JUAN M. SZABO, LUIS A. PACHECO(MADRID, BOGOTA--)
When oil prices finally seemed to have broken out of the encirclement imposed by negative market sentiments, and looked set to post a generous weekly gain, the market went into reverse. Market optimism, largely in response to indications that negotiators in the US House of Representatives and the White House were close to a deal on the debt ceiling and budget cuts, resulted unfounded.
By mid-morning on Friday, May 19, the Republican negotiators walked out of the table, calling the White House position unacceptable and announcing an indefinite pause in the talks. Markets reacted to the possibility of a US default on government bonds next month. Crude oil futures fell sharply afternoon of that day, falling USD2/bl from the day's high, as details of the political impasse emerged.
Brent Crude futures were trading at USD75.72/bl, compared to the previous day's high of USD77.70/bl, showing a modest increase from the previous week of around USD1.4/bl. WTI crude behaved similarly. Market players are expected to remain nervous until an agreement is reached on the US debt ceiling, and there is a better understanding of the behavior of the Chinese economy, with the possibility of economic performance below expectations.
Since the US economy is the largest in the world, with effects that reach even the most remote parts of the global economy, it is relevant to try to decipher its behavior to better project global oil demand. The debate among economists centers on the surprisingly strong macroeconomic results, even though the Federal Reserve (Fed) has raised interest rates at one of the most aggressive paces in history, to harness the economy and control inflation.
A possible explanation for the robustness of the US economy is the amount of funds that were delivered directly to citizens, from the time of the COVID-pandemic on, to stimulate consumption and the return of economic normality. Additionally, federal spending continues to increase. Federal spending through the end of the year is expected to exceed UD$ 7 trillion. Of course, if the current Republican-controlled House of Representatives can negotiate some spending cuts while raising the debt ceiling, that number will go down.
Although a sharp economic slowdown may occur during the rest of the year, the reality is that there is still plenty of monetary liquidity to support economic activity in the short term and possibly result in a "soft landing" or simply low growth rates, as in the first quarter. In the latter case, the destruction of demand, which has worried the oil markets, would not materialize or would be minimal.
Of course, the US contribution to the oil balance is not limited to the demand side, it influences the supply side as well. Three basic elements can be identified: replacement of part of the volumes extracted from its Strategic Reserve (SPR), drilling activity, and gasoline inventories. Forecasting the purchase of oil volumes for strategic inventories has become a game of chance, due to the number of changes in direction that the federal government has had on this issue, although according to the secretary of the Department of Energy (DOE), they are thinking of refilling at least 3mmbls.
Regarding drilling activity, the number of rigs drilling in the shale oil basins has been declining, which confirms that a rebound in this activity cannot be expected for now. On the contrary, it is a factor that weakens the global supply capacity. This decline in activity is dictated by the fiscal discipline of companies, in what are times of volatility and uncertainty.
Gasoline inventories in the US are at very low levels, considering the approaching summer driving season. This situation occurs when the gasoline market is relatively tight globally, which usually encourages an increase in processing in refineries that leads to an increase in demand for crude oil.
The only Mexican refinery on the Pacific Coast, Salinas Cruz, suffered an explosion that puts it temporarily out of service, its impact on the global gasoline market still to be assessed. This was not the only incident at refineries in Mexico, which the López Obrador government was quick to describe as sabotage.
In the coming weeks, the wildfires in Alberta, Canada, will be removing additional volumes of crude from the market, as the personnel of the production fields at risk are evacuated. A closing of around 400 Mbpd is estimated to start next week.
The European economy is also giving some positive signs, as fuel prices remain low, and are helped by the normalization of the export of grains through the Black Sea, because of the extension agreed between Russia and Ukraine with the mediation of Turkey, and the rebound in tourism in many of the countries of the continent.
Meanwhile, OPEC+ seems to be watching the bulls from the sidelines, keeping their powder dry for their meeting next month. Considering the difficulties that the group experiences in reaching agreements on global production targets while thinking of avoiding a recession, it is most likely that OPEC+ will leave the current quotas unchanged. Russia has already notified that it has complied with its cut of 500 Mbpd.
