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Schork Oil Outlook: Hugo Chavez vs. China's Red Capitalists

No honor among comrades...

What’s a Socialist to do when a Communist goes all capitalist on them?

According to the latest revelation from WikiLeaks and published by the Spanish newspaper "El Pais," an official (name redacted) from Venezuela’s state-owned oil company, Petróleos de Venezuela (PdVSA), complained to visiting U.S. economic officers last February that China was profiting handsomely from a sweetheart deal between Caracas and Beijing.

First, some background. Perhaps you have not noticed, but Venezuelan President Hugo Chavez, does not like the United States. (See: Venezuela's Chavez Moves Again to Rule By Decree) There have been anecdotal reports since 2003 (i.e., since Chavez purged commercial talent at PdVSA and replaced them with political lackeys) that he has diverted cargoes destined for the U.S Gulf Coast (GoM) towards China.

Given that China, unlike the U.S., lacks downstream capacity to refine heavy Venezuelan oil, the obvious question has always been… what was in it for the Chinese? As we have just learned from WikiLeaks, apparently a lot.

For instance, a round trip from Venezuela’s export terminals to U.S. GoM ports is around 3,600 miles as opposed to 17,000 miles (via the Panama Canal) to China.

"News that Chavez is getting as little as $5 a barrel from the Chinese when U.S. refiners are willing to pay over $67 a barrel f.o.b. for Venezuelan oil is amusing." -The Schork Report, Stephen Schork

The greater distance means that Chinese refiners (who cannot refine this oil in the first place) have to pay more to compensate for the longer voyage… assuming Chavez is charging them fair market value.

Therefore, the market consensus has always been that Chavez was willing (and able) to sell his country’s oil at below market value in order to project his political ideology afar, at the expense of the Venezuelan people’s economic wellbeing.

In this vein, news that Chavez is getting as little as $5 a barrel from the Chinese when U.S. refiners are willing to pay over $67 a barrel f.o.b. for Venezuelan oil is amusing.

What is absolutely hilarious is the revelation from the WikiLeaks cables that PdVSA officials are aghast that the Chinese are taking $5 Venezuelan oil and selling it to the U.S. for a profit.

As we track the path in today’s issue of The Schork Report, Chavez is diverting his oil from the U.S. GoM (PADD III) to the U.S. West Coast (PADD V)… and he is picking up the Panama Canal toll to boot.

That is poetic justice.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.