Oil Surges as U.S. Signals Trade Thaw, Venezuela Buyers Scramble

(Bloomberg) -- Oil prices jumped higher after U.S. Treasury Secretary Steven Mnuchin signaled a truce is possible in the trade war with China amid multiplying threats to global crude supplies.

Futures gained 2.5 percent in New York on Tuesday. The White House may remove tariffs on Chinese goods if Beijing presents sufficient concessions, Mnuchin told Fox Business Network. The remarks came just hours after the U.S. announced penalties aimed at ousting Venezuelan President Nicolas Maduro by strangling the country's crude exports.

In response to the sanctions, Valero Energy Corp. and other U.S. refiners began stocking up on Canadian crude that's similar in quality to Venezuelan oil, while Venezuela's state-run oil firm began asking for upfront payments from refineries.

“You're getting a little bit more of a security premium built into the price today," said John Kilduff, founding partner of hedge fund Again Capital LLC in New York. “As more of the details emerge of Maduro standing tough and trying to send the oil away from Gulf Coast refiners, and the Trump administration planning to freeze bank accounts and lock up opposition, the situation is on the boil."

With bitterly cold weather forecast for parts of the northern U.S., a boost in home heating oil demand was also supporting oil prices. Diesel futures rose 3.3 percent to settle at $1.8975 a gallon on Tuesday, enjoying their biggest advance in a month.

West Texas Intermediate crude for March delivery rose $1.32 to $53.31 at the close of trading on the New York Mercantile Exchange. That regained most of a loss Monday triggered by signs of slowing economic growth.

Brent for March settlement climbed $1.39 to $61.32 on the London-based ICE Futures Europe exchange, and was at an $8.01 premium to WTI.

U.S. President Donald Trump's campaign against oil producer Petroleos de Venezuela SA is intended to bolster the position of National Assembly leader Juan Guaido, whom Washington has recognized as Venezuela's interim president. Guaido said Monday he would take control of the country's accounts abroad and appoint new boards to PDVSA and its Houston-based subsidiary, Citgo Petroleum Corp.

Read also: Venezuela Needs to Dilute Its Oil. That's Going to Become Harder

The sanctions will see global oil flows rerouted. Refineries in China and India are the only ones that can process Venezuelan crude outside the U.S., Eurasia Group analyst Risa Grais-Targow wrote in a note. PDVSA will have to “deeply discount” its oil to displace Middle Eastern crudes in those countries, she wrote.

Venezuela, holder of the world's largest oil reserves, has already seen output fall to just above 1 million barrels a day from more than 3 million in the late 1990s. A recovery will take time, Goldman Sachs Group Inc. said.

“You've got to wait years before you see a game-changing increase out of Venezuela,'' Jeff Currie, Goldman's head of commodity research, said in a Bloomberg Television interview. “Your best-case scenario where you start to see an improved situation, an inflow of capital, is two years bare minimum.''

On trade, Mnuchin said “everything is on the table" ahead of the latest round of negotiations, set to begin Wednesday in Washington. Still, Trump's team remains divided, with hawks including Trade representative Robert Lighthizer seeking tougher terms from China, and Mnuchin and White House economic adviser Larry Kudlow prioritizing preserving U.S. growth.

--With assistance from Sharon Cho, Alex Longley, Michelle Kim and Saleha Mohsin.

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Carlos Caminada, Catherine Traywick

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