OPEC+ gathers on June 4 as the oil market shows a particular uneasiness. Saudi Arabia's Prince Abdulaziz bin Salman has put short-sellers on alert, while Russia's Deputy Prime Minister Alexander Novak contradicted him on expectations of a production cut. What comes out of this meeting will prolly set the tone for the rest of 2023.
| JUAN M. SZABO, LUIS A. PACHECO
(MADRID, BOGOTA--) The oil market is a complex and constantly changing puzzle. There are many factors that can affect the price of oil: supply and demand, economic growth, political instability, and natural disasters. As a result, it can be difficult not only to predict how this market will behave in the future but also to explain what has already happened.
OPEC+, which brings together the OPEC countries and 10 other producing nations, has a meeting scheduled for June 4, in Vienna, the first they’ll have held in person in a long time. Leading up to the meeting, the group's natural leader, Saudi Arabia, has been in the news this week selling the narrative of supply security. The kingdom wants the markets to respond with prices that guarantee both their financial needs and a healthy balance in the supply/supply equation.
The Saudi kingdom's energy minister, Prince Abdulaziz bin Salman, took advantage of Qatar Economic Forum to send a warning to those who the sell oil short, advising them to proceed with "care"; everyone was reminded of the surprise production cut last April, which caught speculators with their pants down.
However, the next day, Russia's Deputy Prime Minister Alexander Novak contradicted him on expectations of a production cut at the OPEC+ meeting, assuring that Russia did not expect changes in strategy. Novak's announcements caused a sharp decline in prices, and he had to retract, saying that Russia and OPEC+ will decide what is best for the oil markets, adding that OPEC+ can act at the June meeting if necessary.
In general, oil prices have been on a downward trend since June 2022, which does not please the Saudis, nor do they sympathize with the speculators who are betting that this trend will continue.
The meeting in Vienna is likely to end with an ambiguous announcement, but with a clear message that OPEC+ will not allow price erosion to continue. The current conditions correspond to higher theoretical prices, suppressed, some think, by the fear of an economic recession that has not yet materialized.
Another element that has affected the markets, in general, has been the inconclusive negotiations between the White House and the House of Representatives to approve an increase in the US debt ceiling. However, last Sunday we learned that President Joe Biden and the leader of the House of Representatives, Republican Kevin McCarthy, sealed the final elements of an agreement.
According to Reuters, the details are not fully finalized, but the crux of the agreement is to keep total spending levels, excluding defense, at 2023 levels for two years. The accord would be carefully structured to be able to go through both houses of Congress with a minimum Democratic and Republican majority in each. Whether this is acceptable to radicals on both sides remains to be seen.
Wall Street has also contributed to diluting the bearish sentiment in the markets, at least for now. Thanks to the technology sector and the euphoria around companies that benefit from artificial intelligence some investors are getting some solace. This may be a false positive, as the rally is concentrated in the big tech companies, while the rest of the market languishes. In any case, the markets seemed to put aside the uncertainty about the progress of the talks to avoid a US debt default and the perceived disagreements within the Fed on the course of US monetary policy.
The Pillars
On the other hand, the physical realities of the oil market, that is, the elements that make up the fundamental balance between demand and supply, tell their own story. Demand is above 100 MMbpd, and even the most conservative analysts predict an additional increase of more than 1.0 MMbpd before the end of the year, this because of higher consumption of gasoline and aviation fuel in the US. and economic growth in Asia, mainly China and India.
On the supply side, the situation has many more edges. Reductions are observed due to, among other factors, the lack of Turkish agreement regarding the passage through its territory of Kurdish crude oil from Iraq; production shutdowns due to clashes in Nigeria; forest fires in Canada; maintenance of facilities in Brazil; and the decreasing rig activity in the US (-9 rigs).
