El Taladro Azul Published Originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
The future international and economic policy to be carried out by President-elect Donald Trump generates more questions than answers. On the one hand, a deregulation of the American economy is expected, promising greater dynamism and should point toward increased demand, but there is also talk of greater domestic supply if “drill baby drill” materializes.
In China, the government's stimulus measures continue to fall short of their expected effect and create uncertainty among those who still consider the Asian giant as the main driver of demand. Forecasts of reduced growth in oil demand over the next 14 months, by both the IEA and OPEC, also weigh on the market.
This accumulation of uncertainties keeps the energy market in a pessimistic sentiment. Not even the sharp falls in gasoline and diesel inventories in the U.S., or the dark clouds in the Middle East, managed to mitigate the bearish sentiment in the oil market.
Geopolitics
In the U.S. elections, with few votes still to be counted, it is now firm that the Republican Party will control both chambers of Congress, which will facilitate the new president's management unless internal fractures occur: the sessions to approve cabinet nominations will be the first test.
Now that the Biden administration is a matter for historians, in boardrooms and government offices worldwide, people are trying to understand what Donald Trump's victory means for their company or country. Last week, we tried to give a preliminary interpretation of this situation in the energy sector, but since then, Trump has made some high-profile designations that could well be designated as “Trump's Hawks,” which complements our initial evaluation.
The designations include Marco Rubio, Matt Gaetz, Elton Musk, Pete Hegseth, Mike Waltz, and Chris Wright, among others. These nominations seem to be marked by two main characteristics: unquestionable commitment to the new president's vision and the willingness to “shake up” Washington bureaucracies and international relations; we'll see if these revolutions are real or just a return to Trump 1.0.
The nomination of Chris Wright for the Department of Energy (DOE) is particularly striking. Wright, an engineer and oil services company executive, has fiercely criticized the existence of a climate crisis and the transition to renewable energy sources. While Wright doesn't dispute the existence of climate change, he has argued that policies aimed at reducing climate change impact are misguided and alarmist.
On the Russia/Ukraine war front, amid expectations that the U.S. president-elect might pressure both sides to end the conflict, both countries have carried out their largest drone attacks since the war began, particularly on energy installations. Russia is trying to consolidate its territorial gains to strengthen its position in any negotiation.
Meanwhile, in the Middle East, there is widespread speculation about what a second Trump presidency will mean for the region: unlike fears expressed in Europe about Trump's unpredictability, Gulf Arab countries tend to see him as a force for stability. There are rumors that the new U.S. administration would welcome Israeli activity that would hinder Iran's nuclear development. The nomination of Mike Huckabee as U.S. ambassador to Israel seems to reaffirm the rapprochement between the two countries.
On the other hand, leaders from dozens of Arab and Islamic nations met in Riyadh, the Saudi capital, for a summit. Saudi Arabia has tried to pressure the United States and Israel to end hostilities in Gaza, and Crown Prince Mohammed bin Salman, the kingdom's “de facto” ruler, gathered Arab and Muslim leaders to reinforce that message.
In Baku, Azerbaijan's capital, the COP 29 climate conference is taking place. World leaders (with notable absences) and negotiators are trying to establish a new funding goal to cover the trillion-dollar costs of helping low-income nations adapt to climate change while meeting emission reduction targets. Developed countries recognize that developing countries face climate investment needs amounting to trillions of dollars.
However, they haven't yet established a specific target for international financial support because there's one thing on everyone's mind in Baku: How will President Trump's return to the White House affect the fight against global warming? After all, he will probably reformulate the environmental policies of the world's largest economy and second-largest greenhouse gas (GHG) emitter. Therefore, the cap and financing mechanisms and details for implementing an efficient carbon credit market remain to be defined.
Major European oil and gas companies BP, Equinor, Shell, and TotalEnergies have committed to making a joint investment of $500 million in the coming years to help ensure access to affordable, reliable, sustainable, and modern energy for all.
