ADD VENEZUELA TENDER AS FACTOR IN SPREAD STRENGTH

Reuters reports that the PDVSA awarded an 8 million barrel tender for light sweet crude to BP and China Oil:https://au.news.yahoo.com/world/a/31139773/bp-china-oil-said-to-have-won-pdvsas-crude-tender-platts/    PDVSA, Venezuela’s state oil company , was forced to double the size of their purchases of light sweet crude (to be used as a diluent for their heavy, sour crude production). PDVSA has had  continuing trouble producing the light sweets, hence the size of this tender.  Some detail from the Reuters piece follows:      “China Oil, a unit of state-run China National Petroleum Corporation (CNPC), must deliver 2.7 million barrels of U.S. WTI crude in April at PDVSA’s terminal in Curacao at a price of NYMEX WTI plus $1.58 per barrel, according to a Platts report published earlier on Friday.”

“For its part, BP must discharge 2.7 million barrels of WTI in April at a price of $2.39 per barrel over NYMEX WTI, and 2.7 million barrels of Nigeria’s Qua Iboe crude in May-June at NYMEX futures plus $2.00 per barrel.”

Assuming the April dates are accurate for the WTI piece of the tender(we are not sure of the logistics on that one nor of the exact crude specs),  it would mean 5.4 million barrels of light domestic sweet would be exported from the US Gulf to Venezuelan ports for April (or in all probability into May). We would also assume that the buy hedges had to be placed in the front months of WTI and along with the producer selling into the back months was a key factor in the tightening of the curve. As these hedges are lifted and producer selling abates somewhat one would expect these spreads to pullback and perhaps pullback sharply. The extent of the WTI spread rally can be seen very clearly in the May/December spread chart below courtesy of Bar Chart. This seven month spread rallied from -610 on February 9th to -281 close on Friday. Significantly the spread went vertical last week rallying almost 1.00 dollar per barrel during the week. Clearly there are plenty of cross currents in these spread values, but this tender we believe was one of them.