Barrels and Central Banks

 EL TALADRO AZUL

Published in Zignox. June 27, 2023

Despite expectations of a potential recession induced by rising interest rates, the oil global demand continues to track at 101 MMbpd with no signs of slowing down anytime soon. How a still hawkish monetary policy will affect the global energy balance?

Juan M. Szabo and Luis A. Pacheco 

 

China's economic recovery has fallen short of expectations, and the less rosy reality is tempering the oil markets' initial excitement about better prospects. And while the eastern giant's industrial recovery has not been up to par, with consumer-oriented sectors underperforming, the decision by the People's Bank of China to cut two benchmark interest rates by just 10 basis points each, is considered too small to make a difference. Therefore, the topsy-turvy reaction among market players was undoubtedly a foregone conclusion. 

On the other side of the world, the story is somewhat different, although the impact on the market has been the same. The Bank of England surprised many by raising interest rates from 4.5% to 5%, stoking fears of a recession in the Old Continent. This was not a solo increase, as the European Central Bank had announced a 0.25% hike, and central banks in Norway and Switzerland raised interest rates on the same day as the BOE. Also, the Federal Reserve in the US warned that two additional increases can be expected for the remainder of 2023. The central banks' strategy, and their consequential macroeconomic projections, have undermined confidence in the oil demand outlook, pushing prices down.

We face an oil anomaly. In one part, the perception that the oil market is in a “bearish mode” amid the expectation of a potential recession --that eventually the central banks will turn into an extended one-- as a way to subdue inflation. On the other hand, the market observes that for now and for the foreseeable future, world crude oil inventories are low and decreasing, a situation that could become critical if we consider that current consumption is at historical highs. These two sides of the market, negative sentiment and critical inventories, are engulfing the oil market in what some call “cognitive dissonance”. 

Global Supply

Non-OPEC+ supplies continue without showing signs of improvement. The US, the largest oil producer, continues to lose ground by experiencing a further reduction in active rigs, with -6 this week or 71 less than 12 months ago. The second-largest producer, Brazil, is plateauing at 3.2 MMbpd, with a decline that it will not be able to offset until the newly added rigs start supplying additional output potential, estimated for the end of the first quarter of 2024.

On the OPEC+ side, the only foreseeable change is the cut of 1.0 MMBPD announced by Saudi Arabia for July, the effect of which could be neutralized with the floating inventories they maintain on the coast of Egypt. So, there are no major-scheduled changes, although the beginning of the hurricane season in the Gulf of Mexico, as well as the unexpected events in Russia, could generate temporary interruptions in oil production. 

An analysis of drilling activity reveals that the few countries that show an increase in activity are more than offset by declines in other regions: The net result is a reduction of 18 rigs year to date.

Closer to the Latin American region, Ecuador will soon vote on legislation to ban production at one of its main oil blocks. According to public polls, the proposed bill has a high possibility of being approved in August. The issue concerns block 43-ITT in the Amazon region of Yasuní, which includes the Ishpingo, Tambococha and Tiputini (ITT) fields, where the state-owned oil company, Petroecuador, began operations in 2016. If the legislative initiative is approved, Ecuador would reduce its production by some 60 Mbpd, a reduction in oil revenue of more than USD1 billion/year. 

The completion of the gas pipeline to transport Vaca Muerta gas from southern to northern Argentina could put a few additional barrels of oil on the market, as a good portion of the gas to be transported is associated with oil. However, as is often the case in state-run activities, now that there is an infrastructure in place, there are no wells.

Global demand

The global demand continues to hover at 101 MMbpd and has not shown the signs of reduction that one would expect given the expectation of a recession induced by interest rate hikes: the market has been slow to digest or believe these signals. 

Although China has maintained its pace of crude imports, it seems that part of these volumes is being stored in its strategic reserve, as the internal demand for fuels is below estimates.

The Netherlands, after much discussion, has announced the upcoming October 1 as the final closure date for Europe's largest gas field, Groningen. The replacement of this gas in Europe will come from greater imports of LNG and from the increase in demand for crude oil.

The demand for aviation fuel, like the demand for oil for its transformation into petrochemical products, remains strong and with a tendency to grow, both in Asia and North America. 

The Basics: Demand/Supply Equation

From all of the above, we can infer that, for now, prices will remain volatile, reacting to a kind of "ping-pong" between the reality of the physical market and the emotion induced by emerging news. 

During the week, Brent and WTI prices reached lows of USD72/bbl and USD68/bbl, respectively, but on Friday prices experienced a recovery of USD2/bbl and USD1.5/bbl for Brent and WTI respectively.

Finally, although the political-military crisis in Russia quickly deflated, the situation could still lead to instability that infects the markets in general and the energy market in particular. Let's not forget that Russia's oil and gas production is a cornerstone of the global energy system. 

