Venezuela May Cut US Oil Supply, A Reason For Crude To Rally

Venezuela President Hugo Chavez has once again threatened to cut the South American country’s supply of oil to the US, according to a number of news reports. Venezuela has been charged with harboring rebels from neighboring Columbia, which has threatened to retaliate. Columbia is a major ally of the U.S. in the region.

“We wouldn’t send another drop of oil to its refineries, not a single drop more!” Chavez shouted, adding that the United States is “the big one to blame for all the tension in this part of the world, the AP reports.

A rise in tensions in South America should cause crude oil prices to rise. The CIA Factbook ranks Venezuela 7th among all nations in crude reserves, just behind Kuwait and ahead of the United Arab Emirates.

Chavez might move to divert shipments away from nations that have refineries that ship to the US . China is a major importer of Columbian crude and could increase its purchases.Oil sold for under $70 in May but has moved back near $80 as concerns about increased demand from the US, China, and other large consumers has risen. Oil traders assume that an improving global economy and an interruption of supply from the Gulf will keep prices high.

Chavez’s threats may mean little. Refiners that use Venezuelan crude usually refine oil from regions around the world. It would be hard for the South American nation to pinpoint where all the gas and other petroleum by-products from its reserves are used. The US could tap supplies from other refiners to offset the flow from Venezuela if Chavez could come up with a method to block shipments to refineries that do business with America.

It is a long shot that Chavez can control the vast infrastructure that handles  the flow of his nation’s oil as it moves around the world from production to shipment to refinery to end product. And, with Venezuela in economic distress, he cannot afford to make good on his threat anyway.

Douglas A. McIntyre