked' accounts that could not be accessed by the Maduro government. National Security Adviser John Bolton said the move would cost "Maduro and his cronies" around $11 billion a year.
"If the people in Venezuela want to continue to sell us oil, as long as the money goes into blocked accounts we will continue to take it, otherwise will we not be buying it," Mnuchin told reporters Monday.
Brent crude contracts for March delivery, the global benchmark, were marked $1.09 higher from their Monday close in New York and changing hands at $61.05 per barrel while WTI contracts for the same month were seen $1.04 higher at $53.03 per barrel.
Venezuela's annual crude output has fallen to just 1 million barrels per day -- compared to the more than 11.9 million barrels that are pumped each day in the United States -- as the country's economic crisis prevents key investments to tap the world's biggest proven oil reserves. U.S. oil exports account for around 40% of its total foreign sales. Energy Information Administration data shows the U.S. imported around 514 million barrels per day from Venezuela last year.
"This supply is key for a number of refiners in the US Gulf Coast, who blend it with domestic light oil, making an optimum blend for US refineries," said ING's head of commodity strategy Warren Patterson. "These refiners can switch to other origins for heavier crude oil though it may be fairly difficult for the time being."
"The obvious choice for the industry would be to turn increasingly to Canadian oil," Patterson noted. "However, as a result of mandated production cuts in Alberta, the additional supply from Canada is likely to be limited."
Oil market gains were capped somewhat by broader concerns over global economic growth and end demand for crude in key markets such as China, which saw industrial sector profits fall for two consecutive months at the end of last year as the economy recorded it weakest GDP figures in more than 2 decades.
At the same time global demand wanes, U.S. output is likely to top 12 million barrels per day this year, the Energy Information Administration said earlier this month, as the shale oil boom continues to add to swelling domestic stockpiles and push the United States to the top of the world production table.
The EIA said last month that production from the country's seven biggest shale areas, including the Permian Basin, will rise to around 8.1 million in early 2019. That's likely to add to overall U.S. output, which hit a record 11.9 million barrels per day in the week ending January 11.
That's helped drive energy sector gains over the past three months, with the S&P Oil & Gas Exploration & Production total return index rising 24.4% since December 24.
Crude's late December rebound, which has extended into January, has added more than 20% to prices since the Christmas Eve trough and lifted Chevron Corp. (CVX) - Get Report shares 12% higher, to $112.94 each, and rival Exxon Mobil (XOM) - Get Report 9% higher at $71.79 each.