Chavez Embargo Threat Fails To Roil Oil Markets

By Forrest Jones

Of DOW JONES NEWSWIRES

CARACAS (Dow Jones)--The international oil market largely shrugged off Venezuelan President Hugo Chavez's threats to cut crude oil sales to the U.S. if a diplomatic confrontation between Venezuela and Colombia, a Washington ally, escalates into a military conflict.

In the past, Chavez's threats of turning off the spigots in Venezuela have spooked markets and governments alike. But this time, analysts say, Chavez picked a bad time with spare capacity in the market and the end of the U.S. summer driving season in sight.

Venezuela on Thursday severed all diplomatic ties with Colombia after the government of President Alvaro Uribe charged that Chavez tolerated the presence of Colombian leftist guerrilla groups in Venezuelan territory. On Sunday, Chavez said that if Venezuela were attacked from Colombia or elsewhere, he would halt oil sales to the U.S.

The outgoing Uribe administration has maintained silence since Chavez severed ties, and officials of the incoming administration of Colombian President-elect Juan Manuel Santos, rather than talking of attacks, have been talking of restoring strained trade ties with Venezuela. Santos is scheduled to take office Aug. 7.

The U.S. denied having any plans for military action against Venezuela, Agence France-Presse reported Monday, quoting a State Department spokeswoman as saying the U.S. and Venezuela have a mutually beneficial energy relationship, "and we wish to see that relationship continue."

But even if Chavez's comments were aimed at rattling oil markets, they failed to do so Monday. Crude for September delivery settled flat at $78.98 a barrel on the New York Mercantile Exchange, again failing to close above $80, the top of its range of recent months.

Alan S. Hegburg, a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies, said there are an estimated five million barrels of surplus capacity in the oil market right now, which could be tapped to meet any potential shortfalls resulting from an embargo.

Also, the end of the driving season is near, and that means less demand for gasoline and therefore for oil. "That does put a damper on any fears in the marketplace," Hegburg said.

Even if Caracas does cease oil shipments to the U.S., others would find a way to fill in the gap. "High prices tend to bring more oil into the marketplace," he said, and in any case Venezuela will still remain a relevant player in the world's oil markets.

Venezuela has been seeking to cut crude sales to the U.S. in the past few years, and Chavez wants to increase oil sales to China, the world's second-biggest oil user after the U.S.

In recent years, Venezuela has been the fifth-biggest source of crude oil imports for the U.S., with much of it going to the refining network of Citgo, the refining and retail unit of Venezuela's state-owned oil company Petroleos de Venezuela SA, or PDVSA.

The South American country has accounted for up to 11.5% of annual U.S. crude imports since 2007, down from 12.9% during the 2004-2005 period and well below levels of the late 1990s, before Chavez took office. In 1997, Venezuela was the top source of U.S. crude imports, with a 17% share and volume of near 1.4 million barrels a day, according to the U.S. Energy Information Administration, the statistical and analytical arm of the Department of Energy.

In 2009, combined U.S. imports of crude oil and petroleum products from Venezuela averaged 1.078 million barrels a day, the lowest in any year since 1991.

The most recent figures from China, meanwhile, show that in the first six months of 2010, China's crude oil imports from Venezuela were up 168.3% from the same period a year ago, while China's imports of Venezuelan fuel oil were up 14.5% from the same period a year earlier, making it the third-biggest supplier.

Juan Pablo Fuentes, an economist at Moody's Economy.com in Philadelphia, doubts Venezuela is ready to break commercial ties with the U.S., especially with many Citgo refineries on the Gulf Coast configured to handle Venezuela's heavy crude.

"In reality, Venezuela has much more to lose than the U.S. if Chavez cuts oil exports," he said. "Venezuela would have to sell it on the spot market at a deep discount. Such action would result in substantial loss of revenues for Venezuela in the short term, which the country can hardly afford at this particular moment."

Citgo, meanwhile, would have to buy crude oil at a premium in the spot market. "It is a lose-lose proposition for PDVSA and Venezuela," Fuentes said.

From the U.S. point of view, the impact would be very minor, as Saudi Arabia or Kuwait would jump at the chance to fill the gap with their ample spare capacity.

-By Forrest Jones, Dow Jones Newswires; (58) 414 249 6821; forrest.jones@dowjones.com

(David Bird and Jerry A. DiColo contributed to this report.)

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