OIL PRICES COLLAPSE AS GEOPOLITICAL RISKS DILUTE

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

The fragile implementation of the ceasefire and the beginning of the hostage exchange between Israel and Hamas, coupled with the promise of a summit between Presidents Trump and Putin in Budapest, which fuels hopes that it will lead to an outcome similar to that of Gaza's in Ukraine, have reduced the perception of geopolitical risk to a minimum.

The reimposition of tariffs by the United States on imports from China has reignited concerns about the strength of the economy and, consequently, oil demand. If we add to this the forecasts of a significant expansion in supply—in line with projections made by the International Energy Agency (IEA)—the perception has begun to consolidate in the markets that they are going through a period of economic slowdown accompanied by abundant oil supply.

The recent report of increased crude oil inventories in the United States has only added to this pessimism, which was reflected in a new decline in oil prices, reaching their lowest levels since the 2020 pandemic.

On the other hand, the potential effect on demand of the stimulus measures that central banks are reconsidering has an impact that is difficult to estimate. If we add to this the difficulties in determining the real capacities of producing countries, particularly the estimation of field declines, a better scenario than what is currently perceived as the base case could well occur.

In any case, we believe that current productions do not support the announced supply levels despite OPEC+'s month-over-month increase in September of approximately five hundred thousand barrels per day (500 kbpd) since production increases from the U.S., Canada, and Brazil could be overestimated.

GEOPOLITICS

Russia-Ukraine

The oil market has interpreted the upcoming meeting between Presidents Trump and Putin in Budapest as a possible starting point for resolving the conflict in Ukraine. The financial pressures from economic sanctions that significantly limit Russia's ability to continue the war continue to increase, making some type of compromise more likely. However, in Russia and Ukraine, the expectation prevails that this meeting will not generate substantial progress. It should be noted that Budapest was chosen as the venue because Hungary is not part of the International Court of Justice, which exempts Putin from concerns regarding possible arrest for charges filed at The Hague.

During a meeting at the White House between Donald Trump and Volodymyr Zelensky, no agreement was reached for the supply of Tomahawk missiles; this decision seeks to preserve these missiles as a negotiating tool in relations with Russia. On the other hand, NATO defense ministers are scheduled to meet on Wednesday to strengthen military support for Ukraine, in response to the significant decline in shipments of weapons and ammunition to that country.

The ministers will also debate a request from the NATO commander to lift restrictions on using their aircraft and other military equipment so they can be used to defend the alliance's eastern border with Russia, Belarus, and Ukraine more effectively.

The British government has included Russia's two main oil companies, Rosneft and Lukoil, in its latest sanctions package, as well as 44 tanker vessels identified as part of the "shadow fleet"; it has also added to the sanctions the Nayara refinery in India, which is majority controlled by Russian capital. However, these measures did not generate a market response.

Simultaneously, President Trump stated that India's Prime Minister, Narendra Modi, agreed to cease purchasing Russian oil. This is part of U.S. efforts to exert economic pressure on Russia and force it to negotiate an end to the conflict in Ukraine.

Middle East

Following the start of the ceasefire between Israel and Hamas, the exchange of hostages was carried out without incident. This was not the case with the bodies of hostages who died in captivity: of the 28 that had been agreed upon, as of October 19, only 9 had been returned. According to Hamas, they had problems recovering the rest of the bodies from the rubble in the strip and were receiving help from other countries to locate them.

Apparently, Hamas intends to maintain security control in Gaza. A senior Hamas official indicated that he could not commit to the group's disarmament. Mohamed Nazzal, a member of Hamas's politburo, also said the group was ready for a ceasefire of up to five years to rebuild devastated Gaza and would provide guarantees for what happens afterward based on Palestinians being given "horizons and hope" of obtaining their own state. Nazzal, from Doha, defended the repression the group is carrying out in Gaza, where it conducted public executions on Monday. "Exceptional measures are always applied during war, and those executed are criminals guilty of homicide," he stated.

While Hamas has expressed these opinions before, they are evidence of the main obstacles obstructing efforts to consolidate a complete end to the war in Gaza. The ceasefire negotiated by the United States in Gaza appears to have survived its first major test this weekend, as Israel and Hamas affirmed their commitment to the agreement after two Israeli soldiers were killed in the enclave on Sunday, triggering waves of airstrikes.

While the ceasefire has held, the other fronts, such as Hezbollah and the Houthis, have not changed their stance toward Israel, and several bombings, mainly in southern Lebanon, have been carried out by Israeli forces in retaliation or prevention.

Iran

For unknown reasons, Iranian-flagged tankers have activated their automatic identification systems (AIS), which had been deactivated since the U.S. imposed sanctions on Iranian oil exports in 2018. That decision sought to hide the traffic of tankers that violated sanctions, including frequent ship-to-ship transfers. Groups monitoring tanker movements reported that more than 80% of Iranian vessels have transmitted location signals.

The measure seems counterintuitive, given that sanctions have intensified. The possibility is raised that these actions seek to reaffirm legitimacy and sovereignty; however, considering Iran's current situation, it is more plausible that they respond to warnings issued by the United States. According to these warnings, sailing without activated transponders violates regulations established by the International Maritime Organization, which constitutes a legitimate cause to prohibit the circulation of any vessel on the high seas. The measure could have also responded to demands from China, which imports 90% of Iran's oil exports.

Transporting Iranian crude directly to China again would represent substantial savings for Iran, provided China continues accepting the shipments. In any case, shortly afterward, the tankers deactivated their signals again.

