<PAGE>   1
                     SECURITIES AND EXCHANGE COMMISSION
                          Washington, D. C.   20549

                                  FORM 10-Q


[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
             For the Quarterly period Ended  September 30, 1996
                                             ------------------

                                     OR

[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
         For the transition period from ____________ to ____________


Commission file number 1-14380
                       -------


                         CITGO PETROLEUM CORPORATION
                         ---------------------------
           (Exact name of registrant as specified in its charter)


        DELAWARE                                          73-1173881
        --------                                          ----------
  (State or other jurisdiction of         (I. R. S. Employer Identification No.)
   incorporation or organization)

      ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA  74136
      ----------------------------------------------------------------
        (Address of principal executive office)            (Zip Code)


                               (918) 495-4000
                               --------------
            (Registrant's telephone number, including area code)


                                    N. A.
--------------------------------------------------------------------------------
            (Former name, former address and former fiscal year,
                        if changed since last report)


                 Indicate by check mark whether the registrant (1) has
      filed all reports required to be filed by Section 13 or 15(d) of the
      Securities Exchange Act of 1934 during the preceding 12 months (or
      for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements 
      for the past 90 days.     Yes   X     No  ___

                 Indicate the number of shares outstanding of each of the
       issuer's classes of common stock, as of the latest practicable
       date.


         Common Stock, $1.00 par value                   1,000
         -----------------------------                   -----
                  (Class)                    (outstanding at October 31, 1996)
<PAGE>   2
CITGO PETROLEUM CORPORATION

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                 PAGE
                                                                                                 ----
<S>                                                                                              <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................2

PART I.   FINANCIAL INFORMATION
          
 Item 1.  Financial Statements (Unaudited)
          
          Condensed Consolidated Balance Sheets - September 30, 1996 and December 31, 1995........3
          
          Condensed Consolidated Statements of Income - Three-Month Periods Ended
            September 30, 1996 and 1995 and Nine-Month Periods Ended September 30,
                   1996 and 1995..................................................................4
          
          Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended
            September 30, 1996 and 1995...........................................................5
          
          Notes to the Condensed Consolidated Financial Statements............................. 6 - 10
          
 Item 2.  Management's Discussion and Analysis of Financial Condition and
            Results of Operations..............................................................11 - 18
          
PART II.   OTHER INFORMATION
          
Item 1.  Legal Proceedings
          
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
          
SIGNATURES....................................................................................... 20
</TABLE>





                                      1
<PAGE>   3
                 FACTORS AFFECTING FORWARD LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 31E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the caption  "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to capital expenditures and investments related to environmental
compliance and strategic planning, purchasing patterns of refined products and
capital resources available to the Company (as defined herein) are forward
looking statements.  In addition, when used in this document, the words
"anticipate," "estimate," "prospect" and similar expressions are used to
identify forward looking statements.  Such statements are subject to certain
risks and uncertainties, such as increased inflation, continued access to
capital markets and commercial bank financing on favorable terms, increases in
regulatory burdens, changes in prices or demand for the Company's products as a
result of competitive actions or economic factors and changes in the cost of
crude oil, feedstocks, blending components or refined products.  Such
statements are also subject to the risks of increased costs in related
technologies and such technologies producing anticipated results.  Should one
or more of these risks or uncertainties, among others, materialize, actual
results may vary materially from those estimated, anticipated or projected.
Although CITGO believes that the expectations reflected by such forward looking
statements are reasonable based on information currently available to the
Company, no assurances can be given that such expectations will prove to have
been correct.





                                      2
<PAGE>   4
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>                                      
<CAPTION>                                    
                                                SEPTEMBER 30,       DECEMBER 31, 
                                                     1996                 1995     
                                                 (UNAUDITED)      
                                                --------------      -------------
<S>                                             <C>                 <C>       
ASSETS                                                                              
                                                                                    
CURRENT ASSETS:                                                                     
  Cash and cash equivalents                     $     23,506        $     19,863
  Accounts receivable                                926,320             817,990
  Due from affiliates                                 27,568              28,991
  Inventories                                        897,615             785,275
  Prepaid expenses and other                          65,913              30,199
                                                ------------        ------------
            Total current assets                   1,940,922           1,682,318
                                                                                
PROPERTY, PLANT AND EQUIPMENT - Net                2,704,882           2,491,849
                                                                                
RESTRICTED CASH                                       12,028               1,258
                                                                                
INVESTMENTS IN AFFILIATES                            757,593             650,360
                                                                                
OTHER ASSETS                                         127,235              97,793
                                                ------------        ------------
                                                $  5,542,660        $  4,923,578
                                                ============        ============
                                                                                
LIABILITIES AND SHAREHOLDER'S EQUITY                                            
                                                                                
CURRENT LIABILITIES:                                                            
  Short-term bank loans                         $     86,000        $     25,000
  Accounts payable                                   473,531             438,172
  Payables to affiliates                             223,789             176,800
  Taxes other than income                            159,497             173,915
  Other                                              242,017             224,077
  Current portion of long-term debt                   95,240              95,240
  Current portion of capital lease obligation         11,150              10,557
                                                ------------        ------------
                                                                                
            Total current liabilities              1,291,224           1,143,761
                                                                                
LONG-TERM DEBT                                     1,466,554           1,159,263
                                                                                
CAPITAL LEASE OBLIGATION                             135,776             141,504
                                                                                
POSTRETIREMENT BENEFITS OTHER THAN                   179,523             167,905
PENSIONS                                                                        
                                                                                
OTHER NONCURRENT LIABILITIES                         191,356             186,376
                                                                                
DEFERRED INCOME TAXES                                427,217             367,644
                                                                                
MINORITY INTEREST                                     27,071              25,618
                                                                                
COMMITMENTS AND CONTINGENCIES                                                   
                                                                                
SHAREHOLDER'S EQUITY:                                                           
  Common stock - $1.00 par value, 1,000                    1                   1
  shares authorized, issued and outstanding                                       
  Additional capital                               1,235,009           1,222,345
  Retained earnings                                  588,929             509,161
                                                ------------        ------------
            Total shareholder's equity             1,823,939           1,731,507
                                                ------------        ------------
                                                                                
                                                $  5,542,660        $  4,923,578
                                                ============        ============
</TABLE>                                                             

See notes to condensed consolidated financial statements.






