A potential nuclear and oil agreement with Iran may bring as much as 1 million barrels of oil to a market constrained by economic recession fears.
JUAN M. SZABO, LUIS A. PACHECO (MADRID, BOGOTA--)
Just days ago, the OPEC+ decision to cut production aimed to set the course for the oil market. But the gravitational force of the announcements issued from Helferstorferstrasse 17, in Vienna, is less strong today and shorter the duration of their effects.
The ink is barely dry and the attention of pundits and analysts has turned to an issue that was not even on the radar of the oil world: A potential Iranian nuclear/oil agreement.
The Middle East Eye reported last week that talks between US and Iranian representatives were close to an interim agreement on nuclear enrichment and oil exports. The unexpected news was denied by the parties shortly after appearing in the media, but not fast enough to prevent a sharp decline in oil prices. The market assumed that some contact or negotiation must be taking place that can add additional barrels.
The widely circulated MEE article detailed contacts made between US Special Envoy for Iran, Robert Malley, and Iran's ambassador to the UN, Amir Saeid Iravani. The subsequent denial of the leak was interpreted as a political effort at to conduct some damage control. Iran's Supreme Leader, Ayatollah Ali Khamenei, told Iranian media on Sunday : "There is nothing wrong with the deal [with the West], but the infrastructure of our nuclear industry must not be touched."
The commotion caused by this news took place hours after a meeting on June 7 between the US Secretary of State, Antony Blinken, and the Crown Prince of Saudi Arabia, Mohamed bin Salman, in Jeddah. And some analysts speculated that the purpose of the reunion was to inform the Saudis that a deal was being negotiated with its regional arch rival.
A potential agreement would allow the export of 1.0 MMbpd of Iranian crude, the same volume that Saudi Arabia announced it would cut in July, triggered some suspicions among analysts, especially when seen in the context of the unfreezing of relations between the Saudis and the Iranians.
In parallel, the Washington Post reported on a classified document describing how, after President Biden vowed to impose "consequences" on Saudi Arabia for cutting oil production last year, Mohammed bin Salman privately threatened to cut ties and retaliate financially.
In addition to all these coincidences, or carefully planned events, independent oil tanker trackers, such as TankerTrackers, reported a substantial increase in Iranian exports in the last two weeks, as the saying goes: “There's no smoke without fire.”
Every time that evidence emerges, based on fundamentals, for oil prices to rebound, there is a headline, a rumor, a reality, that reverses the upward trend, just like the noise around Iran this week. In a market fearful of a possible recession, any dissonance translates to weaker prices.
This continuous confrontation between fundamentals and perception has kept the prices of crude oil and its products in a range that consuming countries celebrate. But sooner rather than later, the market will react to the reality that there is not enough supply to meet future demand, if there is not an effort to increase investment to reverse that deficit.
The latter is perhaps the explanation for many of the events that are in full swing on the oil patch: the change of position of the Biden administration towards Iran and Venezuela, as well as the sending of emissaries to the countries of the Persian Gulf, the only ones speeding up investments in hydrocarbons.
For estimating global oil supply levels, it is safe to assume that US production will remain stable. The combination of lower prices –and the greater focus of oil companies on compensating their shareholders and promoters, devoting the cash flow generated to reduce debt, pay dividends and buy back their own shares–, has reduced investments dedicated to growth.
Thus, during 2023, it is reasonable to forecast a slight but continued reduction in US production, with a turning point in early 2024, when production would increase as the effects of the corporate consolidation process that has been occurring in the “unconventional” oil and gas basins begin to kick-in. Operating companies, including Exxon and Chevron, more efficient because of operational and financial synergies, stronger balance sheets and access to cutting-edge technology, would return to the path of growth.
Another point that weighs on the US oil strategy is the fact that during the 2022's energy crisis, they drained almost half of their strategic reserves, and now it is their turn to refill them. They are starting with a timid purchase of 6 MMBls at a price just above USD73/bbl.
The case for two countries
In the southern hemisphere, we find two sources of rising oil production in the coming years. On the one hand, Guyana, which is rapidly developing the newly discovered reserves, is already producing almost 400 Mbpd and is estimated to reach 650 Mbpd by the end of the year. The country is on track for what is shaping up to be a safe development of up to 1.0 MMbpd by the end of 2027.
The other center of development, also in deep water, is Brazil, whose production has increased by 2.0 MMbpd since the beginning of the century, thanks to the timely incorporation of the development of pre-salt fields in 2013, just when the production from the traditional basins of Santos and Campos began its decline and depletion.
Brazil's current production is about 3.2 MMbpd, on track for 4.3 MMbpd, according to Brazilian forecasts. However, to reach those levels, they will have to find and develop new reserves.
Petrobras planned to look for the same type of geological formation discovered in Guyana, at the delta of the Amazon River. But as we mentioned in this space before, they have not obtained the environmental authorization to start the exploration. Although Brazil’s production is stagnant at 3.2 MMbpd, it is estimated that it will add some 300 Mbpd in the next 12 months, as five new platforms will develop the pre-salt.
There are no developments on the horizon in other latitudes capable of materially changing the composition of global supply in the short term.