U.S.-China Trade

China and the United States reported on Saturday, October 18, that they will hold another round of trade negotiations next week to avoid imposing new tariffs. Last week, Beijing implemented new restrictions on the export of rare earths, which led the U.S. president to raise the option of establishing 100% tariffs on imports from China. Additionally, the possibility of canceling the meeting between the U.S. president and Chinese President Xi Jinping in South Korea during the Asia-Pacific Economic Cooperation (APEC) summit was mentioned.

Chinese state media reported that Vice Premier He Lifeng and U.S. Treasury Secretary Scott Bessent held "frank, in-depth and constructive exchanges" during a call on Saturday morning and that both parties agreed to hold a new round of trade talks "as soon as possible."

U.S. Government Shutdown

The federal government shutdown extended into its third week on Wednesday, after lawmakers failed to advance in negotiations.

The ninth failed Senate vote occurred when the parties met separately at the Capitol to accuse each other of being inflexible. Meanwhile, military families and federal workers generally face the prospect of having their paychecks interrupted by the end of the month. A new attempt is scheduled for the afternoon of Monday, October 20, but without much hope of finding a compromise.

FUNDAMENTALS

An unusual convergence is observed between physical factors, such as increased production by OPEC+ countries and the rise in crude oil inventories in the United States. Forecasts anticipate weak demand and high supply, generating a dual pessimistic sentiment in market perception.

Our analysis indicates that during September, OPEC+ cartel members increased their production by approximately 500,000 kbpd compared to August. This increase places the total voluntary opening of shut-in crude, since April of this year, at 1.7 MMbpd, compared to the 2.2 MMbpd announced by the group. It should be noted that the primary source of this data is OPEC itself and its secondary sources, except for Russia, whose values we have adjusted according to additional specific observations.

According to the weekly report from the Energy Information Administration (EIA), commercial crude oil inventories increased by 3.5 MMbbls but remained 4% below the five-year average range. Meanwhile, gasoline and distillate inventories decreased by 4.8 MMbbls.

Regarding the supply increase forecast by the International Energy Agency (IEA) and retransmitted by other sources, chronological analysis of information from original sources leads us to conclude that they overestimate the production increase. For the remainder of 2025, we believe there will only be increases in crude production from Guyana, 80 kbpd; Brazil, 25 kbpd; and Argentina, 18 kbpd, a total non-OPEC+ increase of 123 kbpd. During 2026, we anticipate an increase in global production of 1.5 MMbpd.

The IEA suggests more than 2.0 MMbpd increases in 2025 and 2026, reaching production of 108.3 MMbpd, which exceeds our calculations by more than 2.0 MMbpd. The most likely explanation is that the IEA has an agenda to discourage investment in fossil fuels, as its pronouncements often affect the management decisions of small and medium-sized oil companies and financial entities. This would be a curious agenda, to say the least, since the IEA has also spoken about the need to increase investment to avoid a supply crisis.

OPEC and its allies are naturally on the other side of the argument. According to Amin Nasser, CEO of the Saudi state oil giant Aramco, the oil industry must intensify exploration and investment in new supplies; otherwise, the world risks suffering a supply shortage. "If that doesn't happen, there will be a supply crisis," Nasser told the Financial Times.

Saudi oil company Aramco and OPEC have warned for years that the reduction in oil exploration, driven by recent net-zero emissions policies, would harm consumers and world economies with an insufficient oil supply. We estimate that an investment of $800 billion annually is required to avoid an energy crisis over the next 25 years.

Returning to the present, U.S. oil companies plan to maintain a balance between their investments and remuneration of their investors, so that potential-generating activities remain relatively constant in shale basins and there is a slight uptick in offshore developments.

Guyana is increasing production at its fourth floating production, storage, and offloading (FPSO) facility, Guyana 1, from about 112 kbpd today to 250 kbpd in April 2026. The next FPSO will arrive in Guyana at the end of the year, but the production increase will be perceived in 2027.

In Brazil, production recently began from the FPSO installed in the Bacalhau field in the Brazilian Pre-salt: the most significant offshore project operated by Norway's Equinor and its partners ExxonMobil, PetroGal, and the Brazilian company PPSA. Peak production will not be reached until 2027. Another unit, FPSO P-78, which recently arrived at the Búzios field, is estimated to be commissioned and begin production in 2026. Argentina, for its part, plans to increase output in Vaca Muerta by about 60 kbpd during 2026.

Price Behavior

The almost complete alignment of geopolitical factors, fundamentals, and forecasts of demand and supply behavior caused the market to enter panic mode, and prices fell to their lowest levels in five years and almost 20% lower than at the beginning of the year. All this in a scenario full of short—and medium-term uncertainties.

Thus, at the close of markets on Friday, October 17, the benchmark crudes, Brent and WTI, were trading at $61.29/bbl and $57.54/bbl, respectively, a loss of almost 2% compared to the previous week's close.

VENEZUELA

"The pitcher goes so often to the well that it breaks."

In the last week, Venezuela's political situation has once again revolved around diplomatic tensions with the U.S. and the regime's internal actions to convey security to its allies and fear to its opponents. Meanwhile, in the economic sphere, the substantial currency devaluation stands out.

Nicolás Maduro, alluding to President Trump's recent declaration that CIA actions should be carried out in Venezuela against drug cartels, resorted to the well-worn 20th-century playbook of the northern enemy's "coups d'état" to promote regional solidarity. It is sometimes difficult to understand whether or not there is a coherent strategy or if both sides are just reacting to events. Do financial markets seem to bet on political change, allowing them to negotiate and recover part of the state's enormous debt?

