The world is witnessing a series of events marked by the uncertainty over the global economy, the war in Ukraine and the definitive path of monetary policies in the US, Europe and China. And as usual, oil and the actors behind its production, are playing a verve role worth keeping the eyes on.
JUAN M. SZABO, LUIS A. PACHECO
As in the famous piece of music by Maurice Ravel, "Bolero" (1928), in which a melody and tempo are repeated insistently, "in crescendo", and with only small orchestral variations, the oil market has composed a melody that is repeated, week after week, with only a few tweaks in its components, under the baton of the conductor on duty.
The score, in general, tends to be the same. In the wind section (demand), as it were: inflation, inventories, world economic growth - recession. And in percussion (supply): under-investment, the energy transition, and geopolitical, climatological, and operational problems.
Current conditions generate the perception that one or the other instrument resonates with greater intensity, but ultimately, it is merely interpretative.
This week, doubts about China's real growth, despite the stimulus, and the rise of the US unemployment rate, are the most heard elements in terms of demand. On the supply side, the lead is taken by the chronic inability of OPEC+ countries to achieve the production levels agreed within the cartel - not even after considering the latest cuts. The supply limitation is defined by the already well-known decline in Russian production, the problems with Turkey to re-ship Kurdish crude through the port of Ceyhan in the eastern Mediterranean, and the force majeure applied in part of the production of Nigeria. In sum, OPEC+ production shows a deficit of about 1.5 million bpd versus its official target.
OPEC tried to send upbeat signals in its monthly report published on May 11, raising Chinese demand growth this year to 800,000 bpd, but these attempts were offset by news published directly in China, signaling that various components of the country's economy were lagging somewhat in relation to post-COVID forecasts. Global supply could also be affected by the recent wildfires in western Canada, as the fire spreads rapidly toward the oil provinces.
Thus, the fall in the price of oil has continued, as fears of a US recession were aggravated by a rise in the unemployment rate and an unexpected increase in crude oil inventories. Neither the news of the possible start of the replenishment of the strategic reserve (SPR), nor the reduction of gasoline inventories, managed to attenuate a bear market. In this same sentiment, the US stock markets remained mixed, amid new economic data and heightened concerns about regional banks.
It was also reported later in the week that claims for jobless benefits rose to the highest since October 2021, and inflation continued to moderate. For now, the data suggests a pause in the tightening policy of the Federal Reserve, Fed. To further complicate the domestic situation in the US, investors are worried about the negotiations on the debt ceiling and the instability of the banking sector.
Also, the number of active drilling rigs, the best indicator of operations in the hydrocarbon industry, showed a drop of eighteen rigs in the Shale Oil Basins, the largest experienced this year, confirming the cautiousness of companies to increase their CAPEX, in times considered as risky.
While, in Europe, despite the significant reductions in the cost of energy, the concern is centered on the droughts that the countries in the south of the continent are experiencing, which threaten serious increases in the costs of important items in the food basket and may affect the wine industry, so important in the exports of those countries. Obviously, the continuing war in Ukraine, and its impact on the distribution of grains and oils, is affecting the prices of these commodities. The European Central Bank, unlike its counterpart in the US, intends to continue raising interest rates to control inflation.
European countries are very attentive to the general elections in Turkey. The results of the May 14 election suggest that President Recep Tayyip Erdoğan and his main rival, Kemal Kılıçdaroğlu, will go head-to-head in a runoff election after Erdoğan had better results than expected but fell short of the threshold of 50% to win the presidential race outright.
If there is a change of government in Turkey, geopolitical relations within the European Union, and even with some actors in the Middle East and the Chinese orbit, could materially change since the unified opposition candidate promised in his campaign to get closer to the West. Turkey, even though it is not an oil country, has significant control over the crude oil pumped in pipelines through its territory, and controls the movement of tankers and freighters through the route that connects the Black Sea with the Mediterranean through the Bosporus Strait. Currently, there is more than 300,000 bpd of crude from northern Iraq without being able to access the markets due to Turkey's intransigency.
Venezuela, Political-Economic Aspects
The regime led by Nicolas Maduro and the opposition have not reached agreements to resume negotiations in Mexico, despite the urging published by the group of foreign ministers gathered in Bogotá at the end of April. So, the US is still not seeing progress toward free elections, an essential condition to make economic sanctions more flexible, and it seems to have run out of options. General License 41 (GL41) will probably be renewed by OFAC, but without the authorization to make investments, which limits the maximum production that Chevron's operation in Venezuela can reach.
Meanwhile, Venezuelan economic activity has continued to slow down, coupled with a further deterioration in the exchange rate. After having remained around 24.5 Bs/USD since February of this year, a gradual depreciation trend returned this month, and the week closed with a parallel market rate of 26.7 Bs/USD, an erosion of almost 9%/month.
The currency depreciation translates into inflation and erodes the purchasing power of Venezuelan citizens. In parallel, the regime did not increase the minimum wage, on the traditional salary adjustment date of May 1. Instead, it announced bonuses of a different nature, which have no salary effect and left workers frustrated.
Both effects, depreciation, and the inability to offer fair wages, are the consequence of a common cause: the lack of foreign currency.