                                      3
<PAGE>   5

CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>                                                                          
                                                          THREE MONTHS                         NINE MONTHS         
                                                       ENDED SEPTEMBER 30,                 ENDED SEPTEMBER 30,     
                                                       -------------------                 -------------------     
                                                     1996              1995              1996               1995   
                                                     ----              ----              ----               ----   
<S>                                             <C>                <C>               <C>               <C>
REVENUES:                                                                                            
  Net sales                                     $ 3,258,006        $ 2,649,238       $ 9,071,078       $ 7,860,553
  Sales to affiliates                                52,450             58,245           180,569           156,556
                                                -----------        -----------       -----------       -----------
                                                  3,310,456          2,707,483         9,251,647         8,017,109
  Equity in earnings (losses) of affiliates           3,891              8,696            19,227            25,826
  Other income (expense) - net                         (456)              (160)           (1,540)            2,190
                                                -----------        -----------       -----------       -----------
                                                  3,313,891          2,716,019         9,269,334         8,045,125
                                                                                                                  
COST OF SALES AND EXPENSES:                                                                                       
  Cost of sales and operating expenses            3,186,413          2,596,525         8,936,804         7,683,709
   (including purchases of $960,193,                                                                              
   $835,427,  $2,842,997  and                                                                                     
   $2,462,068 from affiliates)                                                                                   
  Selling, general and administrative                                                                             
   expenses                                          44,562             42,084           120,970           115,048
  Interest expense, excluding capital lease          25,306             23,210            70,805            66,720
  Capital lease interest charge                       4,133              4,413            12,686            13,499
  Minority interest                                     (77)               443             1,453             1,259
                                                -----------        -----------       -----------       -----------
                                                                                                                  
                                                  3,260,337          2,666,675         9,142,718         7,880,235
                                                -----------        -----------       -----------       -----------
                                                                                                                  
                                                                                                                  
INCOME BEFORE INCOME TAXES                                                                                        
 AND EXTRAORDINARY ITEM                              53,554             49,344           126,616           164,890
                                                                                                                  
INCOME TAXES                                         19,815             18,257            46,848            60,899
                                                -----------        -----------       -----------       -----------
                                                                                                                  
INCOME BEFORE EXTRAORDI-                                                                                          
 NARY ITEM                                           33,739             31,087            79,768           103,991
                                                                                                                  
EXTRAORDINARY GAIN, early                                                                                         
 extinguishment of debt, net of related                                                                           
 income taxes of $2,160                                 -                  -                 -               3,380
                                                -----------        -----------       -----------       -----------
                                                                                                                  
NET INCOME                                      $    33,739        $    31,087       $    79,768       $   107,371
                                                ===========        ===========       ===========       ===========
</TABLE>

See notes to condensed consolidated financial statements.




                                      4

<PAGE>   6

CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>                                                                     
-------------------------------------------------------------------------------------------------------
                                                                                  NINE MONTHS              
                                                                               ENDED SEPTEMBER 30,         
                                                                               -------------------         
                                                                              1996              1995       
                                                                              ----              ----       
<S>                                                                       <C>               <C>            
CASH FLOWS FROM OPERATING ACTIVITIES                                      $    73,055       $   190,651    
                                                                          -----------       -----------    
                                                                                                           
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      
  Capital expenditures                                                       (318,343)         (207,839)   
  Proceeds from sales of property, plant and equipment                          3,696               810    
 (Increase) decrease in restricted cash                                       (10,770)           18,038    
  Investments in LYONDELL-CITGO Refining Company Ltd.                        (106,361)         (147,768)   
  Investment in subsidiary and advances to other affiliates                     -               (47,805)   
                                                                          -----------       -----------    
            Net cash used in investing activities                            (431,778)         (384,564)   
                                                                          -----------       -----------    
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                      
  Cash infusion from parent                                                     -                15,000    
  Net proceeds from short-term bank loans                                      61,000            65,000    
  Net payments on revolving bank loans                                        (10,000)          (35,000)   
  Payments on term bank loan                                                  (22,059)            -        
  Proceeds from master shelf agreement                                          -               100,000    
  Proceeds from issuance of senior notes                                      199,694           -          
  Proceeds from issuance of taxable bonds                                     120,000           -          
  Proceeds from issuance of tax-exempt bonds                                   25,000            90,700    
  Payments on tax-exempt bonds                                                  -               (40,237)   
  Payments of capital lease obligations                                        (5,912)           (4,780)   
  (Repayments) borrowings on other debt                                        (5,357)            4,183    
                                                                          -----------       -----------    
            Net cash provided by financing activities                         362,366           194,866    
                                                                          -----------       -----------    
                                                                                                           
INCREASE IN CASH AND CASH EQUIVALENTS                                           3,643               953    
                                                                                                           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 19,863            16,271    
                                                                          -----------       -----------    
                                                                                                           
CASH AND CASH EQUIVALENTS, END OF PERIOD                                  $    23,506       $    17,224    
                                                                          ===========       ===========    
                                                                                                           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                          
  Cash paid during the period for:                                                                         
        Interest, net of amounts capitalized                              $    73,857       $    67,430    
                                                                          ===========       ===========    
        Income taxes, net of refunds of $3,449 and $3,682
           in 1996 and 1995                                               $    27,635       $    44,033    
                                                                          ===========       ===========    
                                                                                                           
                                                                                                           
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:                                                     
                                                                                                           
  Noncash capital contribution from parent (PDV America)                  $    12,664       $      -       
                                                                          ===========       ===========    
</TABLE> 

See notes to condensed consolidated financial statements.




                                      5 
<PAGE>   7
CITGO PETROLEUM CORPORATION 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)                                            
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
--------------------------------------------------------------------------------

1.    BASIS OF PRESENTATION
      The financial information for CITGO Petroleum Corporation ("CITGO" or
      "the Company") subsequent to December 31, 1995 and with respect to the
      interim three and nine-month periods ended September 30, 1996 and 1995 is
      unaudited.  In the opinion of management, such interim information
      contains all adjustments, consisting only of normal recurring
      adjustments, necessary for a fair presentation of the results of such
      periods.  The results of operations for the three-month and nine-month
      periods ended September 30, 1996 and 1995 are not necessarily indicative
      of the results to be expected for the full year.  Reference is made to
      the audited consolidated financial statements and notes thereto for the
      fiscal years ended December 31, 1995 and 1994 included in CITGO's General
      Form for Registration of Securities on Form 10, as amended, for
      additional information.  