Two days after the CIA announcement, Trump confirmed the attack on a kind of submersible vessel loaded with drugs north of Venezuela, this time with a couple of survivors who were recovered by American helicopters and repatriated to Colombia and Ecuador, their alleged countries of origin. Another surprising news, which appeared in newspapers but was later confirmed by Trump, was that Nicolás Maduro had offered the U.S. preferential access to oil and other resources in exchange for a regime survival agreement. Curiously, the regime has accused the opposition, particularly María Corina Machado, of making the same offers.

On the economic side, the availability of foreign currency has not improved. On the contrary, lower prices for oil exports are hurting that front. The foreign currency deficit generates monetary financing to cover public spending needs, but the bolívars thus generated end up putting pressure on the foreign exchange market, forcing the devaluation of the bolívar and the consequent increase in inflation.

Venezuela's official exchange rate rose 451.8% in one year, a severe depreciation of the bolívar. The shortage of foreign currency has triggered the gap between the official exchange rate and parallel markets, which has only been mitigated by restricting the dollars injected into the market at the official rate and offering the remainder at higher prices using dollar-linked cryptocurrencies, USDT, and others, creating a parallel exchange market controlled by the ruling party. This allows certain companies and officials to obtain foreign currency at a price higher than the official rate.

Naturally, this process has intensified the country's transactional dollarization, particularly in purchasing basic basket products. The Venezuelan Finance Observatory (OVF), a prestigious private reference, has reported significant economic contractions, suggesting an ongoing recession.

Oil Operations

Operations in the hydrocarbon sector have continued their normal course. It is reported that in northern Monagas, approximately 300 million cubic feet per day (300 MMcfd) of natural gas is being collected and injected into the reservoirs, thus reducing the volume of gas flared and vented to below 1,500 MMcfd.

Crude oil production during the last week averaged 863 thousand barrels per day (863 kbpd), distributed geographically as follows:

•        West                    225    Chevron:     109

•        East                     119

•        Orinoco Belt         519    Chevron:     124

•        TOTAL               863    Chevron     233

National refineries processed 230 kbpd of crude and intermediate products, with yields in terms of gasoline of 76 kbpd and diesel of 78 kbpd.

A spill was reported on the western coast of the Paraguaná peninsula, coming from the Cardón refinery, affecting the activities of fishing communities.

In the petrochemical sector, Fertinitro's production train No. 1 was started up, while No. 2 continues in maintenance. In the methanol plants, one of Metor's plants is paralyzed due to a lack of natural gas, while the other two are operating normally. The SuperOctanos plant remains paralyzed.

Mid-week, crude oil exports exceeded 10 MMbbls, again destined for China and the U.S. Six shipments, a total of 2.0 MMbbls, were sent to refineries on the Gulf Coast of America.

We estimate that the weighted price of exported crude is $29.8/bbl.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute

GEOPOLITICS AND MARKET SENTIMENT WEAKEN OIL PRICES

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

GEOPOLITICS AND MARKET SENTIMENT WEAKEN OIL PRICES

During this week, the oil market experienced the impact of four relevant factors:

1.     Reduced geopolitical risk: The possibility that the agreement proposed by President Trump for the Middle East may be sustainable reduces geopolitical risk.

2.     Supply and demand dynamics are determined by weak forecasts and OPEC+ production opening announcements, although the cartel continues to face difficulties placing physical barrels in the market.

3.     Trade tensions: Tensions have increased in the trade war between the United States and China, resulting from the Chinese imposition of export controls related primarily to rare earths.

4.     Crude inventories: The moderate increase in crude inventories in the United States, although perfectly justified, was the fourth element contributing to the decline in oil prices.

The oil price retreat, even if temporary, hits the economies of producing countries hard, particularly Russia, and its ability to continue financing the war with Ukraine. Economic pressures are increasingly intense on the immutable Putin, while consuming countries rub their hands.

Additionally, the market closely observes various political events: the internal conflict regarding budget approval in the United States, which keeps the administration partially paralyzed; the removal of Peru's president, Dina Boluarte, following a unanimous censure motion; President Macron's difficulty in forming a stable government in France; and the complex diplomatic situation between the United States, Venezuela, and Colombia.

GEOPOLITICS

Israel-Hamas Agreement

Without a doubt, the most important event of the week has been the signing of phase one of an agreement to end the more than two-year war between Israel and Hamas, which represented a clear and positive advance. However, unresolved issues (such as Hamas's disarmament and its role in the territory's future) will preserve a degree of uncertainty about the associated geopolitical risk. The problem that most divides the parties is the creation of a Palestinian state, and the current agreement is far from outlining a sustainable solution.

In any case, and vital for the civilian population of the strip, a ceasefire in the Palestinian territory went into effect at 12:00 p.m. local time on Friday, and the Israeli army has begun to withdraw from parts of the Strip toward a defined line, after the Israeli cabinet approved the first phase of the agreement. Seeing Hamas members parade uniformed, hooded, and armed through Gaza, just left behind by Israeli forces on screens, is evidence of how complex the path is to achieve sustainable peace.

This Monday, in compliance with the first phase of Trump's agreement, the release of the 20 Israeli hostages known to be still alive was carried out, and the delivery of the bodies of deceased hostages began. For its part, Israel started the release of about 250 Palestinian prisoners and 1,700 Gaza detainees. An increase in the entry of humanitarian aid to the Strip has also begun to be evident.

A multinational task force in Israel, known as a civil-military coordination center, is being formed through the U.S. military, which will include troops from the U.S. (who would not enter Gaza), Egypt, Qatar, Turkey, and the United Arab Emirates, to oversee the ceasefire. Assuming the exchange of hostages and prisoners is completed, the intention is to build a so-called International Stabilization Force, but this must still be agreed upon between the parties.