The case of the US is particularly striking, since while there are reductions in inventories of both crude oil and products, with prices rebounding, the industry chooses to limit its activity, just when the administration of President Biden carried out the first round of land leases, on federal lands in New Mexico and Kansas, since the approval of the law on climate change.
Regardless of how the June 4 OPEC+ meeting turns out, under current conditions the OPEC+ countries have already reduced their May exports by about 2.0 MMbpd. These reductions are partly voluntary, as in the case of Saudi Arabia and the United Arab Emirates (UAE), but in others, they reflect uncompensated natural decline, as in the case of Russia, and unexpected events, such as the case of Nigeria.
The impact that the re-election of President Recep Tayyip Erdoğan in Turkey will have on supply dynamics must also be factored into the oil picture if he continues his policy of alignment with Russia's interests.
In any case, when contrasting the demand with the supply, there is evidence of a shortage of almost 2 MMBPD that will have to be supplied by draining inventories and/or changes in the OPEC+ quota strategy, limited to the countries that have idle production capacity.
The sum of all the variables points to higher prices in the second half of the year, as well as in 2024, which contrasts with the EIA projections starting in 2024.
The increase in crude oil prices can only be reversed with a material increase in investment in the hydrocarbons sector, which very few companies or countries are planning to do at this time.
The supply deficit was reflected in an increase in crude oil prices in the last days of the week. At the close of the markets, the Brent and WTI crude oil markers were trading at $76.95 and $72.26/bbl respectively.
It is worth mentioning an oil transaction that, due to its size, would not usually arouse much interest. However, its background and the current situation make it news in the Latin American oil environment. It involves the purchase, by the Mexican billionaire Carlos Slim, of a minority stake (49.9%) in the Mexican unit of Talos Energy (NYSE: TALO) for $125mm, to participate in the development of Campo Zama, in shallow waters of the Gulf of Mexico. The discovery in Zama (600 MMbbl of reserves) was made by Talos and its partners, who had obtained the block in the “Apertura” tenders promoted under President Enrique Peña Nieto. The company clashed with Pemex and AMLO’s government, upon finding that the deposit extended to an adjacent Pemex block. The Mexican authorities forced Pemex, as operator, and Talos threatened to go to arbitration but ended up settling with Pemex. The low price paid by Slim reflects the current Mexican country risk.
Energy Transtion
Periodically, we will be commenting, in addition to oil and gas, about events in what is perhaps the most talked about political agenda at a global level, the Energy Transition, including the role of fossils in that transition.
This past week, the International Energy Agency (IEA) published its Annual Energy Investment Report. The report became news for stating that investments in energy worldwide are growing significantly. Investments in "clean energy" are expected to exceed USD 1.7 trillion in 2023, a figure higher than expected investments in fossil fuels, USD 1.0 trillion.
Fatih Birol, executive director of the IEA, argues that these figures show a major breaking point in investments in the energy sector, and make him optimistic about the possibility of still reaching the objectives of the agency’s Net Zero for 2050 scenario.
A more detailed analysis of the numbers shed light beyond the headline. Investment in clean energy includes not only power generation (39%), but also investment in efficiency (21.6%), networks (19%), electric vehicles (7.4%), batteries (2.12%), and even nuclear (3.6%). The report also warns that, although the increase in investment is positive, it is concentrated (90%) in advanced economies and China. Higher interest rates, unclear policy frameworks and market designs, financially constrained public services, and a high cost of capital are holding back investment in many other countries.
On the other hand, the question arises whether enough investments are being made in the fossil fuel sector to achieve a transition without disrupting the global energy system. The report identifies that the amount of new oil and gas resources approved for development, in 2022 and 2023, has been below the average level observed over the past decade. However, 2023 is seeing a 25% increase in new approvals relative to 2022 and most of them are for natural gas, reflecting the drive to fill the shortfall in Russian supply.
Some analysts think that investments in oil and gas are not enough for the short and medium term, given the demand projections, but in the long term they may be redundant, depending on the reduction in demand that IEA would like to see. It is this dilemma, especially in natural gas, that is difficult to resolve to make decisions about long-term projects.