This joint investment commitment is part of major energy companies' efforts to support promising and high-impact projects, mainly in sub-Saharan Africa, and South and Southeast Asia, in line with COP 29 considerations. The projects seek to help millions of people from disadvantaged communities gain access to electricity and other sustainable energy sources.
COP 29 is the second consecutive climate conference held in an oil-producing country, which has raised criticism that this forum has lost its usefulness.
Russia is considering another gas pipeline to China, this time through Kazakhstan, capable of transporting up to 1.1 TCF of natural gas per year. The plan, announced by Deputy Prime Minister Alexander Novak, comes at a time when Moscow is turning strongly toward Beijing, to which it has already sent 1.4 TCF of gas this year. Now that Europe is firmly out of sight, China is Putin's star energy customer.
Gas demand in China is increasing by more than 9% year-over-year. This demand is generated by urban heating, industry, and a significant push to replace diesel trucks with LNG. By 2040, natural gas demand in China is expected to surge by more than 50%, according to Julianne Geiger of Oilprice.com.
Fundamentals
Trump's commitment to economic deregulation could be good for growth. One cannot say the same about his plan for mass deportations of irregular immigrants and radical tariffs, especially on China. We are persuaded that when these intentions move to the implementation phase, the realities of international trade and the interests of those who supported candidate Trump will shape the process.
In the short term, the combination of encouraging domestic production while enforcing sanctions on Iran and Venezuela will result in restricted oil supply; although, in the medium term, this trend could reverse due to increased U.S. production and the dismantling of sanctions on Russia, in case of a negotiated resolution to the war.
For now, U.S. production remains relatively stable, around thirteen million barrels per day (13.4 according to the EIA), but with a tendency to decline due to the stable drilling activity. This week, according to Baker Hughes, another rig was added to the inactive list.
With its eye on inflation figures and, surely, uncertainty about the upcoming fiscal and tariff policy, the Federal Reserve (FED) is becoming more cautious about the scope of further interest rate easing. This was indicated by Jerome Powell, FED Chairman, at a conference in Dallas, saying: “The U.S. economy is not sending any signal that we should rush to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
OPEC has cut its global demand growth forecasts for 2024 and 2025 for the fourth consecutive month, mainly due to reduced consumption in China, to 450 MBPD from 580 MBPD in last month's monthly report, so that demand growth in 2024 is estimated at 1.82 MMbpd.
Meanwhile, the International Energy Agency (IEA) predicts considerably different demands and supplies: global oil supply will exceed demand in 2025, even if OPEC+ cuts remain in place, due to growing production from the U.S. and other producers outside the OPEC+ sphere. According to the IEA, the prospect of a supply surplus of more than 1.0 MMbpd, slightly more than 1% of global production, would directly affect OPEC+ in its plan to begin increasing production.
The divergence between the two sources (IEA and OPEC) is not surprising; on the contrary, it has become common, as each remains rooted in their respective interests. The notable difference in forecasted demands is undoubtedly due to the estimation of timing and magnitude of demand reduction due to Chinese economic problems. Also mentioned is the advancement of renewable energies replacing fossil fuel use, especially in China, due to the rapid deployment of clean energy transport technologies, such as electric vehicles, LNG-powered trucks, and high-speed railways, according to the Paris-based agency.
The advancement of alternative energies doesn't seem to meet the extremes desired and predicted by the IEA, judging by the increase in GHG emissions during 2024. Greater use of coal, precisely in China, the issues with electric vehicles (little progress in electrification networks), and greater energy requirements for data processing centers to take advantage of AI are the most important obstacles to the speed of replacement.
The IEA maintained unchanged its oil demand growth forecast for 2025 at 990 MBPD. At the same time, it expects non-OPEC+ countries to increase supply by 1.5 million bpd, driven by the U.S., Canada, Guyana, and Argentina, more than the demand growth rate.
Next year's surplus, according to IEA forecasts, could make it difficult for OPEC+ to reopen its shut-in production. Earlier this month, OPEC+ again postponed a plan to begin easing production cuts amid falling prices.