War context

To try to understand what happened in these years of war, we must remember that what started the war was the surprise attack that Israel suffered in October 2022, in which more than 1,200 Jews were massacred and Hamas terrorists took hundreds hostage. Israeli military intelligence has still not given coherent explanations for why it could not detect what ended up being the most serious attack against Jews since the Holocaust.

Prime Minister Netanyahu, amid the surprise and gravity of the events, promised that Israel's response would "change the Middle East." During the following two years, against all odds, including dissent in his own country and international criticism and sanctions, Netanyahu used Israeli military capacity and intelligence (Mossad) to decimate Hezbollah in Lebanon and Houthi leaders in Yemen. His actions also contributed to the overthrow of Bashar al-Assad in Syria. While Israel defended itself from air attacks from Iran, it carried out unprecedented attacks against the financial center and brain of regional terrorism, Tehran, which severely weakened it.

The greatest effort of the Israeli defense forces was dedicated to pursuing and trying to annihilate Hamas in its lair, the Gaza Strip. The terrorist group, reduced and battered, took refuge in an impressive network of tunnels and used civilians as human shields. The war, in addition to the initial Israeli victims, has claimed tens of thousands of Palestinian lives and caused countless material damages.

The weakening of jihadist/terrorist groups, amid pressure and accusations against Netanyahu and Israel, which reignited global anti-Semitism, created a fertile scenario for the Trump White House's influence to force the parties, including Arab countries, to make a substantial change in their positions and that the search for a diplomatic agreement with credible and feared guarantors was the best solution to the military violence of the last two years.

If lasting peace is achieved in Gaza that includes the Palestinian Authority and excludes Hamas, with a government supervised by Arab countries, the regional repercussions would be enormous, and its reverberations would be felt around the world, including in oil demand.

Russia-Ukraine Conflict

The confrontation situation between Russia and Ukraine has not changed much; Russia continues with its drone and missile attacks, lashing Ukrainian territory and population. The most recent attack wreaked havoc on the capital, Kyiv's, electrical supply system. Meanwhile, Ukrainians have concentrated on attacking Russian energy infrastructure; in October, more than a dozen attacks on Russian refineries and pipelines were recorded. President Trump is beginning to lean toward the Ukrainian cause and is about to authorize the use of long-range missiles by Ukraine. The European Union (EU) and NATO are structuring a network of aid to Ukraine that could include deliveries of part of the Russian funds frozen in the European financial system.

However, diplomatic initiatives are not entirely ruled out. Kremlin adviser, Yuri Ushakov, said Thursday that Russia and the United States' efforts to end the conflict in Ukraine remain in force, the TASS state news agency reported. This contradicts Russia's Deputy Foreign Minister Sergey Ryabkov, who declared the "powerful momentum" for peace talks since August had been lost. In any case, Ukrainian President Volodymyr Zelensky has said he does not believe in President Putin's good intentions.

Currently, after 1,327 days of conflict, Russia's initial territorial objectives have not yet been achieved, and the morale of the Ukrainian population remains firm despite the trench warfare and continuous attacks on their cities. The confrontation is at a stalemate and is generating, particularly in Russia, considerable resource consumption in a significantly weakened economy. Indeed, for Putin, the situation is becoming economically increasingly unsustainable, since, in addition to the adverse effect on his oil infrastructure from Ukrainian attacks, low oil prices and the increasing costs of circumventing sanctions considerably reduce his income.

Political Crisis in the United States

In the U.S., the partial federal government shutdown has entered its second week without a clear path to resolution. Both houses of Congress remain mired in disputes over health policies as the October 15 military pay deadline approaches, creating significant political and market pressure. It is reported that President Trump has ordered his Secretary of Defense to pay military salaries as due.

Senate negotiations remain stalled, with no additional vote until October 14. Democrats continue to demand a permanent extension of tax credits for Affordable Care Act premiums (Obamacare) and reversal of Medicaid cuts before supporting any budget approval. The political dynamics have been further complicated by Senate Minority Leader Chuck Schumer's (Democrat from New York) comment that the shutdown helps them politically "more every day," which Republicans have interpreted as proof that Democrats are willing to prolong.

U.S.-China Trade Tensions

Trade relations with China are also going through a rocky stretch. On Thursday, China announced new restrictions on exports of rare earths and related technologies, expanding controls on the use of these critical elements for many high-tech and military products. This is before a meeting in approximately three weeks between the U.S. president and Chinese leader Xi Jinping.

The regulations announced by the Chinese Ministry of Commerce require foreign companies to obtain special permission to export items containing even small traces of rare earth elements from China. These essential minerals are used in various products, from jet engines, radar systems, and electric vehicles to consumer electronics such as laptops and cell phones. China controls 70% of the production and 90% of the processing of this raw material.

President Trump announced this Friday that, in response to the "extraordinarily aggressive" controls the Asian giant announced on its exports, the United States will impose 100% supplementary tariffs on China starting November 1. Trump added in his Truth Social network that the United States will also impose its own controls on exports of strategically important software beginning November 1. The president has suggested that the meeting with Xi could be cancelled.

This situation could be part of a tough trade negotiation strategy. Still, the oil market interpreted it as a threat to demand, sowing even more uncertainty in the global economy.