On the other hand, the experience of the last 18 months in Europe, because of Russia's invasion of Ukraine, suggests that energy security is as important a variable as environmental goals, and that crises make the strongest strategies change. In any case, a report worth reading with some care.
Closer to our latitude, Colombia presents an interesting case study in the complications of advancing the energy transition. President Gustavo Petro was elected (2022) on a platform that predicates the elimination of fossil fuels not only as an energy source, but also as an important pillar of the economy, although Colombia's emissions in the global context are negligible. True to their word, the energy minister has been promoting the idea that there is no need to award new oil and gas exploration contracts, arguing that the country has sufficient oil and gas reserves to navigate the transition, betting on investments in solar and wind energy
Reality has the bad habit of invading even the most laudable designs. This week, Colombia's National Hydrocarbons Agency (ANH) announced the country's December 2022 oil and gas reserves, and alarm bells began to ring, not so much because the volumes were a surprise, Colombia is not a particularly prolific basin relative to its neighbors, but because the figures contradict the government's strategy and messages.
To further complicate matters, ENEL (BIT: ENEL) announced that it was indefinitely suspending the execution of the Windpeshi Wind Project and is evaluating its sale. This project, located in La Guajira, in the northeastern region of the country, would have an installed capacity of 205 MW and would generate 1,011 gigawatt-hours/year, energy capable of meeting the annual needs of approximately 500,000 homes. The company explained that, due to the blockades of the communities, a customary occurrence for almost all infrastructure projects, it cannot guarantee the construction rhythms of the project and, therefore, the economic returns necessary to continue investing.
A week earlier, the Ministry of Mines and Energy had announced that the document detailing the roadmap for the energy transition in Colombia would no longer be published in May of this year, as expected, and a new estimated date was proposed: February 2024. We are almost certain that the transition will occur, but also that it will not be in the terms of time and space that have been postulated, in Colombia as well as everywhere else.
Venezuela: Political-economic aspects
The Venezuelan regime has refused to return to the negotiating table with the opposition, even though the decision has a cost in terms of oil revenue due to the freezing of the liberalization of economic sanctions by the US government.
The economy continues to show signs of weakness. The parallel exchange rate reached 28.2 Bs/$, a weekly depreciation of 4%, and it is observed that new businesses, especially in the service and restaurant sector, are having trouble keeping their doors open. Wages continue to deteriorate, and faulty public services keep the country in almost continuous protest. During this week, there were power blackouts and restrictions throughout the country, with greater emphasis on the central and western regions.
The month of May has passed without any major shocks in the operations of the hydrocarbons sector, except for the effect of power cuts and blackouts. Production for the week averaged 704 Mbpd, distributed as follows:
• West 98 (49 Boscán)
• East/South: 164
• Belt: 442 (61 PetroPiar and PetroIndependencia)
• Total: 704 (Chevron 110)
The refineries processed some 200 MBPD of crude oil and intermediate products, with low yield in terms of gasoline. The shortage of gasoline is becoming a widespread problem in the interior of the country. According to PDVSA, part of the problem is due to the numerous illegal taps installed in the national distribution system. Another reason, not mentioned, is the supply of all kinds of fuels to Cuba, where they are facing an energy crisis of major proportions.
The export of crude oil, for the month of May, is above 500 MBPD, of which 114 MBPD have been destined for the US refineries located in PADD 3, 25 MBPD were dispatched to Cuba, 35 MBPD to Spain under an ENI/Repsol debt barter, and more than 300 MBPD to China through intermediaries and barter operations with Iran.
OFAC published General License 8L (GL 8), through which it extends the operating limitations that were in effect related to the four large international oil service companies. Since a new modified license has not been issued to Chevron, the current conditions are considered renewed with the same authorizations and limitations contained in the license published at the end of last year.
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