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.
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