Venezuela, Politics, and Economy

The situations and events this week that have the greatest repercussion in the political/economic field that could have an impact on the future of the hydrocarbons industry are:

• The Maduro regime continues to refuse to return to negotiations with the opposition, in Mexico.
• The resignation of all members of the National Electoral Council (CNE), under pressure from the Venezuelan regime, further weakens the legitimacy of any electoral process going forward. 
• Roger Carstens, the US special envoy for hostage affairs, once again visited Venezuela. Their presence, and other recent visits by major Venezuelan debt holders, could indicate that there are talks between the US administration and the regime in Venezuela to lift the sanction that prevents the transactions of sovereign debt and PDVSA bonds, in exchange for the release of some political prisoners.
• The Central Bank of Venezuela (BCV) confirmed that, during the first 5 months of 2023, inflation has reached 100%.
• During the month of June, the bolivar has already lost 5% of its value in the parallel market, fueling inflation and the deterioration of the purchasing power of the population.

Hydrocarbons

Production: During the last months, crude oil production has stabilized, affected only by power outages, including the explosion of a PDVSA substation in Bachaquero, in western Venezuela, which affected some fields on the eastern shore of Lake Maracaibo: Barúa, Motatán, and Franchise. 

An explosion was also reported in the eastern region, at the Tejero Operations Center (COT), in Punta de Mata, where both light crude oil and gas are processed and compressed; the production could be negatively affected and in addition to an increase in venting and gas flaring. Downstream, processing could also be reduced or stopped altogether at the Puerto la Cruz refinery; also, the capacity to blend Merey 16 crude could also be affected. Information has been too scant to fully assess the damage and its consequences. 

In sum, the average production for June seems to be 710 Mbpd. The geographical distribution of production, showing Chevron's contribution in parentheses, is presented in the following table in thousands of barrels per day (Mbpd):
•      West                             100 (48 Boscán)
•      East /South                 162 (could change depending on the accident)
•      Orinoco Belt:              448 (70 PetroPiar and PetroIndependencia)
•      TOTAL:                        710 (Chevron 119)

The production of the joint ventures (JVs) operated by Chevron has reached as high as could be expected, considering that investments are not allowed under the OFAC General License (GL41 ) currently in force. The expected extension of the license has not occurred due to the suspension of the negotiation process in Mexico. Production in the West shows a certain upturn with the activation of wells in the Franquera Field.

Active drilling rigs in the country increased to 2, both operating for PetroMonagas in the Orinoco Belt. They are drilling and casing surface wells in tandem. People close to the operations report that both units are in poor mechanical condition, operating only 20% of the time.

Chevron 

A more detailed analysis of the levels of production in Venezuela recently, with an emphasis on the last eight months, just before the General License 41 was granted, allows us to conclude that the main element in the growth of production during the period, has been the management of production in Campo Boscán, in addition to the efforts of the multinational oil company to reduce deferred production in PetroPiar and PetroIndependencia, in the Orinoco Belt.

As can be seen in the graph, during the first 9 months of 2022, Campo Boscán produced variable volumes, between 25 and 55 Mbpd, mainly subject to fluctuations in the asphalt market in the Far East, where the production was going. During the negotiations of the terms of GL41, the field was closed and returned to production once the License was issued by OFAC, reaching a production close to 50 MBPD, equal to its production before the “strategic” closure.  

Chevron’s joint ventures in the Orinoco Belt received a different treatment. The decrease in production before 2023 was slight and a result of reduced maintenance activity, possibly to keep the upgrader at Jose operational. Once the license was granted, the recovery was gradual, since it was not just about opening valves, but also service and repair activities that only began after the license was granted. Also, problems with the reservoir have raised further complications: the increasing water invasion in some sectors of the exploitation block assigned to PetroPiar.

Downstream

The Venezuelan refining system has processed 230 Mbpd of crude and intermediate products. Most of it in the Paraguaná refineries (Amuay and Cardón, in western Venezuela), where ongoing operational problems in the catalytic cracking units (FCC) have limited the quantity and quality of gasoline supplied to the domestic market, producing only improved naphtha using reformer products. 

The Puerto la Cruz refinery, in eastern Venezuela, has also been operating and producing reduced volumes of gasoline and diesel, constrained by crude availability; the accident in El Tejero, may restrict further the availability of light crude oil. 

Although the start-up of the El Palito refinery in the central region was announced once again, that operation is still unstable. To the best of our knowledge, no product has been delivered to the local market, although a shipment of naphtha was received from Paraguaná, possibly for the FCC start-up or to distribute as gasoline in central Venezuela. 

The President of the Iranian Engineering Company (NIOEC), Farhad Ahmadi, in charge of the overhaul project, announced that El Palito refinery will be operating at capacity in about two months after the repair works are completed. PDVSA has not made an official comment.

Gasoline shortages have eased somewhat in places like Caracas and Valencia, although they remain critical and are exacerbated by shipments to Cuba, and the flow of contraband to Colombia, which has not stopped despite low availability of the fuel. It is expected that a shipment of Iranian gasoline will arrive in Venezuela in a few days.

Exports

It seems that June will close exports at around 500 Mbpd of crude. Although several vessels are anchored around the Jose terminal waiting to be loaded, the limitation is cargo capacity. Exports made and scheduled for June are shown below:
•      36 Mbpd were exchanged under the ENI/Repsol agreement.
•      30 Mbpd were sent to Cuba.
•      132 Mbpd are estimated under the Chevron License for PADD 3, in the US.
•      302 Mbpd in tankers to the Far East: 70 Mbpd through Iranian swaps and 232 Mbpd through intermediaries, both with China as final destination .

Additionally, around 75 MBPD of fuel oil was exported to Cuba and Singapore.

Income: Of the 575 MBPD of crude oil and products exported, only 374 of them generate income in foreign currency. We estimate that these barrels will bring $514 million to the Venezuelan regime. 

________________________________________

Note: A version of this article was published in Spanish by La Gran Aldea on June 27, 2023.

 

Barriles e Intereses

 EL TALADRO AZUL

Publicado en La GRAN ALDEA. Junio 27, 2023

M. JUAN SZABO / LUIS A. PACHECO

Justo cuando el mercado petrolero comenzaba a animarse a la idea de que un gran paquete de estímulo por parte de Beijing impulsaría la demanda del mayor importador de crudo del mundo, los precios del petróleo se han visto afectados después de que la realidad decepcionara. Los mercados han dado un vuelco después de que el Banco Popular de Chinarecortara dos tasas interés de referencia en apenas 10 puntos básicos cada una, considerados demasiado pequeños para marcar la diferencia. 

La recuperación económica de China no ha cumplido con las expectativas, y la emoción inicial en los mercados petroleros se ha visto mermada por una realidad menos positiva. La recuperación industrial de China no ha estado a la altura, y le ha ido peor que a los sectores orientados al consumidor.

En el otro lado del mundo, la historia es algo diferente, aunque el impacto sobre el mercado haya sido igual. El Banco de Inglaterra sorprendió a muchos aumentando las tasas de interés de 4,5% a 5%, lo que avivó los temores de recesión en Europa. Esto no fue un incremento en solitario, ya el Banco Central Europeo (BCE) había anunciado un incremento de 0,25%, y los bancos de Noruega y Suiza subieron las tasas de interés el mismo día que en Inglaterra. La Reserva Federal en EE.UU. (FED) advirtió que se pueden esperar dos aumentos adicionales para el resto del año. La estrategia de los bancos centrales, y las consecuentes proyecciones macroeconómicas, han socavado la confianza en las proyecciones de demanda de petróleo y empujaron a los precios hacia abajo.

Estamos en presencia de una anomalía petrolera. Por un lado, la percepción del mercado petrolero se deteriora en respuesta a la expectativa de una potencial recesión que tarde o temprano los Bancos Centrales convertirán en una recesión extendida, como el mecanismo de doblegar la inflación. Por el otro lado, ese mismo mercado observa que, por ahora y en el futuro previsible, los inventarios mundiales de crudo están bajos y con una tendencia a reducirse, una situación que se puede tornar crítica si tomamos en cuenta que los consumos actuales son los más altos históricos. Estos dos efectos: sentimiento negativo e inventarios críticos en paralelo, colocan al mercado petrolero en lo que algunos llaman “disonancia cognitiva”¹. 

Suministro Global

Los suministros No-OPEP+ siguen sin mostrar incrementos. EE.UU., el mayor de los productores, sigue cediendo terreno al experimentar una nueva reducción de taladros activos, -6 esta semana (71 menos que hace 12 meses). El segundo en nivel de producción, Brasil, se encuentra en una meseta a 3,2 MMbpd, con una declinación que no podrá contrarrestar hasta que los taladros recién agregados comiencen a generar potencial de producción adicional, estimado para finales del primer trimestre de 2024.

Por el lado de la OPEP+, el único cambio previsible es el recorte de 1,0 MMbpd anunciado por Arabia Saudita para julio, cuyo efecto podría ser neutralizado con los inventarios flotantes que mantienen en las costas de Egipto. De manera que no se observan mayores cambios programados, aunque el comienzo de la temporada de huracanes en el Golfo de México, así como los inesperados eventos en Rusia, podrían generar interrupciones temporales en la producción petrolera. 

Un análisis de la actividad de taladros² revela que los pocos países que muestran un  incremento en actividad están más que compensados con las bajas en otras regiones, el resultado neto es de una reducción de 18 taladros en lo que va de año.

Más cercano en la región, Ecuador se someterá a votación legislativa para prohibir la producción en uno de sus principales bloques petroleros. Según encuestas, la ley tiene una alta posibilidad de ser aprobada en agosto 2023. Se trata del bloque 43-ITT en la región amazónica de Yasuní³, donde la petrolera estatal Petroecuador inició en 2016 las operaciones de  producción, que incluye los campos Ishpingo, Tambococha y Tiputini (ITT). De aprobarse la iniciativa legislativa, Ecuador reduciría su producción en unos 60 Mbpd, que representa una merma del ingreso petrolero de más de 1,0 MMM$/año. 

La culminación del gasoducto para transportar el gas de Vaca Muerta desde el sur de Argentina, podría poner en el mercado unos barriles adicionales de petróleo en el mercado, ya que buena parte del gas a transportar es asociado a la producción del petróleo. Sin embargo, como a menudo es el caso en actividades estatales, ahora que hay infraestructura, no hay pozos.

Demanda Global

La demanda global continúa en cifras de 101 MMbpd y no ha mostrado los signos de reducción que uno esperaría dada la expectativa de una recesión inducida por las subidas de tasas de interés: el mercado ha tardado en digerir o creer esas señales. Aunque China ha mantenido su ritmo de importación de crudo, parece que parte de esos volúmenes está siendo almacenado en su reserva estratégica, ya que la demanda interna de combustibles está por debajo de los estimados.

Los Países Bajos, después de mucha discusión, anunció una fecha definitiva de cierre del yacimiento de gas más grande de Europa, Groningen: el 1º de octubre de este año. El reemplazo de este gas en Europa vendrá de mayores importaciones de LNG  y del  incremento en la demanda de crudo. La demanda de combustible de aviación, al igual que la demanda petrolera para su transformación en productos petroquímicos, se mantiene fuerte y con tendencia a crecer, tanto en Asia como en Norte América. 

Los fundamentos: ecuación demanda/suministro

De todo lo anterior, podemos inferir que, por ahora, los precios se mantendrán volátiles reaccionando a una especie de “ping-pong” entre la realidad del mercado físico y la emoción inducida por las noticias emergentes. 

Durante la semana, los precios del Brent y WTI llegaron a mínimos de 72 $/bbl y 68 $/bbl, respectivamente, pero el viernes los precios experimentaron una recuperación de 2 $/bbl y 1,5 $/bbl para el Brent y WTI respectivamente.

Finalmente, a pesar de que la crisis político-militar en Rusia se desinfló rápidamente, la situación todavía puede desembocar en inestabilidad que contagie al mercado en general y al energético en particular. No olvidemos que la producción de petróleo y gas de Rusia es piedra angular del sistema energético mundial. 

Venezuela

Política y Economía: Las situaciones y eventos de esta semana que mayor repercusión tuvieron en el campo político/económico que podrían repercutir en el devenir de la industria de los hidrocarburos son:

• • • El régimen de Maduro continúa negándose a volver a negociar con la oposición en México.
    • La renuncia de todos los integrantes del Consejo Nacional Electoral (CNE), bajo presión del régimen venezolano, debilita aún más la legitimidad de cualquier proceso electoral hacia adelante.
    • Roger Carstens, enviado especial de EE.UU. para asuntos de rehenes, visitó una vez más a Venezuela. Su presencia, y otras visitas recientes de importantes tenedores de deuda venezolana, podrían indicar que hay conversaciones entre las administraciones de EE.UU. y el régimen en Venezuela, destinadas a levantar la sanción que impide las transacciones de bonos de deuda soberana y de PDVSA, a cambio de la liberación de algunos presos políticos.
    • El Banco Central de Venezuela (BCV) confirmó que, durante los primeros 5 meses de 2023, la inflación ha llegado al 100%.
    • Durante el mes de junio el bolívar ya ha perdido 5% de su valor en el mercado paralelo, alimentando la inflación y el deterioro del poder adquisitivo de la población.

Hidrocarburos

Producción:Durante los últimos meses la producción de crudo se ha estabilizado, afectada únicamente por cortes en el suministro eléctrico, incluyendo la explosión de una subestación de PDVSA en Bachaquero, estado Zulia que afectó algunos campos en la Costa Oriental del Lago de Maracaibo: Barúa, Motatán y Franquera. 

Se reportó una explosión en el Centro de Operaciones Tejero (COT), en Punta de Mata, estado Monagas, donde se procesa y comprime tanto crudo liviano como gas, por lo que la producción de ambos podría verse afectada negativamente, además del aumento en venteo y quema de gas. Aguas abajo, se podría reducir el procesamiento o paralizar la Refinería de Puerto la Cruz, o reducir la capacidad para mezclar crudo Merey 16. La información ha sido demasiado escasa para evaluar completamente los daños y sus consecuencias. 

En suma, la producción promedio para junio parece ser de 710 Mbpd. La distribución geográfica de la producción, mostrando entre paréntesis la contribución de Chevron, se presenta en el siguiente cuadro en miles de barriles por día (Mbpd):

La producción de las empresas mixtas (EM) gestionadas por Chevron ha alcanzado el nivel razonable que se espera, considerando que no se permiten inversiones bajo la Licencia General OFAC (GL41) hoy en vigor. La ampliación esperada de la licencia no se ha producido debido a la suspensión del proceso de negociaciones en México. La producción en occidente muestra cierto repunte con la activación de pozos en el Campo Franquera.

Los taladros de perforación activos en el país aumentaron a 2, ambos operando para PetroMonagas. Están perforando y entubando pozos de superficie en tándem. Las personas cercanas a las operaciones informan que ambas unidades se encuentran en malas condiciones mecánicas, operando solo el 20% del tiempo.

Caso Chevron: Un análisis más detallado de los niveles de producción de Venezuela en los últimos años, con énfasis en los últimos ocho meses, justo antes de que se otorgará la Licencia General 41, permite concluir que el principal elemento en el crecimiento de la producción durante el periodo ha sido la gestión de producción en Campo Boscán, además de los esfuerzos de la multinacional petrolera para reducir la producción diferida⁴en PetroPiar y PetroIndependencia, en la Faja Petrolífera del Orinoco.

Como se puede ver en el gráfico, durante los primeros 9 meses de 2022, el Campo Boscán producía volúmenes variables, entre 25 y 55 Mbpd, sujeto principalmente a los vaivenes del mercado de asfaltos en el Lejano Oriente, a donde se destinaba la producción. Durante las negociaciones de los términos de la GL41, el campo fue cerrado y retornó a la producción una vez emitida la Licencia por la OFAC, llegando a una producción cercana a 50 Mbpd, igual a su producción antes del cierre “estratégico”.  

Las empresas mixtas (EM) en la Faja del Orinoco recibieron un tratamiento diferente. La disminución en la producción anterior a 2023 fue leve como resultado de la reducida actividad de mantenimiento, posiblemente para mantener operativo al Mejorador en Jose. Una vez recibida la licencia la recuperación fue paulatina ya que no se trataba solo de abrir válvulas, sino que requería de actividad de servicio y reparación que solo comenzaron después de la concesión de la licencia, complicado además por problemas con el yacimiento: la creciente invasión de agua en algunos sectores del bloque de explotación asignado a PetroPiar.

Refinación:El sistema de refinación venezolano ha procesado 230 Mbpd de crudo y productos intermedios. La mayor parte a través de las Refinerías de Paraguaná (Amuay y Cardón), donde los continuos problemas operativos en las unidades de craqueo catalítico⁵(FCC) han limitado la cantidad y calidad de las gasolinas suplidas al mercado interno, y solo se ha producido una nafta mejorada con productos del reformador. 

La Refinería de Puerto la Cruz ha estado funcionando y produciendo volúmenes reducidos de gasolina y diésel, limitada por la disponibilidad de materia prima; podría verse afectada a corto plazo por el accidente en El Tejero que restringirá la disponibilidad de crudo liviano.  Aunque se anunció, otra vez, la puesta en marcha de la Refinería El Palito, esa operación no ha podido ser estabilizada. Hasta donde sabemos, no se ha entregado ningún producto para el mercado local, aunque se recibió un cargamento de nafta mejorada de Paraguaná, posiblemente para la puesta en marcha de la FCC o para distribuir como gasolina en el centro de Venezuela. 

El presidente de la compañía de ingeniería iraní (NIOEC: por sus siglas en inglés), Farhad Ahmadi, a cargo del proyecto de recobrar la refinería, anunció que  El Palito estará operando a capacidad en unos dos meses, después que concluyan los trabajos de reparación. PDVSA no ha hecho pronunciamiento oficial.

La escasez de gasolina disminuyó un poco en lugares como Caracas y Valencia, aunque sigue siendo crítica y se ve agravada por los cargamentos a Cuba, y al flujo de contrabando hacia Colombia, que no ha cesado a pesar de la poca disponibilidad. Se espera que en unos días llegue a Venezuela un cargamento de gasolina iraní.

Exportaciones: Parece que junio cerrará con exportaciones de alrededor de 500 Mbpd de crudo. Aunque una cantidad de embarcaciones están fondeadas cerca del Terminal de Jose, la limitación es la capacidad de carga. Las exportaciones realizadas y programadas para junio se muestran a continuación:

• • • Se canjearon 36 Mbpd bajo el acuerdo ENI/Repsol.
    • Se enviaron 30 Mbpd a Cuba.
    • Se estiman 132 Mbpd bajo la Licencia Chevron a PADD 3, en EE.UU.
    • 302 Mbpd en tanqueros hacia el Lejano Oriente: 70 Mbpd a través de “swaps” iraníes y 232 Mbpd a través de intermediarios, ambos con destino final China.

Adicionalmente, se exportaron alrededor de 75 Mbpd de fueloil a Cuba y Singapur.

Ingresos: De los 575 Mbpd de crudo y productos exportados en el mes de junio, solo 374 Mbpd generan ingresos en divisas y se estima le reportarán al régimen venezolano 514 MM$.

—
(1)La disonancia cognitiva describe el estrés mental y la incomodidad que experimenta un individuo que se enfrenta a dos observaciones verdaderas, pero aparentemente contradictorias.
(2)https://rigcount.bakerhughes.com
(3)Durante el gobierno del presidente Rafael Correa (2007-2017) hubo una iniciativa fallida para no desarrollar los recursos del subsuelo a cambio de financiamiento internacional.
(4)Producción diferida: Es el volumen de crudo que por diversas razones no se produce de acuerdo al potencial de producción esperado, en un determinado momento.
(5)https://es.wikipedia.org/wiki/Craqueo_catalítico

—
*La ilustración generada utilizando Midjourney, realizada por Luis A. Pacheco, es cortesía del autor al editor de La Gran Aldea.

—
*M. Juan Szabo, Analista Internacional.
*Luis A. Pacheco, non-resident fellow at the Baker Institute Center for Energy Studies.

CHINA to the Rescue. Published in Zignox June 20, 2023

 ZIGNOX

EL TALADRO AZUL

The world's second-largest economy is improving its performance while authorities are willing to protect and extend the recovery. No doubt, the Asian nation is nowadays the main driver of the world's oil demand. 

Jun. 20 08:44 AM GMT-5 | JUAN M. SZABO, LUIS A. PACHECO

(MADRID, BOGOTA--)  As the oil market continues to experience price volatility amid a sharp contrast between the fundamentals of the physical and the perceptions of the paper markets, in the Far East a tenuous light has begun to illuminate the way.

After many doubts about China's post-pandemic economic growth and its impact on oil demand, the news from the Asian giant finally turned positive, boosting oil prices. The news could not have been better timed, coinciding with the Federal Reserve pausing its monetary tightening at least temporarily. The positive signals from China also offset an unexpected build-up in US crude and product inventories.

As a highly centralized economy, China assigned higher import quotas to its refineries. Moreover, the People's Bank of China, PBOB, asked the country's top lenders to lower their deposit rates, paving the way for the central bank to cut its policy rate by 0.1 percentage points on June 13th. The reduction itself is insignificant, but it indicated that the government is not oblivious to the danger that the current recovery may be fragile. These decisions are aimed to inject liquidity into the financial system, which should promote greater economic activity and purchases by private refineries, increasing the demand for crude oil.

As a matter of fact, signals emanating from China's economic recovery are already visible: as measured at the end of May the nation's refining output rose by 15%, and a marked increase in the charter rates of Very-Large Crude Carriers (VLCC) was also observed.  VLCC and Ultra-Large Crude Carriers, known as ULCC, are the types of tankers used to transport crude oil to China. India's purchases moved in the same direction, strengthening bullish sentiment regarding oil demand. 

Whether this dynamic is sustainable over time is something to monitor carefully, as the Asian economy is currently the main driver of the world's oil demand.

In addition to taking these steps, China is also considering issuing approximately $140 billion in special treasury yuan-denominated bonds to help indebted local governments and to boost business confidence.

In the old continent, the European Central Bank, ECB, extended its policy of monetary stance and continued with a progressive rate increase, focused exclusively on inflation control and the consequent slowdown in economic growth.

Meanwhile, OPEC+ has maintained an unusual silence, perhaps due to the somewhat negative reaction to its recent decision on production quotas. It seems that the path taken earlier this month so far has only benefited Russia. Evidence of Russia's success within the cartel is the redefinition of its quota for 2024, from 9.828 MMbpd, initially announced at the end of the meeting on June 4, to 9.949 MMbpd as the final figure. In any case, both exceed the actual production capacity of that country for next year.

Facts seem to confirm that supply will remain largely tight in the face of rising demand - not only in Asia but also in other parts of the world. The most evident confirmation of this trend is the performance of global inventories, which since last year have hovered around sub-average levels; production cuts, both voluntary and involuntary, will force these levels to lows not seen in years.

In this sense, as we have said in previous editions, the three non-OPEC producers with growth potential, namely US, Brazil, and Guyana, will not show additional output. In the case of Guyana, the expected increase will take place at the end of the year; and for US and Brazil, the scenario will materialize well into 2024. In the US, the trend of reduction in activities continued: the last week another eight rigs in conventional and non-conventional basins stopped operating.

The prospects for a nuclear agreement with Iran seem to have faded away, perhaps due to the advancement of the electoral campaign in the US. In any case, when analyzing the possible consequences of lifting oil sanctions on Iran, it may be concluded that the only effect of importance will be on the mechanisms used to circumvent the sanctions since the volumetric effects would not be significant.

Another element to consider, although due to its magnitude, it is not considered material, is the commitment announced by the Biden administration to continue filling in the strategic reserves with 6 MMbbl, in addition to those announced last week.

Given all these changes and variables, prices during June have suffered extreme volatility, but the markets closed last week on a positive note. At the close, Brent was trading at USD76.61/ bbl and WTI at USD71.44/bbl, 2% above the previous week.

On the supply side of natural gas to Europe, the plans of the Dutch government to close the Groningen natural gas field this year, despite the precarious supply position in the old continent, are striking. Groningen is the largest natural gas field in Europe, but the extraction of almost 75% of the recoverable volumes has resulted in ground subsidence that has generated numerous earthquakes that have caused social pressure to shut down production.

On a curious note, the term “Dutch disease” was coined in 1977 by the British magazine The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959.

Energy Transition

ENERDATA, an independent research company that specializes in the analysis and forecasting of climate and energy issues, presented this week its annual report on global energy trends, which portrays how the world is doing in its aspiration to transform the system. of world power generation.

From the report, we extract the most striking figures for the years 2021 and 2022 for the G20 countries :

• The post-pandemic economy has resumed its growth path, showing annual rates of +6.2% for 2021 and +3.2% for 2022, which compares with +3.4% for 2010-2019.
• Naturally, this economic growth is reflected in energy consumption, which shows annual growth rates of +5.1% (2021) and 1.7% (2022), compared to +1.9% for 2010- 2019. The annual energy consumption of the G20 (2022), in terms of oil equivalent [1], was 11.8 Gtoe (11.8 trillion tons, or what is the same MMboed 237). The G20 countries account for about 80% of the world's energy consumption
• The variable derived from the above, given the composition of the global energy matrix, are CO₂ emissions, which had annual growth rates of +6.3% (2021) and +1.9% (2022), which compares with +0.8% for 2010-2019. These figures measure emissions from combustion, which account for more than 80% of all CO₂ emissions.

As expected, the reduction in emissions during 2020, a product of the recession induced by the pandemic (-4.9%), was not sustainable once the economy began to recover. However, not all economies have returned to pre-pandemic dynamism, particularly China, which took very strict quarantine measures that are only beginning to be relaxed in 2023.

ENERDATA also focuses on the Carbon Factor, that is, CO₂ emissions per unit of energy consumption (TCO 2 /Toe). This factor has been decreasing since COP21 (Paris 2015) in the G20countries, however, and this is the relevant point, the gap versus the established objective has been widening. This is because the power generation is still 60% thermal.

In the G20 countries, the consumption of fossil fuels increased in the post-pandemic period, except for natural gas, whose consumption decreased in 2022 as a result of the crisis in Europe associated with the war in Russia and Ukraine. In any case, fossil fuels still represented, in 2022, 81% of the primary energy used in the G20 countries

.

On the other hand, in 2022, there was a significant increase in the use of solar energy (+27%) and wind energy (+13%) in the generation of electricity, although this continues to be dominated by thermal generation. On wind energy, China and the US showed the highest growth, while in the solar energy sector, China is undoubtedly the dominant player: 45% of new installations were made in the far eastern country. The other side of that coin, is that China reportedly licensed more coal-fired power plants in 2022 than at any time in the last seven years. That is the equivalent of about two new coal-fired power plants a week.

In short, the post-pandemic has witnessed the recovery of the economy and hence energy consumption. And although there are advances in the use of non-fossil energies, they are far behind what was planned to achieve the objectives that have been set out in international treaties. This evidences the complexities that still exist to convert a system of transformation and use of energy created over more than a century and global in scope.

As an example of these complexities, oil giant Shell held a meeting with capital market players in New York City, surprising few with what could be seen as a shift in strategy by its new CEO, Wael Sawan.

In 2021, Shell said its oil production had peaked in 2019 and was set to decline continuously over the next three decades, as it shifted its focus to the renewables side of the business.

However, the post-pandemic surge in demand for oil and gas, and the Russian invasion of Ukraine, with the subsequent major dislocation of energy trade, has clearly demonstrated "the fragility of the energy system when we deprive it of the supply it requires", the company’s CEO stated in an interview earlier this year. He also added that Shell's plan to cut its oil production by up to 2% each year during this decade was under review.

At this week's New York meeting, the senior manager said:

“We are investing to provide the secure energy customers need today and for a long time to come, as we transform Shell to win in a low carbon future. Performance, discipline and simplification will be our guiding principles as we allocate capital to improve shareholder distributions, while enabling the energy transition."

Shell's change in strategy follows the one announced by BP in February. The UK-based major oil company said in its latest strategy update that it aims to produce more oil and gas in the near term.

Again, the transition path to which the world has idealistically committed itself will be long and winding. The shifting position of multinational oil companies will not come without reactions from the other side of the argument – one can expect ESG investment funds to react negatively.

Venezuela, political-economic aspects

Economically, the figures continue to indicate a slowdown as a result of the decline in demand due to the diminished purchasing power of the population, the intermittency of public services, and in particular the scarcity of motor fuels that has repercussions in all areas of the economy. The country's income in foreign currency hardly allows trying to stabilize the parity of the monetary sign.

As a result of this situation of economic debacle, it has been rumored that the regime has maintained contacts with the White House to try to unfreeze the process of easing sanctions, but two events have arisen that the parties did not count on.

On the one hand, the actions of the Venezuelan regime to interfere in the transparency of the opposition primary elections (the removal of the National Electoral Council), which presages what it would be willing to do to interfere with the credibility of the presidential elections scheduled for 2024.

On the other hand, former President Trump, burdened by judicial accusations, doubled down on his campaign to win the Republican Party primaries, indicating that he was being subjected to a witch hunt and decided to go on the attack against the Biden administration.

The former president put a series of sensitive issues on the table, among which is the case of Venezuela. He exposed that the maximum pressure relationship his administration had imposed on the Maduro regime had morphed into covert financing of a dictator, and that the Biden administration was ready to further liberalize economic sanctions without any evidence of concessions by Maduro’s regime.

This criticism has the ear of both Republicans and many Democrats, since each legislator and voter interpret the information according to their own agenda: as helping a dictator, turning a blind eye to human rights violations, promoting fossil fuels, or simply as an affront to the US oil industry.

If this were not enough, former President Trump insinuated that behind his policy of pressure on Venezuela during his administration was the interest in controlling oil reserves, thus distorting the opposition process in that period and giving the regime renewed arguments to persecute the democratic actors.

In any case, these events in North American and Venezuelan politics will probably paralyze any initiative that was being discussed around economic sanctions.

Thus, on the oil operation, we must focus on a "status quo" scenario, since there is little probability that the national hydrocarbons' industry will materially increase the injection of financial resources for the economy, except for an increase in oil prices that would also be undermined by the discounts implicit in trading Merey crude and DCO in the Asian markets.

Operational Activities

Electrical problems are wreaking havoc on national oil production. OPEC secondary sources assigned Venezuela 735 Mbpd of production, while our report indicated production of 712 Mbpd. The difference between the two figures is perfectly explainable since the OPEC figure includes the diluent used in the production process of heavy crude oil in the field, which varies between 18 and 22 MBPD.

Production for the week ending was 698 Mbpd, 5 MBPD lower than last week, due almost entirely to power failures. The geographic distribution is indicated below in Mbpd:

• West                                          89 (46 Boscán)    
• East/South:                              161           
• Belt:                                           448 (68 PetroPiar and PetroIndependencia)  
• TOTAL:                                      698 (Chevron 114)

The Venezuelan refineries processed 230 Mbpd of crude oil. According to official sources, “El Palito” refinery (in the central region of the country) was commissioned, with its 20 MBPD catalytic unit working. However, we have not been able to identify shipments of finished products from that refinery, nor have we observed the arrival of Iranian light crude to be processed there. Possibly, the refinery is in the start-up process prior to the stabilization of the processes.

The Puerto la Cruz refinery (in the eastern part of the country) could be operating at low levels, limited by the availability of light crude oil. While the Paraguaná Refining Complex (in the northwestern region), continues with problems in the processes directly related to the manufacture of gasoline. Consequently, the gasoline situation in the country is critical and will not show improvement until the arrival of a shipment of Iranian gasoline that is sailing to Venezuela.

Exports in the first half of June averaged 440 Mbpd. The majority of this volume was sent to the Far East, with the final destination being China. Exports to PADD 3 in the US, managed by Chevron, register less movement than usual, around 65 MBPD, as a result of a limited tanker movement schedule, but they will be compensated in the second fortnight. Only one tanker was dispatched to Cuba, and so far, this month, no tankers destined for European barter have been loaded.

Recently, the oil minister, Colonel Tellechea, showed a projection of crude oil production until the end of the year 2023, highlighting the milestones of reaching 1.0 MMbpd in August and close to 1.2 in December, with important developments in the west and in the Orinoco Belt.

An analysis of those projections reveals the improbability of their coming true. The attached graph shows the official projection and the red line corresponds to the actual numbers to date and our projection for the rest of the period.

For example, for the month of May, the official projection indicates a production of 891 Mbpd, but the information sent directly by the Ministry to OPEC was 819, the apparent lag already began in March. These trends do not bode well unless there is a policy shift leading to changes in the sanctions regime.

 

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[1]This is obtained by equating the energy content of all sources to the energy content in one metric ton of oil.