FUNDAMENTALS

During the week, fundamentals could do nothing to prevent the near panic in oil markets. First, the [Energy Information Administration] (EIA) reported an increase in commercial crude inventories of 3.7 million barrels (3.7 MMbbls). The market reacted to the number without factoring into its analysis that during the week, 4.0 MMbbls more had been imported than the previous week and that gasoline and distillate inventories had fallen more than 3.6 MMbbls during the same period.

In any case, the U.S. remains in a kind of oil lethargy. The marginal decline in shale oil and gas basins is offset by higher offshore production in the Gulf of America (formerly Gulf of Mexico), where several fields are at the start of their development phase or satellite production increase.

According to [Baker Hughes], rig activity has fallen by two units; however, these are four rigs dedicated to oil, as those dedicated to gas increased by two units. Similarly, the slight increase reported corresponded entirely to natural gas drilling in Canada.

South America on the global energy map

On the other hand, South America is beginning to recover a more prominent role on the global energy map, with Bloomberg projecting that the region will cover more than one-third of world oil demand growth through 2030. After years of decline due to Venezuela's crisis and the pandemic, activity in other countries places Latin America again in positions of importance in terms of contributions to global supply, despite setbacks in Colombia, Mexico, and Ecuador. Brazil, Guyana, and Argentina set the pace.

Brazil consolidated as the region's largest producer with the development of "Presalt" discoveries and has reached production of 3.8 million barrels per day (3.8 MMbpd). In Guyana, projects in the Stabroek block, operated by ExxonMobil, show impressive vitality, producing 830 Mbpd and on track to reach one million barrels per day. In Argentina, the dynamism of the Vaca Muerta basin drives growth: it currently produces 825 Mbpd, an Argentine record for the 21st century.

In contrast, Mexico maintains its production around 1.5 million barrels per day (1.5 Mbpd) after a sustained decline. Venezuela remains below 0.9 MMbpd, despite a slight recovery during the OFAC license period. Colombia, which previously provided stability, fell to 0.7 MMbpd. Examples of how bad policy can outweigh natural resources.

Exploration is also accelerating in Suriname, which shares a geological basin with Guyana. The region's relative institutional stability and low geopolitical risk reinforce its attractiveness compared to other producing areas.

OPEC+ and market forecasts

Finally, OPEC+ continues announcing accelerated production openings while trying to generate production potential to make true its announcements, which it has not yet achieved.

Most forecasts and analysts, except OPEC, announce supply surpluses for the remainder of the year and in 2026, based on strong supply growth and demand growth of about half of what it had been in recent years.

Those analyses also mention an increase in tanker inventories in transit and floating inventory as an argument for overproduction. However, as we mentioned last week, this phenomenon is due to increased navigation time and the detours used to deliver sanctioned crude to customers rather than overproduction.

We do not share this vision and have revised our projections, concluding that supply growth will exceed the IEA's forecast and reach a balance with OPEC's forecast toward the end of 2026.

PRICE BEHAVIOR

At the first opportunity, the ceasefire agreement between Israel and Gaza reduced geopolitical risk premiums in oil futures and led to a nearly 3% weekly decline in crude prices. Likewise, the evident escalation of tensions between China and the U.S. is also not boosting crude, and everything points to an impact on world trade in 2026 if the current pace of sanctions and reciprocal tariffs is not moderated.

Thus, at the close of markets on Friday, October 3, the benchmark crudes, Brent and WTI, were trading at $62.73/bbl and $58.90/bbl, respectively.

VENEZUELA

The Nobel Peace Prize irritates the not-so-peaceful

For Venezuela, the event of the week was the surprising but well-deserved award received by Venezuelan opposition leader María Corina Machado (MCM): the 2025 Nobel Peace Prize. The significance of the news has been such that it has polarized not only Venezuela but the world in general. Particularly noteworthy was that neither King Felipe VI nor President Sánchez of Spain congratulated MCM. Others, ideologically opposed to MCM, such as President Petro and President Sheinbaum, diminished the value of the award. To date, the Venezuelan regime has said little, while MCM's political enemies are busy attacking her.

In a bizarre episode, the White House criticized that the prize had not been given to President Trump. MCM moved quickly to neutralize the potential crisis and communicated with the U.S. president to thank him for supporting Venezuela.

In any event, as the award text reads: "The committee has decided to award the 2025 Nobel Peace Prize to María Corina Machado for her tireless work in promoting democratic rights for the people of Venezuela and for her struggle to achieve a just and peaceful transition from dictatorship to democracy." A firm declaration of political support for the country's democratic opposition.

Tensions with the United States

The conflict between the Trump administration and drug cartels, particularly the Cartel of the Suns, has become more serious. Trump announced that diplomatic contacts with Venezuela had been suspended, in apparent reference to contacts between Jorge Rodríguez, Venezuela’s chief negotiator, and special envoy Richard Grenell. At the same time, various sources reported the presence of U.S. forces in Trinidad, and it became known that the U.S. requested the island republic of Grenada to install radar equipment and military personnel on its territory.

The U.S. Senate rejected an initiative on Wednesday to halt the military campaign initiated by President Donald Trump in Caribbean waters, which seeks, in principle, to stop drug trafficking to his country. The initiative, led by Democratic Senator Adam Schiff of California and co-sponsored by his party's Senators Tim Kaine of Virginia, Ron Wyden of Oregon, and Vermont independent Bernie Sanders, was defeated 48 votes in favor and 51 votes against. It remains unclear what the military board is on which the U.S. is moving its pieces, nor what its preferred gambit is: negotiation or intervention.