Meanwhile, the market tries to manage this information with the changing information coming from China regarding the effectiveness of the stimuli applied to the economy, and the action taken by the US Federal Reserve, betting that it will pause raising interest rates for the first time in more than a year. Similarly, the European Central Bank is rethinking continuing with the interest rate increases, considering that the European Union just entered a technical recession, by repeating the negative rate of 0.1% growth in the first quarter.
In short, the global demand for oil is currently between 100 and 101 MMbpd, and its variation over time is a function of the monetary policy decisions of the Central Banks, in their efforts to contain inflation, and the behavior of the Chinese economy. These variables will take time to manifest themselves, and they will do so with the organic growth of world energy consumption.
Hence, the balance between supply and demand is today being determined by the supply side of the equation, which could improve with an investment policy in the hydrocarbons sector in the most competitive regions or with a global or selective removal of US economic sanctions against Iran and eventually against other countries.
As it is, the current oil market is in a gloomy mood. At the close of the market last week, Brent was trading at $75/bbl, while WTI was just above $70/bbl. Notwithstanding this one-off result, our projections continue to indicate a rebound during the second half of 2023, when inventories reach levels that begin to worry the market.
Energy Transition
One of the most worn-out arguments in the energy transition conversation is to attribute exceptional natural phenomena to global warming and blame, by implication, the fossil fuel industry. Hurricanes, droughts, rain, etc., explained in a rational way in the geography books that we use in high school, today are witnesses for the accusers in the inquisition unleashed by political and industrial interests against the main form of energy of modern society.
The fires taking place in Canada's boreal forests, and their very visible repercussions in the northern US, are the latest natural phenomena readily enlisted by anti-fossil groups.
In a normal season, temperature, rainfall, but also local firefighting policies, human-forest interactions, and agricultural practices, all interact to cause fires, not to mention that fires are also part of the natural cycle of forests. A report cited by the WSJ, states that in the period 1959–2019, there was a sharp increase in the destruction caused by forest fires in the first half of that 60-year period, and a decrease overall in the second half.
Far from making a calmer analysis of the evidence, some lawmakers and activists, taking advantage of the unfortunate effect that the wildfires are having on air quality in the northeastern US, once again implored President Biden to declare a climate emergency, which would give him special powers, such as blocking crude oil exports and imposing other limits on fossil fuels.
This case is an illustrative example of why a more balanced and objective discussion is needed. Knee-jerk reactions may pay off politically but ignore the long-term impact on a society that depends on the availability of reliable, cheap, and sustainable energy.
It is only necessary to remember the attempt to accelerate the substitution of fossil energy for renewable energy during the post-COVID-19 recovery of economic activity, which led to the energy crisis of 2021 and paved the way for the use of energy as a weapon by the Russians, to warn us of the danger of "playing" with the availability of energy.
Venezuela, Political-economic aspects
The data for the first quarter shows that there is a marked decline in the Venezuelan economy, which threatens to become a recession for the rest of this year. Q1 data shows national production 1.5% lower than the same period in 2022.
The decline is due to lower demand, greater competition from imported products, lack of bank lending, high levels of taxes and unreliable public services, which keeps the industrial park operating at 30% of its capacity.
Most parts of the country have suffered blackouts and an acute shortage of fuels, particularly gasoline. These shortages, and the general discontent over low wages, have generated endless social protests that have included PDVSA workers and the industries of Guayana. The regime has turned a blind eye to these issues, as well as on the calls to return to negotiations with the opposition, which in turn keeps talks to ease US economic sanctions at a standstill.
Operational Activities
Power failures in most of the country, particularly in Zulia and the Andean states in the western region, due to transmission failures from the Guri dam, as well as the lack of fuel for local thermoelectric plants, have affected oil output. Production for the second week of June fell, compared to May's averages. Production so far has averaged 703 Mbpd, distributed as follows:
- West 93 Mbpd (47 Boscán)
- East/South: 164 Mbpd
- Belt: 446 Mbpd (68 PetroPiar and PetroIndependencia)
- Total: 703 Mbpd (Chevron 115)
Undoubtedly, the most publicized operational activity has been the inability of the national refining park to produce gasoline, because of the poor condition of the catalytic cracking and reforming process units, coupled with the absence of the additives needed in the gasoline formulation. The situation has become serious, including in the capital city, to the point of having to bypass the gas stations that will be provided with the product, which they must sell in limited quantities per user. Despite this situation, recently, a tanker loaded with gasoline set sail for the island of Cuba.
Exports corresponding to the first 9 days of June averaged 460 Mbpd: 103 Mbpd were exported by Chevron to PADD 3 in the US; the remainder was sent to China as the final destination, following the traditional screening mechanisms through Iranian barter and the intermediary mechanism via Malaysia. These export numbers are not very representative, barely covering a week, but they will consolidate during the rest of the month.
To close the week, in the afternoon of Saturday, June 10, 2023, an explosion rattled a PDVSA's electrical substation, in Bachaquero, in Zulia state. The accident left several residential areas without electricity and will affect oil infrastructure and, therefore, future production.
________________________________________
No comments:
Post a Comment