Chevron has become the main supplier of foreign currency to the non-state market, by accessing the banking system to obtain the bolivars it needs to meet its operational and labor obligations and the agreed payments to joint venture companies.
There are lobbying groups, domestic and international, pressing for the administration of President Biden to lift/relax the economic sanctions. Indeed, in Washington, a group of legislators, mainly from the Democratic Party and made up of the left wing of the party, sent a letter asking for the elimination of sanctions on Venezuela and Cuba, and in their allegations, they try to blame the sanctions for the immigration crisis that confronts the US southern border.
On the international side, the most visible are those attending the summit organized by the Colombian government in Bogotá, led by Petro. Also, the regime and some highly visible "experts" tried to project a narrative according to which sanctions are the original sin, and not the answer to the abuses, torture, murders, drug trafficking, and money laundering that they allegedly are carried out by the representatives of the regime.
CITGO Results, Q1 2023
CITGO Petroleum Corp. (CITGO), the subsidiary of PDVSA in the US, reported this week its financial and operational results for the first quarter of 2023. This refining company, which since 2019 has been managed independently of the company Headquarters in Caracas, and supervised by an ad hoc Administrative Board of PDVSA, continues to show positive results in sync with the dynamics of the refining market, and not least because it is being managed with technical and financial criteria.
In the CITGO communication, which is worth noting is the only PDVSA subsidiary that publishes financial and operational information regularly, not only in the US, but also in Venezuela, the following achievements are highlighted for the quarter:
• Net income of USD937 million and EBITDA of USD1.4 billion, compared to net income of USD806 million and EBITDA of USD1.2 billion in Q4 2022.
• The Lake Charles (Louisiana) refinery increased its nominal processing capacity by 38,000 barrels per day (bpd) to 463,000 bpd, bringing the total nominal capacity of the CITGO refining system to 807,000 bpd.
• Crude oil throughput Q1 was 772,000 bpd with 96% crude capacity utilization, compared to 797,000 bpd and 104% crude capacity utilization in Q4 2022.
• The Lemont (Illinois) refinery achieved a record crude throughput of 187,000 bpd in March, representing almost 106% of total nominal capacity utilization.
• The Corpus Christi (Texas) refinery processed 150,000 bpd of crude oil and 42,000 bpd of raw materials during Q1, resulting in 90% crude capacity utilization. It has also started a major maintenance project, which will last most of Q2.
• The CITGO refinery system continues to show high reliability, as measured by just 0.71 days of equivalent downtime during Q1.
Not surprisingly, the operational and financial solvency that CITGO's management has managed to build and sustain recently makes it the target of attacks from both ends of the Venezuelan political spectrum, and the preferred prey of PDVSA’s and the Republic’s creditors. The pressure over CITGO is perhaps the most evident example of the institutional decomposition that afflicts the South American country. When it delivers excellent results, as has been the case lately, everyone wants a piece of it. But the same factions, who aspire to control it, do not make the necessary decisions for the survival of this essential piece of the Venezuelan oil industry.
Operational Activities in Venezuela
Venezuela’s production throughout April averaged 702, 000 bpd. The small increase in production is due to fewer power blackouts at the end of the month, and a slight rise in production from Chevron-operated fields, particularly in the Orinoco Belt. Boosted cargoes were shipped to the US Gulf Coast, pushing Chevron's export volumes to more than 150,000 bpd, including a cargo of Boscán crude that is being held in inventory due to a lack of attractive markets.
The increase was hailed as a welcome increase in Venezuelan crude for PADD 3 refiners, however the higher volume is essentially a tanker scheduling and inventory management event.
We expect Chevron's production to peak at around 120,00 bpd under the current license. The license should be renewed before the end of May with the same conditions, although the original belief was that the renewed license would grant investments, but the intransigent behavior of Venezuela’s regime does not appear to merit better conditions in the incredulous eyes of the US.
Once again, the refining system was victim of another unexpected event. This time was El Palito, a refinery which has been in continuous startup since Iranian technicians were called in to rehabilitate it. A total electrical failure paralyzed the refinery, and it will require about 10 days to condition it for a new startup.
The export volume of crude oil and products is like that of April, with the difference that PADD 3 will receive about 130,000 bpd, somewhat lower than the previous month but consistent with production and the levels of improvement and mix of segregations.
In a meeting with all the authorities of PDVSA and theJoint Venture Companies (EM), the Minister/President, Col. Pedro Tellechea, presented PDVSA's "Comprehensive Productive Recovery Plan (PRIP)" for May to December, according to which crude production would reach 1m bpd in August.
The last time PDVSA announced reaching that milestone, December 2021, it only lasted for a month, since the crude produced suffered from quality problems, particularly high BSW and salt content that led to the rejection by customers of the shipments.
Due to investment limitations and problems related to higher levels of crude treatment, especially dehydration and segregated management of diluent., achieving the production goal, in terms of crude oil specifications, seems unlikely again today,
*M. Juan Szabo, International Energy Expert.
*Luis A. Pacheco, non-resident fellow at the Baker Institute Center for Energy Studies.
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