Maduro and his associates, sensing the imminence of a negative outcome from the tense situation, have sent letters to different international authorities to intervene in favor of resolving differences through diplomatic channels. The letters were sent to President Trump, Pope Leo XIV, the UN Security Council, Guterres, and the UN Secretary General, among others. In the country, Russian anti-aircraft missiles and other military equipment continued to be deployed in high-visibility sites, and military exercises were carried out in La Guaira and Valencia.

Economic Situation

The Venezuelan economy continues in intensive care, trying to control a runaway exchange market. The official rate approaches 195 Bs./$, but the injection of foreign currency into that market continues to decrease in favor of currencies used at higher exchange rates to reduce the gap between the official and other alternative markets. The gap has been reduced to around 55%, and in the alternative market, U.S. currency trades are above 300 Bs./$. The combination of monetary financing and continuous devaluation incentivizes dollarization of the economy, reduces consumption, and pushes inflation to dangerous levels.

Oil Operations

The self-elevating rig (Jack Up) Alula remains docked at the Lagunillas Pier, on the eastern coast of Lake Maracaibo. It is being rigged up for activities, probably in the Lagocinco Block, but without a specific start date.

Oil operations in the country were modestly affected by failures in electrical supply. Shipments of heavy naphtha from Russia were received.

Crude production during the last week averaged 860 Mbpd, geographically distributed as follows, in Mbpd:

·       West: 224 (Chevron: 109)

·       East: 119

·       Orinoco Belt: 517 (Chevron: 123)

·       TOTAL: 860 (Chevron: 232)

National refineries processed 235 Mbpd of crude and intermediate products, with a yield in terms of gasoline of 77 Mbpd and diesel of 78 Mbpd.

In the petrochemical sector, Fertinitro's train No. 1 was restarted, while train No. 2 continues in maintenance. One of Metor's plants is out of service due to a lack of natural gas, and the other, like in Supermetanol, operates normally. SuperOctanos continues out of service.

During the first ten days of the month, crude exports totaled 6.4 million barrels, similar to the beginning of September. Two shipments were destined for the U.S. market, about 850 thousand barrels.

We estimate that the weighted price of exported crudes is $31.1/bbl.

North Paria Gas

Trinidad's attorney general announced on Thursday that the U.S. government has given multinational Shell and Trinidad and Tobago permission to develop an offshore natural gas field near the maritime border in Venezuela (Dragon Field north of the Paria Peninsula).

In recent years, the project to supply Venezuelan natural gas to Trinidad has progressed slowly, due to frequent changes in U.S. policy toward Venezuela. Venezuela has remained under U.S. energy sanctions since 2019. The Venezuelan regime has not declared on this latest license how it would affect the agreements it had already negotiated with Trinidad.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute

 

 

OPEC+ MAINTAINS PRESSURE ON THE MARKET

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

OPEC+ countries, which have been claiming for some time that the market needs more barrels to meet rising demand, continue with their objective of recovering their market share. To this end, they have been executing a strategy based on the gradual opening of production capacity that they nominally have closed, managing supply levels under their control (43% of global production).

However, the cartel's announcements, almost monthly since April of this year, have faced the unavoidable reality that most member countries of the cartel do not have the capacity to meet the production targets, either for technical reasons or for lack of investment. At the behest of Saudi Arabia and the United Arab Emirates (UAE), the organization persists in proposing to increase its barrels in the market, even if they are "empty" barrels, at least in the announced timeframe. This tenacious and, at first glance, poorly understood approach has undermined market confidence in future demand/supply balances.

The sequence of events from the last quarter of 2024 to date—weakness in the Chinese economy, trade conflicts and tariff wars introduced by the Trump administration, followed by OPEC+ announcements, in addition to the volatility caused by geopolitical factors—has resulted in a collapse in oil prices of more than 16% over the last 12 months.

In this sense, the announcement of a new OPEC+ meeting to discuss an additional production opening, apparently much larger than October's, contributed during the week to enhance the negativism that the oil market has recently assumed.

As if all that were not enough, the U.S. Congress, in an already repeated political tug-of-war, failed to reach an agreement to approve government budgets and caused the closure of part of the federal administration without a compromise solution.

In what promises to be one of the most relevant news stories in recent times, the peace plan for Gaza proposed by President Trump and welcomed by almost the entire international community, including Arab countries, and accepted by Israel, was finally, but subject to certain conditions, accepted by Hamas. However, this is only a first step in negotiations that have historically been unsuccessful.

GEOPOLITICS

Peace in Gaza?

The Israeli military offensive to take Gaza City and end the Hamas group's stronghold, coupled with multiple pro-Palestinian demonstrations in major European capitals and elsewhere, made this conflict the center of international attention during the week. The positioning of different governments, for or against the recognition of a Palestinian state, added a degree of complexity to this recurring conflict.

Among the demonstrations against the Israeli military offensive, the media highlighted the fleet of about 50 vessels navigating the Mediterranean with the declared purpose of bringing humanitarian supplies to the population of Gaza. As expected, the flotilla was intercepted by the Israeli navy, and the organizers scored propaganda points.

This took a back seat when Hamas supposedly accepted, subject to negotiations, the 20-point peace plan proposed by the White House. The peace plan includes the return of hostages (a necessary condition for Israel), the withdrawal of Israeli military forces from the Gaza Strip, and the end of Hamas's political control in the strip (a necessary condition for Palestinians and for most of the Arab world).