Regarding global supply, an analysis of the increases announced by different producing countries and of expected production declines due to depletion in some cases or geopolitical limitations in others gives a different result than the IEA's. The net production increase that would reach the market is illustrated in the graph below and calls into question the forecast of overproduction of more than 1.0 MMBPD during 2025. On the contrary, the analysis suggests that it barely meets the IEA's demand forecast and falls short of OPEC's forecast.
Source: Public data and own calculations
Of particular concern is the prospect of a prolonged trade war with China, which would likely lead to another year of tepid demand growth from the world's largest oil importer, whose economy has shown signs of weakness throughout this year, causing continuous reductions in refining runs at marginal refineries, commonly known as “teapots.” Indeed, refinery operating rates in China fell in October for the seventh consecutive month, losing 4.6% year-on-year, according to data from the country's statistics agency, cited by Reuters.
According to the Reuters report, a Chinese consultancy said the decline was due to maintenance closures and bankruptcies at three Sinochem-owned refineries. Additionally, independent refineries, the so-called “teapots,” operated at much lower rates than average in October, around 58.7% compared to 77% a year ago.
Price Behavior
The oil market was again surrounded by a pack of discouraging news that didn't even allow it to interpret the positive in the unusual fall in gasoline and distillate inventories in the U.S., reported by the EIA.
The crude market was trending downward on Friday and headed for another weekly decline, after struggling during the week to recover from losses suffered following Trump's electoral victory. This despite expectations that the Trump administration will push for stricter enforcement of oil sanctions against Iran and Venezuela, particularly with Marco Rubio's nomination as Secretary of State candidate. But this effect has not been included in market considerations for now.
Concerns about a trade war using import tariffs continued to weigh on confidence, along with the rising U.S. dollar index (DXY), which touched annual highs of 107 points, and what has already become a backdrop, the weakness of the Chinese economy.
As things stand, Brent and WTI crude oils, at the close of trading on Friday, November 15, were trading at $71.04/bbl and $67.02/bbl respectively, closing the week with a loss of around 4% compared to the previous week.
VENEZUELA
Rubio, More Than Just a Town in the Andes
Senator Marco Rubio, who competed with Trump in the 2016 Republican Party primaries, and whom Trump dubbed “Little Marco,” now transforms into the new president's right hand as Secretary of State of the incoming administration. Rubio, who has always expressed strong rejection of “Chavismo”, will be, from the Venezuelan perspective, a formidable adversary. The senator will be accompanied by other “hawks” in defense and national security.
In Caracas, the appointments were heavily commented on by regime tweeters and by Interior Minister Diosdado Cabello, who expressed his hope that Marco Rubio wouldn't last in the position due to his aggressive nature. In any case, beyond Rubio’s nomination, it's a signal of the treatment to be expected from the new administration regarding relations with Venezuela, electoral fraud, and the extensive corruption framework of the regime; it seems clear there will be considerable noise in the months to come.
To try to dilute the problem of those illegally detained following protests after the July 28 electoral fraud, Maduro ordered the review of about 200 cases in which “there could have been procedural errors.” With obedient speed, the attorney general is leading the reviews. Indeed, releases began over the weekend, all intending to mitigate investigations into the regime's human rights violations. According to the Penal Forum, as of 7:00 pm on November 16, the release of 107 political prisoners has been verified. This is just additional evidence of the politicization of justice that threatens the entire population.
Relations with Brazil had some détente. Lula indicated that Maduro was Venezuela's issue, not Brazil's. The regime celebrated Lula's new position; however, it was disappointed when it found that Maduro was not on the special guest list for the Group of Twenty (G20) summit hosted by Brazil. Most Latin American heads of government are invited.
The real economy continues to unravel the stitches that the vice president's economic group has managed to make to try to contain inflation. Public spending continues to fall at the pace of declining SENIAT collections and oil export income despite Chevron fulfilling all its plans. The placement of the remaining oil, added to the weakness in prices, has proven quite challenging, aggravated by the lack of transparency in the state company's collection process.
Thus, despite the bounded flotation of the official exchange rate, now close to Bs45/$, the gap with the parallel currency market has proved untamable. It narrows with BCV interventions but quickly takes flight again and returns to +/- 20%. This situation has stirred up the inflation rate, which, according to the Venezuelan Finance Observatory, nearly tripled its previous value in October, as we mentioned last week (from 3.4% to 9.6%). As expected, the BCV stopped publishing the index, only doing so when it decreased.
Oil Operations
Last weekend, two major accidents occurred in hydrocarbon handling activities. The larger one was an explosion at the Muscar gas plant in Punta de Mata, Monagas State. The explosion and subsequent fire severely damaged the facility, which will require considerable time to repair. The effect of the accident has rippled as far as Margarita Island, where they have had to ration electricity supply due to lack of gas for generation. Petrochemical plants and gas handling facilities in the Jose area have also been affected. Additionally, the production shutdown is impacting the ability to dilute heavy crude from the Orinoco Belt to Merey 16 grade specifications and limiting feed to the Puerto la Cruz refinery.
The other event was at the PetroCedeño Upgrading plant, now 100% PDVSA-owned after the withdrawal of the Indian company, Jindal, as a partner. Apparently, in an attempt to reactivate delayed coking at this complex, a fire broke out that damaged the plant and will require major work to repair.
Regarding accident risks, The National Academy of Engineering and Habitat warned about the risk of a rupture of what is called the “Lake Maracaibo containment dike”, which protects the Eastern Coast of Lake Maracaibo (Cabimas, Tía Juana, Ciudad Ojeda, Lagunillas, and Bachaquero) from potential flooding. Subsidence of the subsoil after a century of oil production, coupled with the presence of active geological faults, creates a risky combination that requires continuous and active monitoring.
The Academy reports that the installed seismological network has been inactive for about 15 years, and the dike monitoring system is inoperative. It calls on PDVSA's Dikes and Drainage department and other relevant agencies to inform all citizens, particularly the inhabitants of the area, about actions taken and to be taken to minimize risks in the area. This area, because of its characteristics, should be classified as highly vulnerable.
National production decreased to an average for this last week of seven hundred and fifty-four thousand barrels per day (754 Mbpd) due to shutdowns and resulting diluent shortages. The regional distribution of production is shown below:
• West 198 (Chevron 91)
• East 106
• Orinoco Belt 450 (Chevron 106)
• TOTAL 754 (Chevron 197)
Chevron began drilling the last well of its campaign for 2024. The company is mobilizing the rig to the last well, of the seventeen they plan to drill.
Refining levels reached 184 Mbpd of crude and intermediate products, with a gasoline yield of 61 Mbpd and 74 Mbpd of diesel, maintaining gasoline rationing in large regions of the country.
Export programming in the eastern part of the country will have to be recalculated to incorporate the effects of the Muscar accident, partially addressed with inventories. A preliminary estimate indicates that crude exports for November could reach 580 MBPD.
CITGO
On November 14, CITGO Petroleum Corp., PDVSA's refining subsidiary in the U.S., announced its financial and operational results for the third quarter of 2024, which continue to show a healthy corporation capable of navigating the natural storms of the refining business. In summary:
· Total processing of 811 Mbpd, and an average crude processing capacity utilization rate of 96%.
· The higher processing of crude and feedstocks during the quarter, after completing scheduled maintenance during the second quarter, contributed to achieving a third-quarter net income of 66 million dollars, EBITDA of 281 million dollars, and adjusted EBITDA of 290 million dollars, compared to a net loss of 25 million dollars, EBITDA of 162 million dollars, and adjusted EBITDA of 149 million dollars in the second quarter of 2024.
· End-of-quarter liquidity was $3.6 billion, including the full availability of CITGO's $500 million accounts receivable securitization facility.
· Scheduled plant shutdown and maintenance activities were successfully executed.
Although CITGO management made no explicit mention of the status of claims by creditors of the republic and PDVSA (Crystallex et al.), we understand these continue to be bogged down in Delaware courts. In the case of the so-called PDVSA 2020 bonds, which follow a separate lawsuit in New York, OFAC extended asset protection (General License 5Q) until March 7, 2025.