      Effective January 1, 1996, CITGO adopted Statement of Financial Accounting
      Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
      for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").  SFAS No. 121
      establishes the accounting for the impairment of long-lived assets,
      certain identifiable intangibles and goodwill related to those assets to
      be held and used and the accounting for long-lived assets and certain
      identifiable intangibles to be disposed of.  The adoption of SFAS No. 121
      did not have a material effect on the consolidated financial position or
      results of operations of CITGO.  

      The condensed consolidated financial statements include the accounts of
      CITGO, its wholly owned subsidiaries, and Cit-Con Oil Corporation, which
      is 65 percent owned by CITGO (collectively, "the Company").

2.    INVENTORIES
      Inventories, primarily at LIFO, consist of the following:

<TABLE>
<CAPTION>
                                         SEPTEMBER 30,     DECEMBER 31,
                                              1996             1995
                                          (UNAUDITED)
                                         --------------   ---------------
                                                 (000'S OMITTED)
   <S>                                   <C>               <C>
   Refined products                      $     700,083     $     588,696
   Crude oil                                   149,906           149,414
   Materials and supplies                       47,626            47,165 
                                         -------------     -------------
                                 
                                         $     897,615     $     785,275  
                                         =============     =============
</TABLE>                         






                                      6

<PAGE>   8

3.    LONG-TERM DEBT

<TABLE>
<CAPTION>                                                     
                                                                        SEPTEMBER 30,      DECEMBER 31,     
                                                                           1996               1995          
                                                                        (UNAUDITED)                         
                                                                        ---------------------------------   
                                                                                (000'S OMITTED)             
          <S>                                                           <C>              <C>                
          Revolving bank loan                                           $  280,000       $   290,000        
          Term bank loan                                                    95,588           117,647        
          7.875% Senior Notes $200 million face amount due 2006            199,707               -          
                                                                                                            
          Private Placement:                                                                                
            8.75% Series A Senior Notes due 1998                             56,250           56,250        
            9.03% Series B Senior Notes due 2001                            171,429          171,429        
            9.30% Series C Senior Notes due 2006                            125,000          125,000        
                                                                                                            
          Master Shelf Agreement:                                                                           
            8.55% Senior Notes due 2002                                      25,000           25,000        
            8.68% Senior Notes due 2003                                      50,000           50,000        
            7.29% Senior Notes due 2004                                      20,000           20,000        
            8.59% Senior Notes due 2006                                      40,000           40,000        
            8.94% Senior Notes due 2007                                      50,000           50,000        
            7.17% Senior Notes due 2008                                      25,000           25,000        
            7.22% Senior Notes due 2009                                      50,000           50,000        
                                                                                                            
          Tax Exempt Bonds:                                                                                 
            Pollution control revenue bonds due 2004                         15,800           15,800        
            Port facilities revenue bonds due 2007                           11,800           11,800        
            Louisiana wastewater facility revenue bonds due 2023              3,020            3,020        
            Louisiana wastewater facility revenue bonds due 2024             20,000           20,000        
            Louisiana wastewater facility revenue bonds due 2025             40,700           40,700        
            Gulf Coast solid waste facility revenue bonds due 2025           50,000           50,000        
            Gulf Coast solid waste facility revenue bonds due 2026           50,000           50,000        
            Port of Corpus Christi sewage and solid waste disposal                                          
             revenue bonds due 2026                                          25,000             -           
                                                                                                            
          Taxable Louisiana wastewater facility revenue                                                     
            bonds due 2026                                                  120,000             -           
                                                                                                            
          Cit-Con bank credit agreement                                      37,500           42,857        
                                                                        -----------      -----------        
                                                                          1,561,794        1,254,503        
          Less current portion of long-term debt                            (95,240)         (95,240)       
                                                                        -----------      -----------        
                                                                        $ 1,466,554      $ 1,159,263        
                                                                        ===========      ===========        
</TABLE>
        
        


      In March 1996, CITGO issued $25 million of Port of Corpus Christi Sewage
      and Solid Waste Disposal Revenue Bonds due in the year 2026.

      In April 1996, CITGO filed a registration statement with the Securities
      and Exchange Commission relating to the shelf registration of $600
      million of debt securities that may be offered and sold from time to
      time.  In May 1996, the registration became effective and CITGO sold a
      tranche of debt securities with an aggregate offering price of $200
      million.  The Company used the net proceeds from the sale of the notes
      for working capital and the





                                      7
<PAGE>   9
      repayment of borrowings under the Company's revolving credit facility.
      This repayment will not permanently reduce the Company's borrowing
      capacity thereunder.  The Company may, in the future, borrow additional
      amounts under its revolving credit facility to fund capital expenditures,
      to fund working capital requirements or for other corporate purposes.

      On July 25, 1996, CITGO issued $120 million of taxable environmental
      revenue bonds due in the year 2026.  The bonds were issued with a
      variable rate that was 5.429% on the date of issuance.  The proceeds were
      used for the repayment of borrowings under the Company's revolving credit
      facility.  This repayment will not permanently reduce the Company's
      borrowing capacity thereunder.  The Company may in the future borrow
      additional amounts under its revolving credit facility to fund capital
      expenditures, to fund working capital requirements or for other corporate
      purposes.

4.    COMMITMENTS AND CONTINGENCIES

      LITIGATION AND INJURY CLAIMS - Various lawsuits and claims in the
      ordinary course of business are pending against the Company.  Included
      among these are: (i) litigation with a contractor who is claiming
      additional compensation for sludge removal and treatment at CITGO's Lake
      Charles, Louisiana refinery; CITGO is seeking contractual penalties for
      nonperformance and breach of contract and also a determination that a
      portion of any damages awarded would be recoverable from a former owner;
      a trial is scheduled for March 1997 concerning the nonperformance and
      breach of contract issues; (ii) litigation against the State of Louisiana
      concerning a potential assessment to CITGO and other refiners of a use
      tax on petroleum coke which accumulates on catalyst during refining
      operations and a change to the calculation of the sales/use tax on fuel
      gas generated by refinery operations; a Louisiana Supreme Court decision
      on a similar industry case is expected by December 31, 1996; and (iii)
      litigation against CITGO by a number of current and former employees and
      applicants on behalf of themselves and a class of similarly situated
      persons asserting claims under Federal and State laws of racial
      discrimination in connection with the employment practices at CITGO's
      Lake Charles, Louisiana refining complex; the plaintiffs have appealed
      the Court's denial of class certification; the initial trials on this
      litigation are scheduled for March 1997.  The Company is vigorously
      contesting or pursuing, as applicable, such lawsuits and claims and
      believes that its positions are sustainable.  The Company has recorded
      accruals for losses it considers to be probable and reasonably estimable.
      However, due to uncertainties involved in litigation, there are cases,
      including the significant matters noted above, in which the outcome is
      not reasonably predictable, and the losses, if any, are not reasonably
      estimable.  If such lawsuits and claims were to be determined in a manner
      adverse to the Company, and in amounts in excess of the Company's
      accruals, it is reasonably possible that such determinations could have a
      material adverse effect on the Company's results of operations in a given
      year.  The term "reasonably possible" is used herein to mean that the
      chance of a future transaction or event occurring is more than remote but
      less than likely.  However, based upon management's current assessments
      of these lawsuits and claims and that provided by counsel in such
      matters, and the capital resources available to the Company, management
      of the Company believes that the ultimate resolution of these lawsuits
      and claims would not exceed the aggregate of the amounts accrued in
      respect of such lawsuits and claims and the insurance coverages available
      to the Company by a material amount and, therefore, should






                                      8
<PAGE>   10
      not have a material adverse effect on the Company's financial condition,
      results of operations or liquidity.

      ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The Company is subject to
      various Federal, state and local environmental laws and regulations which
      may require the Company to take action to correct or improve the effects
      on the environment of prior disposal or release of petroleum substances
      by the Company or other parties.  Management believes the Company is in
      compliance with these laws and regulations in all material aspects.
      Maintaining compliance with environmental laws and regulations in the
      future could require significant capital expenditures and additional
      operating costs.

      At September 30, 1996, the Company had $58 million of environmental
      accruals included in other noncurrent liabilities.  Based on currently
      available information, including the continuing participation of former
      owners in remediation actions, management believes these accruals are
      adequate.  Conditions which require additional expenditures may exist for
      various sites of the Company including, but not limited to, operating
      refinery complexes, former refinery sites, service stations and crude oil
      and petroleum product storage terminals.  The amount of such future
      expenditures, if any, is indeterminable.

      RECENT DEVELOPMENTS RELATING TO ENVIRONMENTAL COMPLIANCE - Recent
      developments relating to environmental compliance and remediation matters
      include the following:  (i) During late 1993 and 1994, CITGO Asphalt
      Refining Company ("CARCO") received two Notices of Violation and two
      Compliance Orders from the U.S. Environmental Protection Agency ("EPA")
      related to the operations of certain units at CARCO's Paulsboro, New
      Jersey asphalt refinery.  CARCO disagreed with those allegations, but
      entered into a consent decree with the EPA that settles this matter for
      $1,230,000 in October 1996.  In November 1996, the EPA filed the Consent
      Decree with the U.S.  District Court, District of New Jersey for public
      comments and judicial approval. (ii) On September 30, 1996, CITGO received
      a Notice of Violation from the EPA, Washington, D.C., alleging ten
      violations of the Clean Air Act in the Chicago-Gary-Lake County,
      Illinois-Indiana-Wisconsin area, arising from the sale of gasoline that
      failed to meet the applicable minimum or maximum applicable oxygen
      content.  The EPA has not yet proposed penalties but CITGO anticipates the
      proposed penalty could possibly exceed $100,000, but the Company does not
      expect that the actual amount of the penalties, if any, will have a
      material adverse effect on the Company's financial condition, results of
      operations or liquidity.

      DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - CITGO enters into
      petroleum futures contracts primarily to reduce its inventory exposure to
      market risk.  CITGO also buys and sells commodity options for delivery and
      receipt of crude oil and refined products.  Such contracts are entered
      into through major brokerage houses and traded on national exchanges and
      can be settled in cash or through delivery of the commodity.  Such
      contracts generally qualify for hedge accounting and correlate to market
      price movements of crude oil and refined products. Resulting gains and
      losses on such contracts, therefore, will generally be offset by gains and
      losses on CITGO's hedged inventory or future purchases and sales.

      CITGO has only limited involvement with other derivative financial
      instruments and does not use them for trading purposes.  They are used to
      manage well defined interest rate and commodity price risks arising out
      of CITGO's core activities.  CITGO has entered into various interest rate
      swap and cap agreements to manage its risk related to interest rate
      changes on its debt.  The fair value of the interest rate swap agreements
      in place at September 30, 1996, based on the estimated amount that CITGO
      would receive or pay to terminate the agreements as of that date and
      taking into account current interest rates, was an unrealized gain  of
      $0.2 million.  In connection with the determination of said fair






                                      9
<PAGE>   11
      market value, the Company considers the creditworthiness of the
      counterparties, but no adjustment was determined to be necessary as a
      result.

      The impact of these instruments on cost of sales and operating expenses
      and pretax earnings was immaterial for all periods presented.  Management
      considers the market risk to the Company related to these instruments to
      be insignificant during  the periods presented.

5.    RELATED PARTY TRANSACTIONS

      CITGO has various long-term crude oil and feedstock supply agreements
      with subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"). Effective
      January 1, 1992, the supply agreements  with respect to CITGO's Lake
      Charles, Corpus Christi and Paulsboro refineries were modified to reduce
      the price levels to be paid by CITGO by a fixed amount per barrel of
      crude oil purchased from PDVSA.  Such reductions were intended to defray
      CITGO's costs of certain environmental compliance expenditures.  This
      modification resulted in a decrease in the cost of crude oil purchased
      under these agreements of approximately $70 million per year for the
      years 1992 through 1994 as compared to the amount that would otherwise
      have been payable thereunder.  This modification was to expire at
      December 31, 1996; however, in the third quarter of 1995, PDVSA and CITGO
      agreed to adjust this modification so that the 1992 fixed amount per
      barrel would be reduced and the adjusted modification would not expire
      until December 31, 1999.  The impact of this adjustment is an increase in
      crude oil cost of $11 million for the quarter ended September 30, 1996
      and $33 million for the nine months then ended over  what would otherwise
      have been payable under the original 1992 modification.  The Company
      anticipates that the effect of the adjustments to the original
      modifications will be to reduce the price of crude oil purchased from
      PDVSA under these agreements by $25 million per year in 1997 through
      1999, in each case without giving effect to any other factors that may
      affect the price payable for crude oil under these agreements.  Due to
      the pricing formula under the supply agreements, the aggregate price
      actually paid for crude oil purchased from PDVSA under these agreements
      in each of these years will depend primarily upon the then current prices
      for refined products and certain actual costs of CITGO.  These estimates
      are also based on the assumption that CITGO will purchase the base
      volumes of crude oil under the agreements.

      CITGO and PDV America, Inc. are parties to a tax allocation agreement
      which is designed to provide PDV America, Inc. with sufficient cash to
      pay its consolidated income tax liabilities.  In April 1996, $12.7
      million due from CITGO to PDV America, Inc., under this tax allocation
      agreement for the tax years 1992 through 1994, was classified and
      accounted for as a contribution of capital.  In the event that CITGO
      should cease to be part of the consolidated federal income tax return,
      any amounts included in shareholder's equity under this agreement may be
      required to be paid to PDV America, Inc.






                                      10
<PAGE>   12
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                   CONDITION AND RESULTS OF OPERATIONS

Overview

         The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the financial
statements, notes and management's discussion contained in CITGO's General Form
for Registration of Securities on Form 10, as amended, and the unaudited
condensed consolidated financial statements of CITGO included elsewhere herein.

         Petroleum industry operations and profitability are influenced by a
large number of factors, some of which individual petroleum refining and
marketing companies have little control over.  Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
limiting their profits directly.  Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part.  Due to the seasonality of refined products markets and
refinery maintenance schedules, results of operations for any quarter of a
calendar year are not necessarily indicative of results to be expected for a
full year.  CITGO's consolidated operating results are affected by these
industry factors and by Company-specific factors, such as the success of
wholesale marketing programs and refinery operations.

         The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs.  The refining and marketing business is characterized by
high fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities.  This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and the prices realized for
refined products.  Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of CITGO.

         In general, prices for refined products are significantly influenced
by the price of crude oil, feedstocks and blending components.  Although an
increase or decrease in the price for crude oil, feedstocks and blending
components generally results in a corresponding increase or decrease in prices
for refined products, generally there is a lag in the realization of the
corresponding increase or decrease in prices for refined products.  The effect
of changes in crude oil prices on CITGO's consolidated operating results
therefore depends in part on how quickly refined product prices adjust to
reflect these changes.  A substantial or prolonged increase in crude oil prices
without a corresponding increase in refined product prices, a substantial or
prolonged decrease in refined product prices without a corresponding decrease
in crude oil prices, or a substantial or prolonged decrease in demand for
refined products could have a significant negative effect on the Company's
earnings and cash flows. CITGO purchases a significant amount of its crude oil
requirements from PDVSA or subsidiaries thereof under long-term supply
agreements (expiring in the years 2006 through 2013).  These supply agreements
are designed to reduce the volatility of earnings and cash flows from CITGO's
refining operations by providing a relatively stable level of gross margin on
crude oil supplied by PDVSA.  This supply represented approximately two-thirds
of the crude oil processed in refineries operated by CITGO in the nine months
ended September 30, 1996.  However, CITGO also purchases significant volumes of
refined products to supplement the production from its refineries to meet
marketing demands and to resolve logistical issues.  CITGO's






                                      11
<PAGE>   13
earnings and cash flows are also affected by the cyclical nature of
petrochemical prices.  Profit margins on sales of petrochemicals were a
significant contributor to CITGO's income during 1995. While still substantial,
petrochemical profit margins have decreased significantly from 1995 levels
during the nine months ended September 30, 1996.  Inflation was not a
significant factor in the operations of CITGO during 1995 or during the first
nine months of 1996.  As a result of these factors, the earnings and cash flows
of CITGO may experience substantial fluctuations.

RESULTS OF OPERATIONS

         The following table summarizes the sources of CITGO's sales revenues
and sales volumes for the three-month and nine-month periods ended September
30, 1996 and 1995:


                                  CITGO SALES

<TABLE>
<CAPTION>
                                              Three Months         Nine Months       Three Months       Nine Months    
                                                 Ended               Ended              Ended              Ended
                                             September 30,        September 30,      September 30,      September 30,
                                            ----------------    ----------------    --------------    ----------------
                                             1996      1995      1996      1995     1996     1995      1996      1995
                                            ------    ------    ------    ------    -----    -----    ------    ------
                                                       ($ in millions)                        (MM gallons)
<S>                                         <C>       <C>       <C>       <C>       <C>      <C>      <C>       <C>
Gasoline                                    $1,959    $1,663    $5,430    $4,977    3,023    2,947     8,434     8,498
Jet fuel                                       396       285     1,041       838      634      556     1,727     1,656
Diesel/#2 fuel                                 496       324     1,544       983      817      664     2,632     2,020
Petrochemicals, industrial products
   and other products                          212       206       601       626      366      459     1,043     1,115
Asphalt                                         94        90       182       186      209      178       416       382
Lubricants and waxes                           111       112       326       300       56       58       166       158
                                            ------    ------    ------    ------    -----    -----    ------    ------
    Total refined product sales             $3,268    $2,680    $9,124    $7,910    5,105    4,862    14,418    13,829
Other sales                                     42        27       128       107
                                            ------    ------    ------    ------    -----    -----    ------    ------
    Total sales                             $3,310    $2,707    $9,252    $8,017    5,105    4,862    14,418    13,829
                                            ======    ======    ======    ======    =====    =====    ======    ======
</TABLE>
















                                      12
<PAGE>   14
         The following table summarizes CITGO's cost of sales and operating
expenses for the three-month and nine-month periods ended September 30, 1996
and 1995:

                   CITGO COST OF SALES AND OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                    THREE MONTHS                    NINE MONTHS
                                                  ENDED SEPTEMBER 30,            ENDED SEPTEMBER 30,
                                               -----------------------          ---------------------
                                                 1996           1995              1996         1995
                                               --------       --------          ---------   ---------
                                                    ($ in millions)                ($ in millions)
<S>                                            <C>            <C>               <C>         <C>
Crude oil                                      $    747       $    588          $   2,129   $   1,840
Refined products                                  1,829          1,393              5,224       4,284
Intermediate feedstocks                             250            253                676         687
Refining and manufacturing costs                    201            195                602         559
Other operating costs and expenses
  and inventory changes                             159            168                306         314
                                               --------       --------          ---------    --------
    Total cost of sales and operating
      expenses                                 $  3,186       $  2,597          $   8,937    $  7,684
                                               ========       ========          =========    ========
</TABLE>

         Sales revenues and volumes.  Sales increased $603 million, or
approximately 22%, in the three-month period ended September 30, 1996, and by
$1,235 million, or 15%, in the nine-month period ended September 30, 1996 as
compared to the same periods in 1995.  Total sales volumes increased by 5% from
4,862 million gallons in the third quarter of 1995 to 5,105 million gallons in
the third quarter of 1996, and increased by 4% from 13,829 million gallons in
the first nine months of 1995 to 14,418 million gallons in the first nine
months of 1996.  The increase in volumes, coupled with increases in most
product sales prices resulted in the increase in revenues.

         Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 10% in the third
quarter of 1996 as compared to the third quarter of 1995, and increased by 11%
in the first nine months of 1996 as compared to the same period in 1995.
Gasoline, jet fuel and diesel/#2 fuel , excluding bulk sales, had sales volume
increases of 8%, 13% and 23%, respectively, in the third quarter of 1996,
compared to the third quarter of 1995.  For the nine-month period ended
September 30, 1996 versus the same period in 1995, gasoline, jet fuel and
diesel/#2 fuel, excluding bulk sales, had sales volume increases of 10%, 6% and
23%, respectively.  Gasoline sales volumes increased due to successful
marketing efforts, including the net addition of 808 independently owned CITGO
branded retail outlets since September 30, 1995, bringing the total number of
CITGO branded retail outlets to 14,572 at September 30, 1996 (17 of which are
owned by CITGO).

         Sales prices of gasoline, excluding bulk sales, have been higher for
the nine-month period ended September 30, 1996 as compared to the same period
in 1995.  The average increase for the third quarter of 1996 over the third
quarter of 1995 is 9 cents per gallon, or a 15% increase.  Sales prices of  jet
fuel and diesel/#2 fuel, excluding bulk sales, increased 11 cents and 12 cents
per






                                      13
<PAGE>   15
gallon, respectively, or 22% and 24%, respectively, in the third quarter of
1996 as compared to the same period in 1995.  For the nine-month period ended
September 30, 1996, gasoline prices were approximately 10% higher, jet fuel
prices were approximately 18% higher and diesel/#2 fuel prices were
approximately 22% higher than for the same period in 1995.

         To meet demand for its products and to manage logistics, timing
differences and product grade imbalances, CITGO purchases and sells gasoline,
diesel/#2 fuel and jet fuel from and to other refiners and in the spot market.
Such bulk sales increased by $93 million, or 15%, from $619 million in the
three-month period ended September 30, 1995 to $712 million in the same period
in 1996, and decreased by $24  million, or 1%, from $1,913 million in the
nine-month period ended September 30, 1995 to $1,889 million in the same period
in 1996.  The increase in revenue for the quarter ended September 30, 1996 is a
result of a 16% increase in bulk sales prices partially offset by a less than
1% decrease in volumes between the quarters. The nine-month period decrease is
due to a 10% decrease in volumes partially offset by a 10% increase in bulk
sales prices between the nine-month periods.  Despite the nine-month period
decrease in overall bulk sales revenue, bulk sales revenue of diesel/#2 fuel
increased by $76 million, or 52% for the third quarter ended September 30, 1996
and increased $277 million, or 67% for the nine-month period ended September
30,1996 as compared to the same periods in 1995.  The increase in diesel/#2
fuel bulk sales revenue is the result of a 23% increase in volumes combined
with a 24% increase in sales prices between the quarters and a 40% increase in
volumes combined with a 19% increase in bulk sales prices between the
nine-month periods.

         Petrochemicals and industrial products sales revenues increased 8% and
decreased 2%, respectively, for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995, and decreased 14% and
increased 6%, respectively, for the nine months ended September 30, 1996 versus
the nine months ended September 30, 1995.  The petrochemicals revenue increase
for the quarter was the result of a 10% increase in volume, offset by a 3%
decrease in unit sales price and the decrease for the nine-month period was the
result of a 17% decrease in unit sales price and a 2% increase in volume, as
compared to the same periods in 1995.  The industrial products revenue decrease
was the result of an 11% increase in unit sales price and a 12% decrease in
volumes for the third quarter of 1996 and the increase was the result of an 8%
increase in unit sales price and a 2% volume decrease for the nine-month period
ended September 30, 1996, as compared to the same periods in 1995.

          Asphalt sales revenues in the third quarter of 1996 were $4 million
higher and sales volumes were 17% higher as compared to the same period in
1995, and sales revenues were $4 million lower, and sales volumes were 9%
higher in the first nine months of 1996 as compared to the same period in 1995.
Asphalt sales prices decreased 11% in the third quarter of 1996, and 9% in the
first nine months of 1996, as compared to the same periods in 1995.

         Equity in earnings (losses) of affiliates.  Equity in earnings of
affiliates decreased by $4.8 million overall for the three-month period and
decreased $6.6 million overall for the nine-month period ended September 30,
1996 as compared to the same periods in 1995.  For the third quarter period,
the decrease was primarily due to the change in the equity in earnings of two
affiliates.  Equity in the earnings of Nelson Industrial Steam Company
("NISCO") increased by $1.1 million, from a loss of $1.2 million in the third
quarter of 1995 to a loss of $0.1 million in the third quarter of 1996.  Equity
in the earnings of LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO")
decreased $5.2 million, from $4.0 million in the third quarter of 1995 to a
loss of $1.2 million in the third quarter of 1996.  For the nine-month period,
the decrease was primarily due to a decrease in the equity in the earnings of
LYONDELL-CITGO which decreased $8.0 million, from






                                      14
<PAGE>   16
$11.2 million in the first nine months of 1995 to $3.2 million in the first
nine months of 1996.  This decrease is due primarily to a decline in refining
margins on non-Venezuelan crude oil and declines in the profitability of
petrochemicals and lubricants.  The decrease was partially offset by an
increase in the equity in earnings of NISCO of $2.0 million, from a loss of
$4.4 million in the first nine months of 1995 to a loss of $2.4 million in the 
first nine months of 1996.

         As of September 30, 1996, LYONDELL-CITGO was not in compliance with  a
financial ratio covenant contained in LYONDELL-CITGO'S $450 million five-year
term credit facility and its $70 million 360 day revolving working capital
credit facility (together the "LCR Credit Facilities").  Effective as of
November 13, 1996, the LCR Credit Facilities were amended for the period third
quarter 1996 through June 30, 1997.  As a result of these amendments,
LYONDELL-CITGO is currently in compliance with the financial covenants in the
LCR Credit Facilities.

         Other income (expense).  Other income (expense) was $(1.5) million for
the nine month period ended September 30, 1996 as compared to $2.2 million for
the same period in 1995.  The difference is primarily due to a $2.4 million
gain on the termination of an interest rate swap agreement recognized in the
first nine months of 1995.

         Cost of sales and operating expenses.  Cost of sales and operating
expenses increased by $589 million or 23%, in the quarter ended September 30,
1996, and increased $1,253 million, or 16%, in the nine-month period ended
September 30, 1996,  as compared to the same periods in 1995.  Higher crude oil
costs (an increase from $588 million in the third quarter of 1995 to $747
million in the third quarter of 1996) resulted from a 22% increase in crude
prices, and a 4% increase in crude oil volumes purchased.  Crude oil costs
increased from $1,840 million in the nine-month period ended September 30, 1995
to $2,129 million in the first nine months of 1996, the result of a 14%
increase in crude prices, and a 1% increase in crude oil volumes purchased.
Refined product purchases increased in 1996 as compared to the comparable
periods in 1995 (up 31%, from $1,393 million to $1,829 million for the third
quarter, and up 22%, from $4,284 million to $5,224 million, for the first nine
months).  These increases resulted from increases in refined product purchase
volumes (up 15% for the third quarter and 10% for the first nine months of 1996
as compared to the same periods in 1995), and changes in prices (up 15% for the
third quarter and 10% for the first nine months of 1996 as compared to the same
periods in 1995).  Intermediate feedstock purchases decreased to $250 million
from $253 million in the third quarter of 1995, or a decrease of 1%, and
decreased to $676 million for the first nine months of 1996 from $687 million
for the first nine months of 1995, or a decrease of 2%.  Intermediate feedstock
volumes purchased decreased 22%, and prices increased 27% between the quarters
ended September 30, 1995 and September 30, 1996. Intermediate feedstock volumes
purchased decreased 13% and prices  increased 13% between the nine-month
periods ended September 30, 1995 and September 30, 1996.  Refining and
manufacturing costs increased for both periods in 1996 as compared to 1995, 3%
for the third quarter (from $195 million to $201 million) and 8% for the
nine-month period ended September 30 (from $559 million to $602 million).  The
increases in refining and manufacturing costs are due primarily to increased
costs of purchased fuel and electricity at CITGO's Lake Charles and Corpus
Christi refineries as well as the additional manufacturing costs related to the
lubricants plant acquired in May 1995.  Depreciation and amortization expense
increased by $9 million, from $42 million to $51 million for the quarters ended
September 30, 1995 and 1996, respectively, and by $18 million, from $122
million to $140 million for the nine-month periods ended September 30, 1995 and
1996, respectively, due in both cases to increases in depreciation and
turnaround amortization.  Increased capital expenditures are expected to
continue to result in increases in depreciation expense.







                                      15
<PAGE>   17
         CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues.  Refined
product purchases represented 57% and 54% of total cost of sales and operating
expenses for the third quarters of 1996 and 1995 respectively, and 58% and 56%
for the first nine months of 1996 and 1995, respectively.  CITGO estimates that
margins on purchased products, on average, are somewhat lower than margins on
produced products due to the fact that CITGO can only receive the marketing
portion of the total margin received on the produced refined products.
However, purchased products are not segregated from CITGO's produced products
and margins may vary due to market conditions and other factors beyond the
Company's control.  As such, it is difficult to measure the effects on
profitability of changes in volumes of purchased products.  CITGO anticipates
that its purchased refined product requirements will continue to increase to
meet marketing demands.  In the near term, other than normal refinery
turnaround maintenance, CITGO does not anticipate operational actions or market
conditions which might cause a material change in purchased product
requirements.  However, there could be events beyond the control of CITGO which
would impact the volume of refined products purchased and profit margins.

         Commencing in the third quarter of 1995, certain deductible costs
under certain of CITGO's supply agreements with subsidiaries of PDVSA were and
will be deferred from 1995 and 1996 to the years 1997 through 1999.  The
estimated impact of this adjustment is an increase in crude oil cost of $11
million per quarter beginning in the third quarter of 1995 and $45 million for
1996 over what would otherwise have been payable.  As a result of this
deferral, crude costs for the first nine months of 1996 increased approximately
$22 million over such costs in the first nine months of 1995.  (See Note 5 to
the Unaudited Condensed Consolidated Financial Statements).  From 1997 through
1999, crude oil costs are estimated to decrease by approximately $25 million
per year as a result of the deferral and without giving effect to other factors
that may affect the price paid for crude oil under the supply agreements,
effective January 1, 1992, between CITGO and PDVSA.

         Gross margin.  The gross margin for the three-month period ended
September 30, 1996 was $124 million, or 3.7%, compared to $111 million, or
4.1%, for the same period in 1995. The gross margin for the nine-month period
ended September 30, 1996 was $315 million, or 3.4%, compared to $333 million,
or 4.2%, for the nine-month period ended September 30, 1995.  Gross margins in
1996 have been adversely affected by the scheduled modifications to the pricing
provisions in the crude and feedstock supply agreements, the decline in
petrochemical profitability,  increased volumes of refined products purchased
as a percentage of sales volume and increased costs of purchased fuel and
electricity at the refineries (in each case, as discussed above).

         Selling, general and administrative expenses.  Selling, general and
administrative expenses increased in the third quarter of 1996 by 7%, from $42
million in the third quarter of 1995 to $45 million in the third quarter of
1996, and increased 5% from $115 million in the first nine months of 1995 to
$121 million in the same period in 1996.  The increase during the third quarter
and the nine months ended September 30, 1996 is primarily due to increased
marketing expenses in 1996 including the effect of the change in focus of the
Company's marketing programs initiated in April 1996.

         Interest expense.  Interest expense increased by approximately $1
million, or 4% (from $28 million to $29 million), for the third quarter ended
September 30, 1996, and increased year-to-date by approximately $3 million, or
4% (from $80 million to $83 million), as compared to the same periods in 1995.

         Income taxes.  Income taxes for each period reported were based on an
effective tax rate of 37%.






                                      16
<PAGE>   18
         Net income.  The net income of $107 million for the nine-month period
ended September 30, 1995 includes an after tax  extraordinary gain of $3.4
million on the early extinguishment of certain tax-exempt debt.

LIQUIDITY AND CAPITAL RESOURCES

         For the nine-month period ended September 30, 1996, the Company's
consolidated net cash provided by  operating activities totaled approximately
$73 million.  Net income of $80 million and depreciation and amortization of
$140 million were reduced by net changes in other items of $(147) million.  The
more significant changes in other items included an increase in accounts
receivable (including amounts due from affiliates) of $116 million, increases
in inventory of $112 million and increases in prepaid expenses and other assets
of $62 million, which were partially offset by increases in accounts payable
(including amounts due to affiliates) of $79 million, increases in deferred
taxes of $18 million, increases in interest payable of $17 million and an
increase in other liabilities of $13 million.  The increase in accounts
receivable is due primarily to an increase in credit card receivables and
crude oil receivables.  The increase in credit card receivables is primarily
the result of an increase in the number of active accounts, higher gasoline
prices and increased use of revolving credit.  The increase in crude oil
receivables is a result of an increase in crude oil sales volumes and prices.
Refined products inventories have increased from year-end 1995 due to normal
seasonal fluctuations for various products.  The Company anticipates that
inventory levels will be five to ten percent higher as compared to December 31,
1995 levels by the end of 1996.
        
         Net cash used in investing activities of $432 million for the
nine-month period ended September 30, 1996 included capital expenditures of
$318 million (compared to $208 million for the same period in 1995), additional
investments in LYONDELL-CITGO of $106 million (compared to $148 million for the
same period in 1995) and an increase in restricted cash of $11 million.

         Net cash provided by financing activities of $362 million for the
nine-month period ended September 30, 1996 included proceeds to CITGO of $61
million from short term borrowing facilities, proceeds of $25 million from a
tax-exempt revenue bond issue and proceeds of $120 million from a taxable
revenue bond issue.  CITGO also received approximately $200 million from the
public offering of a tranche of debt securities from the $600 million shelf
registration statement filed with the Securities and Exchange Commission in
April 1996.  Funds received from these financing activities were partially
offset by net repayments of $43 million on the Company's term loan, revolving
bank loans and other debt.

         As of September 30, 1996, capital resources available to the Company
include cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $395 million and $94 million of
uncommitted short-term borrowing facilities with various banks.  Additionally,
the remaining $400 million from CITGO's shelf registration with the Securities
and Exchange Commission for $600 million of debt securities may be offered and
sold from time to time. The Company believes that it has sufficient capital
resources to carry out planned capital spending programs, including regulatory
and environmental projects in the near term, and to meet currently anticipated
future obligations as they arise.  CITGO periodically evaluates other sources
of capital in the marketplace and anticipates that long-term capital
requirements will be satisfied with current capital resources and future
financing arrangements.  The Company believes that it is in material compliance
with its obligations under its debt financing arrangements at September 30,
1996.






                                      17
<PAGE>   19
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS

         CITGO enters into petroleum futures contracts primarily to reduce its
inventory exposure to market risk.  CITGO also buys and sells commodity options
for delivery and receipt of crude oil and  refined products.  Such contracts
are entered into through major brokerage houses and traded on national
exchanges and can be settled in cash or through delivery of the commodity.
Such contracts generally qualify for hedge accounting and correlate to market
price movements of crude oil and refined products.  Resulting gains and losses,
therefore, will generally be offset by gains and losses on CITGO's hedged
inventory or future purchases and sales.

         CITGO has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes.  They are used to
manage well defined interest rate and commodity price risks arising out of
CITGO's core activities.  CITGO has entered into various interest rate swap and
cap agreements to manage its risk related to interest rate changes on its debt.
The fair value of the interest rate swap agreements in place at September 30,
1996, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates was an unrealized gain of $0.2 million.  In connection with the
determination of said fair market value, CITGO considered the creditworthiness
of the counterparties, but no adjustment was determined to be necessary as a
result.

         The impact of these instruments on costs of sales and operating
expenses and pretax earnings was immaterial for all periods presented.
Management considers the market risk to the Company related to these
instruments to be insignificant during the periods presented.

NEW ACCOUNTING STANDARD

         Effective January 1, 1996, the Company adopted SFAS 121.  SFAS 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of.  The adoption of SFAS 121 did not have a
material effect on the consolidated financial position or results of operations
of the Company.






                                      18
<PAGE>   20
                         PART II.  OTHER INFORMATION

      ITEM 1.           LEGAL PROCEEDINGS

               For a description of certain recent developments relating to 
      environmental compliance see Footnote 4 to the Condensed Consolidated 
      Financial Statements (unaudited) for the Three and Nine-Month Periods
      Ended September 30, 1996 included in Part I hereof.

      ITEM 6.           EXHIBITS AND REPORTS ON FORM 8 - K

               (a)      Exhibits
                        --------

                        Exhibit No.                Description

                            27                     Financial Data Schedule
                                                   (filed electronically only).
 
               (b)      Reports on Form 8 - K:
                        ----------------------

                        No reports on Form 8 - K were filed during the quarter
      for which this report is filed






                                      19
<PAGE>   21
                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1934, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned thereunto duly authorized.

                          CITGO PETROLEUM CORPORATION



      Date:   November 14, 1996            /s/ R. M. Bright     
                                         ------------------------

                                         R. M. Bright

                                         Controller (Chief accounting officer)




                                      20
<PAGE>   22
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.                Description
-----------                -----------
<S>                        <C>
   27                      Financial Data Schedule
</TABLE>