The peace plan, which was discussed with leaders from at least eight Arab and Muslim countries in the context of the UN General Assembly, seems to have the broad support of the international community, including Israel. After a new ultimatum from President Trump, the Hamas group responded positively before the deadline expired. Hamas accepted at least the return of living hostages and the bodies of those who have been murdered, in exchange for the release of several terrorists imprisoned in Israel, and agreed to sit down to negotiate the rest of the plan in Cairo. Surely the negotiations will be oriented toward the complete disarmament of Hamas and the gradual withdrawal of Israel from the Gaza Strip. President Trump has also assured that he will not allow Israel to annex the West Bank territory.

If a lasting agreement is achieved, it would have significant repercussions on regional and even global geopolitics, due to the oil nature of the region and the presence of Iran's terrorist tentacles, which would likely be reduced or become non-operational, at least for a time. Achieving a lasting agreement will not be easy, as radicals on both sides are not interested in compromise.

On September 30, Yemen's Houthi rebels announced that they were ending a truce agreed upon in May and would resume targeting U.S.-linked assets. Analysts warn that threatened vessels have already avoided the region for months by sailing around Africa's Cape of Good Hope, reducing the likelihood of an immediate escalation.

Russia-Ukraine Conflict

Regarding the Russian conflict with Ukraine, the divergences between Presidents Trump and Putin are becoming increasingly visible, and both the U.S. and most European countries are converging toward a stronger and more united position against the increasingly bold actions of the Kremlin. On the ground, Russian troops have managed to occupy portions of territory in eastern Ukraine, but at an extremely high cost in terms of losses of soldiers and equipment. On the other hand, Ukraine's continued air offensive has taken a quarter of Russia's refining capacity out of operation, weakening the ability to finance the continuation of this long war.

Indeed, sanctions are affecting Russia's ability to counteract the decline of its old Siberian oil fields and the development of new ones in the Arctic. Fuel shortages in the domestic market and declining production are affecting Russian exports. Low oil prices and the discounts Russia has to give to place its sanctioned crude aggravate the revenue loss. This situation, in turn, contributes to the gap between OPEC+'s announced and actual production.

Trump's distancing from Putin has been so noticeable that, on his Truth Social platform, the U.S. president assured that Ukraine, with the support of Europe and NATO, could recover "the original borders from when this war began," due to the economic pressures facing the Kremlin. Meanwhile, the Kremlin has intensified air incursions into European countries, trying to create confusion and test reactions.

U.S. Domestic Politics

Regarding U.S. domestic politics, Trump has his plate full with the budget confrontation in Congress between Republicans and Democrats, which has led to the paralysis of the federal administration. Since Wednesday, the government has only been performing necessary and unavoidable functions. This is the first shutdown or "paralysis" since the longest in history, which lasted 35 days almost seven years ago, and will stop the work of multiple departments and federal agencies, affecting hundreds of thousands of government employees and millions of citizens. Prolonging this situation could delay bilateral negotiations, permit allocation, and other bureaucratic procedures. The disagreement centers on the issue of financing public health services, which both parties are using as an ideological battleground.

FUNDAMENTALS

Demand, supply, and inventory fundamentals do not justify the behavior of the oil market. According to our calculations, global crude demand continues above one hundred three million barrels per day (103 MMbpd) and supply, at around 102 MMbpd. Global inventories confirm this imbalance.

It should be noted that it is complex to estimate global inventories promptly, due to the limited availability of information in various regions and the difficulty of accounting for both sanctioned crude and tankers and floating inventories. This challenge is aggravated by the extensive voyages and waiting times these tankers undertake to evade imposed restrictions. However, the weekly information published by the Energy Information Agency (EIA) of U.S. commercial inventories shows that, despite increasing this week by about 1.8 MMbbls, the figures remain below the average of the last five years. In general, evidence confirms that global inventories have declined modestly, if we exclude floating inventories, for the reasons already described.

U.S. Production

According to the EIA, the U.S. maintains constant production around 13.5 MMbpd, with drilling activity, according to Baker Hughes, and fracking crews that do not point toward short-term growth. Shale basin operators' efforts focus on reducing operating costs to maintain the competitiveness of unconventional crude and gas, even at low prices. The most relevant of these efforts is observed in the Permian Basin, where the capacity to reuse and optimize injection water and formation water produced by wells is being increased.

OPEC+ Production

OPEC+, which has made much fuss announcing the not-so-gradual dismantling of volumes closed by its members since 2020, now deliberates whether to open more production in November, despite having run into production capacity limitations in most countries, except Saudi Arabia and the UAE, which have problems of their own. To a lesser extent, countries like Russia, primarily, and Mexico have produced less as the months have passed. Russia produces around 8.6 MMbpd, with seaborne exports of 3.6 MMbpd and about 300 thousand barrels per day via pipelines. Russia has achieved these export levels because India, China, and Turkey remain willing to buy Russian crude despite President Trump's sanctions pressures.

Last Sunday, at the last minute, white smoke emerged from the OPEC+ conclave. Rationality prevailed, and they announced an additional increase in production starting in November of 137 Mbpd, equal to the modest October adjustment and less than a third of the volume advocated by Saudi Arabia. The group reaffirmed its position of a "stable global economy and current healthy market fundamentals, as reflected in low oil inventories." We'll see if and when these barrels materialize.

On the supply side, in addition to the uncertain increases announced by OPEC+, only Guyana is significantly increasing its production this year. Brazil and Canada are not on the list of increases this year.

Global Demand

On the demand side, difficult-to-confirm information indicates that China has maintained its crude imports due to its policy of increasing its strategic inventories. However, this may change once it achieves the targets. At the same time, India continues to grow in demand based on the growth of its economy.

Price Behavior

During the last week, prices experienced a significant drop, recording the largest weekly loss in more than three months—a terrible week for crude producers and sellers, who saw prices plummet by almost 8%. Buyers had a happy week, seeing a substantial reduction in their raw material costs, and there were opportunities for speculators and participants in financial products derived from the global oil market.