Thus, we ended the week with lower global gasoline inventories, and supply interruptions in different countries-- around 1.4 MMbpd--, against a background that begins to show signs of not reducing demand, given that the economy seems to slow down less than originally anticipated. All of this makes for a market with solid fundamentals, eager for more crude and products, with refining margins that remain high, and with crude prices poised to recover once the US debt ceiling issue is resolved.
Venezuela, political-economic aspects
The Venezuelan regime continues to give mixed signals when it comes to its handling of the economy. On the one hand, it needs foreign currency, since the traditional oil source has been reduced due to lower international prices, greater competition in the Chinese market, and volumes dedicated to barter that do not generate cash. On the other hand, it is trying to resuscitate the discourse of reducing its dependence on the US dollar, clearly in line with similar messages from Russia and China, among others.
Paradoxically, the North American oil company Chevron (NYSE: CVX) is the source of approximately 30% of the foreign currency obtained from the sale of hydrocarbons, a product of the company's activities in Venezuela, empowered as it is by a license from the Office of Control of Foreign Assets, OFAC. To make matters even more confusing, the regime is trying to replicate Chevron's formula in the natural gas space, granting a license to Repsol (BME: REP) and ENI (BIT: ENI) to export natural gas, its liquids, and condensed. This is the first step in its strategy to attract European investment to supply natural gas to the old continent and replace Russia.
In a different announcement, the US has assured the United Nations that it will protect the UN-administered humanitarian fund for Venezuela from creditors, removing a key obstacle to the resources of the fund agreed a few months ago in Mexico. This advance could help encourage a return to negotiations in the Aztec capital.
Operational activities
A better reading of the “Plan de Recuperación Integral Productiva” (Comprehensive Productive Recovery Plan) of the state company PDVSA (PRIP PDVSA 2023), published last week and directed at the recovery of operational reliability, creates more doubts than answers.
The document sets challenging production targets: 1.0 MMbpd by August 2023 and 1.2 MMbpd by the end of the year. However, the details of the activities describe a purely exploratory and maintenance program for some facilities, with no direct effect on production.
The exploratory program consists of the continuation of three wells suspended in past years due to logistical problems, but in an advanced state of execution, which is why they show a meager budget and a 2D and 3D seismic program with little short-term relevance.
Reference is also made to marginally increase gas production, but surprisingly, without mentioning flaring and venting in the eastern part of the country. In the same way, the recovery of the PetroMonagas upgrader is included, without mentioning the necessary repairs after the serious fire that recently consumed a large part of the installation, and without indicating the origin of the funds required to rehabilitate it; it does not seem feasible that the funds come from of the Russian government, partner “B” in PetroMonagas.
In short, a plan that is difficult to analyze due to the scarcity of details and concrete actions to increase the production of oil, natural gas, and fuels, which is the declared objective of the plan.
Production this week was 710 Mbpd, geographically distributed as follows:
West: 102 Mbpd (Campo Boscán 51 Mbpd)
East/South: 166 Mbpd
Orinoco Belt: 441 mbpd (61 Mbpd PetroPiar and PetroIndependencia)
Total: 710 Mbpd (Chevron 112 Mbpd)
The modest increase corresponds to a reduction in deferred production on the Bolívar Coast and the Orinoco Belt. Chevron's production contribution was 112 Mbps or 16% of the total produced.
Crude exports for the first 20 days of the month were 520 Mbpd, of which 110 Mbpd were made by Chevron placing the crude on PADD 3 in the US. Other destinations included China, Spain, and Cuba. Exports by Chevron represented 21% of total exports.
In refining activities, the start-up of the distillation unit of the El Palito refinery, in the center-West of Venezuela, processing Iranian crude, is reported. Apparently, the refinery had to be shut down again due to a near-total power blackout in the region. The situation in the domestic fuel market showed an improvement in the diesel situation, while gasoline continues to be in short supply in various parts of the country.
Development drilling activity continues to be non-existent, making it impossible to increase production potential. All maintenance, reconditioning, and optimization efforts in the crude production system will result in reducing deferred production, but always below the potential ceiling.
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