Thus, at the close of markets on Friday, October 3, the benchmark crudes, Brent and WTI, were trading at $64.53/bbl and $60.88/bbl, respectively.

VENEZUELA

Playing Stratego

In what appear to be speculations or simply trial balloons, various banking sources and international political analysts think there are increasing signs of a possible U.S. military action on Venezuelan territory, in principle targeting alleged drug collection centers and drug manufacturing laboratories. As it is logical to assume that political-military strategies are not shared with the press or close associates, this is nothing more than a sign of these times, where information increases entropy, unless the strategy is to spread that rumor. Dissent factors within the regime could catalyze this toward a situation that supports a political transition option where they survive. At the same time, that scenario would favor a restructuring of the enormous state debt, clearly a situation that would favor creditors, who are many, and the financial world.

In any case, Nicolás Maduro and his Defense Minister, General Padrino, warned U.S. Secretary of State Marco Rubio and Secretary of War Pete Hegseth that initiating an armed confrontation would be a big mistake. This is a choreography in which the regime uses the improbable external threat as a distracting element and an excuse for its poor government.

Meanwhile, a fifth vessel, supposedly with four occupants and an unknown amount of drugs, was neutralized with a U.S. drone attack. In Washington, the Trump administration informed Congress that the U.S. was at war with drug cartels, thought to be a way to circumvent parliamentary authorizations that would otherwise be necessary.

Nicolás Maduro, in response, called on the armed forces to finalize the details of defense mechanisms. Events that have had no significance beyond the "bluff" to try to see what the other players have and seek reasons to deepen the repression of opposition forces.

Another event was the advancement of Christmas decreed by Nicolás Maduro, which began with fireworks launched from El Helicoide, where numerous political prisoners are confined. The opposition showed displeasure at what they consider an act of cynicism and political provocation: making a center of repression the symbol of the festivities.

Economic Situation

The deteriorated economy and public finances are affecting the country's population. Although oil exports were the highest in several months, to date, that increase has not been reflected in the flow of foreign currency. The drop in oil prices and the delay in cryptocurrency payment processing are the main causes. In any case, the economic problems continued to focus on the exchange rate situation and its natural consequences on inflation, wages and salaries, purchasing power, and the level of dollarization.

The Central Bank of Venezuela (BCV) limited the injection of foreign currency into the official market to dedicate a greater volume to cryptocurrency auctions, intending to close the gap with parallel markets. The official rate was allowed to slide to exceed 185 Bs./$. The gap with the parallel market was reduced to around 58%. The inflation figure continues to be unpublished, but undoubtedly, it keeps on its ascending trend.

The scheme of royalty payments in kind and taxes via barter with diluent and products, associated with the most recent license authorizing Chevron's activities in Venezuela, leaves little maneuverability in the exchange mechanism of banks traditionally used by Chevron. The amounts of foreign currency transferred to national banks are limited to the amount required to pay for operating expenses (OPEX) and investments (CAPEX) in bolívares.

Oil Operations

The much-mentioned Chinese offshore platform, Alula, has not yet begun its activity of drilling new directional wells from a central foundation. However, several existing wells have been intervened on, changing the artificial lift method from "gas lift” (historically the method most common in Lake Maracaibo) to the use of electric submersible pumps. On one hand, this is due to the lack of compressed gas in the area, and on the other, it is a more effective method in modern operations. This activity is part of the announced reactivation of 100 wells. The high volumes of fluid these new pumps can lift (oil, water, and natural gas) pose new challenges related to water management and sand control.

Crude Production

Crude production during the last week averaged eight hundred sixty-two thousand barrels per day (862 Mbpd), distributed geographically as follows:

• West                         224      Chevron: 109

• East                           119

• Orinoco Belt             519      Chevron: 122

• TOTAL                    862      Chevron: 231

Part of the western production was used to generate the "Blend 17" segregation, essentially with specifications almost identical to those of the "BCF 17” segregation, the Venezuelan benchmark for many years since the concessionary era and during much of PDVSA's activities.

Refining

National refineries processed 233 Mbpd of crude and intermediate products, yielding 75 Mbpd for gasoline and 80 Mbpd for diesel.

Petrochemical Sector

In the petrochemical sector, one of the ammonia-urea trains at Fertinitro, in the Jose petrochemical complex, was stopped due to operational problems, and the other train was stopped due to a lack of natural gas, leaving the complex without ammonia and urea production. Likewise, one of the methanol production trains at Metor was also paralyzed due to a lack of natural gas, and the other train at Metor and Supermetanol was operating at 90% capacity. The SuperOctanos plant is also paralyzed. Thus, petrochemicals, a relatively stable source of foreign currency income, temporarily generate little more than half of the usual income.

Exports

September crude exports closed with an increase of almost 200 Mbpd compared to August volumes. The increase was concentrated in China, where apparently Venezuelan crude filled the deficit left by the reduction in Russian crude imports, mainly to Chinese private refineries. Two shipments to Cuba that we had not previously identified were also recorded.

Crude exports during September averaged 786 Mbpd. The destinations were:

·       China: 613 Mbpd

·       U.S.: 120 Mbpd

·       Cuba: 53 Mbpd

The exported segregations were:

·       Merey 16: 620 Mbpd

·       Boscán: 103 Mbpd

·       Hamaca: 40 Mbpd

·       Blend 17: 23 Mbpd

We estimate that the weighted price of exported crudes is $31.3/bbl.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute