An Uncertain Triangle: Interest Rates, The Chinese Economy, Inventories

EL TALADRO AZUL  Published  originally in Spanish in LA GRAN ALDEA  

M. Juan Szabo and Luis A. Pacheco

   

The prospect of Kurdish oil exports returning to the market, rumors that the US is overlooking sanctions on Iranian crude, and the surprising US rapprochement with Venezuela have all added to the apparent weakness of the Chinese economy to push down oil prices. 

Further, the information emerging from the annual symposium of global economists in Jackson Hole, Wyoming, gave little support to the oil market. However, the fall in inventories of distillates in Europe and a significant drop in crude oil inventories in the US partially slowed down the decline in prices. The sum of all of the above fueled the oil market's volatility and its players' confusion.

The real estate crisis in China seems to be reaching levels that are affecting the rest of its economy and are jeopardizing the economic policy implemented by President Xi Jinping and the Communist Party of China, which includes state intervention in business matters. The result of these interventions has been unsatisfactory so far, not least due to the fall in domestic demand and extreme youth unemployment. The economic war between China and the US, with protectionist actions and reactions, also detracts from the expected growth rate. The “alliance” with Russia has only brought benefits related to oil prices, at the cost of a reputational loss, so crucial to Xi Jinping. The situation seems serious enough that Xi may consider rebuilding relations with President Biden, which could be in their mutual interest, even if Biden has called him a "Dictator."

Since the Jackson Hole symposium, Federal Reserve System (FED) Chairman Jerome Powell said Fed policymakers would proceed cautiously as they “decide whether to tighten rates further.” Powell has made it clear that inflation is still “too high” and that he will not hesitate to raise rates if he deems it necessary. Disappointing economic data from Germany and France this week has also raised alarms in the EU. European Central Bank President Christine Lagarde avoided giving any indication of potential increases but stressed that the aim was to drive inflation to 2 %. All added up, it may foretell a slowdown in oil demand.

On the supply side, unexpectedly, the US is moving toward giving Iran tacit permission to export crude without the threat of sanctions. This "laissez passer" policy has allowed the Islamic Republic, according to TankerTrackers, to ship close to 3.0 MMbpd, the highest level since the imposition of sanctions, mostly sold to China at deep discounts.

The US change of strategy toward Venezuela and the obstacles that the Biden administration continues to raise to the North American oil industry is beginning to look more like an electoral ploy than a coherent energy strategy. The objective could be to present a "green" policy to satisfy the progressive wing of the Democratic party and, at the same time, encourage foreign production of crude oil to keep oil prices at levels that contribute to controlling US inflation and keep gasoline prices at acceptable levels. It's a somewhat simplistic way of thinking. Still, it could be a strategy that can lift them from the meager approval ratings the president currently shows.

This strategy has its drawbacks in foreign relations, going against the policies and interests of Saudi Arabia, and in particular against the crown prince, Mohamed bin Salman, who is not a Biden enthusiast either. Ironically, as the US negotiates with Iran, it has also been strengthening its military presence around the Persian Gulf, particularly in the Strait of Hormuz, to deter tankers from being hijacked by Iranian militias. The situation moves in a mined territory.

This unusual US energy policy also has effects domestically. It may gather applause from Representative (D) Ocasio Cortez and his supporters. However, it increases the disincentive for developing the domestic hydrocarbons industry, which is still a vital part of the US economy. The reaction of the oil companies so far is one of caution, concentrating on generating returns for their shareholders and forgetting about growth. Thus, the deactivation of drilling rigs continues. According to Baker Hughes, another ten units stopped operating this last week. Adding to this negative trend are the production closures on the platforms in the Gulf of Mexico as a precaution for the passage of Hurricane Harold; only the Energy Information Administration (EIA), with its complex balance sheets, can show increased production for the US.

OPEC, meanwhile, shows a tense and unstable harmony, where Saudi Arabia voluntarily closes production. At the same time, Iran increased production encouraged by the US, and Iraq negotiates with Turkey the restoration of the flow of Kurdish oil through the Turkish terminal of Ceyhan. The market expected Saudi Arabia to extend its voluntary cuts for another month, or even to the end of the year, in reaction to Iran's increased exports. However, a response has yet to materialize. We will have to wait for the next OPEC+ meeting, with no date yet.

Despite all these alarms, shocks, and projections, oil demand continues at its record levels, above 103 MMbpd. Analysts think that even the drop in Chinese oil imports in July was not due to less refining activity but instead caused by the consumption of inventories that were at very high levels. While the demand remains strong, the supply has been affected by different forces: an increase in Iranian crude oil on the market, temporary closures in the Gulf of Mexico, coupled with the voluntary and not-so-voluntary cuts by OPEC+, which as a whole did not satisfy the demand, which is reflected in the reduction of inventories.

Thus, for now, the direction of crude oil prices will fluctuate in resonance with the news coming from China, especially information related to the import of crude oil. The prices moved without a defined direction but lost some ground.

Brent Crude closed the week trading at $84.88/BBL, similar to the previous week's close. While WTI crude closed at $80.05/BBL, a dollar below last week – the second week with losses.

In summary, the analysis suggests that the oil market will continue to tighten as we move into the second half of the year, with a supply shortfall of nearly 2.0 MMbpd; this will result in higher barrel prices if there is no change in demand.

Other news of interest for the energy market:

On Friday, the Wall Street Journal reported a move that could derail US plans for nuclear non-proliferation in the region. The state-owned China National Nuclear Corporation (CNNC) has submitted a bid to build a nuclear plant in Saudi Arabia's Eastern Province, near the border with Qatar and the United Arab Emirates.

South Africa signed a series of agreements with China on Wednesday, August 23, to reform its ailing energy sector, including upgrading its nuclear power plant. The South African government seeks to alleviate its economy's severe energy crisis. The agreements, signed with Chinese power companies in the context of the BRICS summit in South Africa, include improvements to the southern African country's electricity transmission and distribution network.

According to the Guyana source, ExxonMobil and its partners plan to spend $13 billion to develop its sixth offshore oil project in Guyana. The floating production platform for the so-called WHIPTAIL project will start operating in 2027. It would take the Exxon-led consortium's oil production in Guyana to more than 1.2 MMbpd.

 

Venezuela

Political Events and Others

The regime faces its greatest challenge of the Maduro era: weathering the economic storm while mitigating the political turmoil that originates in the generalized discontent of the population, which is finding a voice in a grassroots movement that is considered uncontaminated by the traditional opposition. Preventive measures to avoid a disaster, that is, loss of power, are already being carried out internally and externally. 

First, the National Assembly appointed a partisan CNE (Electoral Council), with three principal members and most alternates close to the regime. Heading the electoral body is Elvis Amoroso, the former comptroller general, a "disqualifier" of opposition candidates and someone who is under sanctions by the US. It is improbable that the new appointments will lead to material improvements in the upcoming electoral process.

On the other hand, the regime is convinced that to appease widespread discontent, it has to increase public spending to finance some economic growth and increase employment and domestic consumption. However, the available resources are limited, and the tax collection and current oil revenues need to be improved, even though Chevron leverages them.

So, the only two ways to finance public spending available to the regime are using the Central Bank's printing press and increasing oil revenues. The dangers of the former are well-known: excessive use of inorganic money  could become an "inflationary boomerang." As for an improvement in oil revenues, these depend on the level of production, which requires huge investments, which the regime does not have, and on elements beyond the regime's control, such as the price of oil.

In this context, the news of active negotiations between the regime and the Biden administration surfaced. Sources point to a formal offer to fully or partially lift the economic sanctions against Venezuelan oil in exchange for measures leading to the holding of fair and verifiable elections in 2024: release of political prisoners and other elements that have not been made public.

Is this not the same thing on the table since the negotiations between the regime and the opposition began? In theory, yes, but in practice, it is very different. It appears to be a  formal offer to grant licenses to other interested oil companies in exchange for verifiable promises of change in electoral conditions. It is an attractive offer for a regime entangled in its contradictions, but its fate is hard to predict.

The appointment of the CNE, the anti-imperialist and politicized rhetoric of the armed forces, and the violence against the opposition rallies represent a significant obstacle for US negotiators. On the other hand, Maduro's exaggerated expectations, at least verbally, for the return of CITGO and other Venezuelan assets abroad, the release of Alex Saab, and the elimination of the case against the Venezuelan regime in the International Criminal Court represent insurmountable obstacles in the negotiation. Of course,  unless the protestations are just bargaining ploys.

Both parties (US and Maduro) seek a result that favors their respective electoral strategies. However, we must wait for who blinks first. The failure of previous negotiations does not augur a hopeful outcome.

 

Hydrocarbons Sector.

The hydrocarbons sector has not registered significant changes during the last week.

Production: During the last days, production remained at the levels achieved during the first half of August. Thus, production for the week was 742 Mbpd, geographically distributed as shown below:

West:                           125 (Boscán 51)

East:                            159

Orinoco Belt:               458 (Chevron 75)

Total:                           742 (Chevron 126)

 

Chevron's production has reached an operating plateau, remaining in the 122-130 Mbpd range until license changes allow fresh investment in development drilling and infrastructure. It is interesting to note the coincidence of the negotiations between the Maduro and Biden administrations and the information that became known that Chevron planned to begin development drilling in 2024.

If the negotiations result in a temporary lifting of oil sanctions, we could see strong interest from international oil companies to opt for licenses similar to Chevron's and licenses that authorize companies to acquire and trade Venezuelan crude and products. Suppose such an agreement becomes effective as of January 2024. In that case, our crude oil production estimate indicates that that year could close with more than 900 Mbpd of production. By the end of 2025, the much-mentioned 1.0 MMbpd could be exceeded. – see graphic.

Refining: According to PDVSA sources, the Amuay refinery in Paraguaná is operational. The four largest refineries reportedly process around 320 Mbpd of crude oil and intermediate products. However, gasoline production has only marginally improved with the start-up, at minimal levels, of the Cardón catalytic cracking plant (FCC). Therefore, we cannot expect queues at service stations to disappear for now.

Exports: The estimated Average exports rose to 550 Mbpd with the usual distribution by destination: 142 Mbpd exported by Chevron to the USA, 310 Mbpd sent to China, 56 Mbpd to Cuba, and 42 Mbpd to Europe.

 

OIL LOSES TRACTION ON UNCERTAIN TERRAIN

EL TALADRO AZUL    - Published  originally in Spanish in LA GRAN ALDEA  

M. Juan Szabo and Luis A. Pacheco

 

OIL LOSES TRACTION ON UNCERTAIN TERRAIN

It never ceases to surprise us that the oil market, always full of surprises, surprises us. It is enough that we begin to believe that this or that trend is sufficiently established for reality to take us out of the comfort that we had or that we wanted. Since May, the oil futures market has established an upward trend in prices, and world oil inventories spoke of a tight supply as they continue to decline, while demand is at record levels.

Today, the market sentiment is not as positive as it was a couple of weeks ago. The minutes of the US Federal Reserve (FED) latest meeting, show that some Federal Reserve officials remain concerned about the pace of inflation and said they could further rate increases may be necessary in the future unless conditions change. The minutes also show that within the institution, there is no unanimous on further rate increases. Add to that the worrying news coming out of China about the state of its economy, and it's not entirely surprising that oil prices have reacted negatively.

Indeed, concerns rose over the performance of China's real estate market after the Evergrande Group, one of China's largest real estate companies, filed for bankruptcy. This seems to underscore the fact that the world's second-largest economy, which has grown on the back of the construction of buildings and infrastructure, may be dealing with more than just a slowdown in its post-COVID economic recovery.

The oil market fears that the slower economic activity in China will be reflected in lower demand for crude oil, which would add to the slack supply generated by strict monetary policies in the West. Investors seem to be hoping for the government to stimulate the economy beyond the cutting in interest rates announced by the People's Bank of China.

On the other hand, these signs of financial stress in the Chinese real estate sector are making markets in general nervous, due to the contagion that this situation could mean in other sectors of the economy. There are those who fear that the situation could lead to a situation similar to the collapse of Lehman Brothers in 2008, since the macroeconomic headwinds and payment defaults on certain financial instruments have also spread to the banking industry. This has generated liquidity concerns in the sector of the "Shadows Banks" (Banks that are not governed by the regulations of traditional banks).

According to Reuters, for example, the state-backed Zhongrong International Trust, one of the largest “shadow banks”, reportedly defaulted on some of its obligations to investors as its parent company faces cash flow restrictions. Likewise, the developer company Country Garden is at risk of non-compliance. While Country Garden's total liabilities of $191.7bn are only 59% of Evergrande's, its project portfolio is 3,121 properties, located in all provinces of China, compared to Evergrande's around 800, which may pose a larger threat.

Understanding the situation is complicated because analysts have a feeling that the data coming from China could be manipulated or incomplete; as in the case of the youth unemployment rate, which reached a record of 21%, according to figures published last week, causing China's National Statistics Office to suspend its publication.

News from the US this week was mixed and did little to help oil markets. On the one hand, the drop in crude oil inventories and the continued reduction in oil activity, showing a reduction of 12 rigs in drilling activity (Baker Hughes), should push prices up. On the other hand, the Energy Information Administration (EIA) forecasts that crude oil production will average, in 2023, 12.8 MMbpd, a record, which should push prices down. There appears to be growing confidence that the world's largest economy can avoid recession and that mitigates, for now, market concerns.

Meanwhile, OPEC+, particularly Saudi Arabia, is “watching from the sidelines”, and we have no doubt that if next week the price recovery seen last Thursday and Friday does not continue, it will extend its cut until the fourth quarter.

As it was, oil prices were moving sideways, but on track to end a seven-week winning streak. After being rattled by the Fed minutes and the Chinese news, oil prices managed to orchestrate a small rally on Thursday and Friday. Prices at the close of the market on August 18 set down at $/bbl 84.8 and $/bbl 81.25 for Brent and WTI crudes respectively; levels lower than last week's close but recovering some of its dynamism.

Other news of interest for the energy market:

·      The North American oil company, Occidental Petroleum (NYSE: OXY), announced the purchase of Carbon Engineering, a clean energy company based in Canada, for $1,100 million, as part of its plans to reduce CO₂ emissions. Vicki Hollub, OXY’s CEO, said she agreed to acquire the Canadian direct air capture company because: “We have always believed that global partnerships and cross-industry collaboration would be required to deploy DAC (Direct Air Capture) infrastructure at the scale required to make a climate-relevant impact.” “Together, Occidental and Carbon Engineering can accelerate plans to globally deploy DAC technology at a climate-relevant scale and make DAC the preferred solution for businesses seeking to remove their hard-to-abate emissions.”. In parallel, the Biden administration selected OXY's carbon capture project, south of Corpus Christi, as one of two projects that will receive up to $1.2 billion in federal funding to support the development of carbon technology absorption of carbon from the atmosphere.

·      Chile's state-owned copper company CODELCO has announced the appointment of Rubén Alvarado, the company's third CEO in a year, as it struggles to reverse a slump in its production and profits. With debt of $19 billion and rising, the stakes for bondholders are ever higher. Production has hit the lowest level in a quarter century, costs have skyrocketed, and ore grades continue to fall, threatening its status as the world's number one producer, even as copper prices soar. 

·      As the upstream community hails the discovery of the Venus 1-X well off the coast of Namibia, which may  go up to 6 billion barrels, Impact Oil & Gas , a key partner in the project led by TotalEnergies(NYSE: TOT), said the cost of development is well beyond its ability to finance and that it would look to sell its 20% stake.

 

Energy transition

Hydrogen: a key factor in the energy transition

“In the beginning when God created the heavens and the earth, the earth was a formless void and darkness covered the face of the deep, while a wind from God swept over the face of the waters.
Then God said, "Let there be light"; and there was light.
And God saw that the light was good; and God separated the light from the darkness.
God called the light Day, and the darkness he called Night. And there was evening and there was morning, the first day.” 

Thus, begins in the book of Genesis (1: 1-5) the biblical account of creation.

 

If we ask Claude.ai or ChatGPT to write a similar paragraph, but from the point of view of the “ Big Bang ”, we would get something similar to the following :

“In the beginning, about 13.8 billion years ago, all the space, matter and energy of the Universe were compacted in an extremely hot and dense singularity. Suddenly, this singularity began to expand rapidly in a gigantic explosion known as the Big Bang, giving birth to time and space... As it expanded, the Universe cooled enough for the first protons and neutrons to form. After a few minutes, the protons and neutrons merged to form nuclei of hydrogen and helium, the lightest elements .

Hydrogen (H, by its chemical symbol), is not only the lightest and most abundant chemical element in the universe , constituting approximately 70% of all matter, but it is also called to play a leading role in the Transition energetic. Hydrogen is a colorless, odorless, and tasteless gas under normal conditions, and it occurs in nature combined with other elements, not as a pure gas.

Hydrogen gas was first identified as a single substance by the English scientist Henry Cavendish in 1766 . Cavendish investigated the chemical properties of acids and bases, focusing his work in the “ flammable air ” that was produced when certain metals reacted with acids. Cavendish did not fully understand that flammable air was a chemical element. That atomic theory came later.

In 1783, the French chemist, Antoine Lavoisier, showed that hydrogen combined with oxygen makes water, confirming Cavendish's identification of the gas as a unique element. Lavoisier gave the gas its modern name “hydrogen”: “hydro” which means water and “gen” which means generator.

It wasn't until the 1970s that hydrogen began to be seriously considered as an energy solution. The oil crisis of that decade led governments and researchers to search for alternative energy sources. One idea was to use electricity from nuclear power plants to split water (H₂O) into hydrogen and oxygen through electrolysis. The hydrogen could then be used as a fuel or as a means of energy storage.

It wasn't until the 1970s that hydrogen began to be seriously considered as an energy solution. The oil crisis of that decade led governments and researchers to search for alternative energy sources. One idea was to use electricity from nuclear power plants to split water into hydrogen and oxygen through electrolysis. The hydrogen could then be used as a fuel or as a means of energy storage. This renewed interest laid the foundation for hydrogen research and development for decades to come.

Hydrogen has several key attributes that makes it attractive as a sustainable energy carrier. As an energy source, hydrogen releases only water vapor when used in a fuel cell or is burned with oxygen. It can be used to store and transport energy from intermittent renewable sources such as solar and wind. Burning hydrogen provides high temperatures, ideal for industrial processes. And hydrogen fuel cells make it possible to generate power efficiently, with low or no emissions.

Today, hydrogen is classified based on its production method. Brown hydrogen: refers to hydrogen produced from fossil fuels, mainly coal, through older methods that generate high emissions. Brown hydrogen has the largest carbon footprint. Blue Hydrogen: this is hydrogen produced from natural gas through steam reforming of methane. The process captures and stores carbon dioxide emissions underground, creating fewer emissions than conventional hydrogen production. Green Hydrogen: This is hydrogen produced through electrolysis powered by renewable electricity such as solar or wind. Electrolysis splits water into hydrogen and oxygen using an electric current. Green hydrogen results in virtually zero carbon emissions

For hydrogen to have a significant impact as a clean energy source, substantial investments in infrastructure and technological innovations are required. Distribution infrastructure, such as pipelines, must be built to move hydrogen from production sites to end users. Cost reductions are also needed for hydrogen production, storage, transportation, and fuel cells.

If these challenges can be overcome, hydrogen could emerge as an important pillar of a decarbonized global energy system by the middle of this century. It can provide a solution for sectors that are difficult to electrify, such as heavy industry (steel, cement) and heavy transport. Currently, most of the hydrogen goes to industrial uses such as oil refining and fertilizer production.

These are some of the main hydrogen producers worldwide:

— Not surprisingly, as in most facets of the energy transition, China is currently the largest producer and accounts for about a third of world production, 33 million metric tons (2021). China produces hydrogen mainly from coal through gasification.

— The United States is the second-largest producer of hydrogen. Most of the production comes from natural gas, and part from coal. 10 million metric tons (2020).

— Europe: the main producers include Germany, France, the Netherlands, and Belgium. Hydrogen production relies primarily on natural gas, as well as some electrolysis using renewable electricity.

— Saudi Arabia: a major producer of hydrogen from natural gas and hydrocarbons. The country aspires to become a relevant exporter of blue hydrogen.

Key companies involved in hydrogen production include industrial gas providers such as Air Liquide, Linde, and Air Products, energy companies such as Shell, BP, and Suncor, and engineering companies such as Siemens. As the demand for clean hydrogen increases, production is expected to grow globally and as hydrogen gains ground in the energy transition, more companies, especially oil and gas, will take a leading role.

Venezuela has competitive advantages for being a producer of blue hydrogen, as it has significant resources of methane gas and geological structures (depleted reservoirs) where to inject the resulting CO₂, either as part of enhanced recovery or as final sequestration.

According to the International Energy Agency, hydrogen demand reached 94 million tons in 2021, recovering above pre-pandemic levels (91 MT in 2019) and containing energy equivalent to approximately 2, 5% of global final energy consumption. Most of the increase came from traditional uses in refining and industry, although demand for new applications grew to around 40,000 tonnes (60% more than in 2020, albeit from a very low base); annual growth of more than 5% is estimated.

Much of the increased demand for hydrogen in 2021 was met by hydrogen produced from fossil fuels, meaning there was no benefit to mitigating emissions. Low-emission hydrogen production was less than 1 MTt in 2021, coming almost entirely from plants using fossil fuels with carbon capture, utilization, and storage (CCUS ).

Although in concept, the use of hydrogen would be key to generating power with reduced emissions, the truth is that technological advances and policy decisions are required for this potential to materialize in the coming decades, not only for its generation but also for transport and storage.

 

Venezuela

Political Events and Others

The Venezuelan political/economic situation is at a crossroads. Insufficient domestic tax collection and stagnant oil revenues represent problems for the regime, which must finance public spending in the run to the 2024 presidential elections: avoid further devaluation of the Bolívar; try to control inflation; keep growing wage protests in check; and mitigate the deterioration of public services (electricity, water, and health).

The regime has intervened significantly recently in the foreign exchange market, which, added to Chevron's usual contribution to the market, has mitigated the devaluation of the Bolívar. During this week of August, the depreciation in the parallel market only reached 0.7%, keeping the monthly variation almost constant at 6.4%.

Hydrocarbons Sector.

The slight improvement in crude oil production, compared to previous weeks, but at the expense of further deterioration of the environment, deserves a brief explanation. Indeed, in the western part of the country, there appears to be an uptick in the volume of oil spills on the eastern shore of Lake Maracaibo, which is almost inevitable when putting damaged infrastructure back to work. In the north of Monagas state, the inhabitants report a greater volume of gas vented and flared, a result of reactivating oil wells without having the additional capacity to handle the associated gas; by the way, that gas would help alleviate the chronic gas shortage if handled properly.

Production: This week's oil activity managed to increase production both in the west, where some 3.0 MBPD of additional production was recorded on the east coast of Lake Maracaibo. Likewise, in the Tejero area, in Monagas state, some light crude wells were opened. These wells, which produce from reservoirs whose pressure has dropped vertiginously, produce more and more gas associated with crude oil, a gas that is sadly vented. Thus, the production for the week was 739 Mbpd, geographically distributed as shown below:

 

·      West:                        124 (Boscan 52)                      

·      East:                         158                                          

·      Sash:                        457 (Chevron 75)                    

      Total:                     739 (Chevron 127)                  

 

Chevron's production remained stable, with a slight increase at PetroPiar, in the Orinoco belt, which allowed it to send 54 Mbpd to the Jose upgrader, producing 51 Mbpd of Hamaca crude. The remaining crude, 21 Mbpd, was blended with 10 Mbpd of diluent to produce 31 Mbpd of the Merey 16 segregation.

Refining: As expected, the simultaneous operation of the four main refineries could not be sustained, according to information from sources close to the operation, later confirmed by union sources. The Amuay refinery had to be stopped, although the reasons are not known. Meanwhile, in neighboring Cardón, efforts to start up the FCC catalytic cracking plant continue, but so far without much continuity. Consequently, the processing of crude oil and intermediate products dropped to 260 million Mbpd, and gasoline production continues at levels below the domestic market requirement.

Exports: The lower level of processing in the refineries opened the door to a temporary increase in exports. Chevron's exports to the US are averaging 144 Mbpd for the month, which could vary on tanker handling and logistics at Venezuelan terminals. The segregations exported by Chevron include 48 Mbpd from Boscán, 66 Mbpd from Hamaca, and 28 Mbpd from Merey 16 (which includes 9 Mbpd of diluent). If exports to the usual destinations of China, Cuba, and barter with Europe are added to these volumes, the exports will total 520 Mbpd, which can be expected to increase if failures in national refineries continue.

Oil Prices take a pause.

 EL TALADRO AZUL    - Published  originally in Spanish in LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

Supply tightness in oil markets, combined with weaker-than-expected economic data from China and slightly higher crude inventories in the US, have combined to limit, or perhaps just pause, the upward trend in oil prices of recent weeks.

The reality is that the strategy implemented by Saudi Arabia through OPEC+, limiting exports, which by the way favors Russia, establishes a floor for prices. The uncertainty of the Chinese economy and growing environmental pressures negatively impact the investment appetite of oil companies, which is maybe the best way to counteract OPEC’s strategy in the short and medium term. This combination of supply restrictions seems so far to be effective in offsetting the negative effect on prices of economic uncertainty, and it places the Saudis, with their growing spare capacity, as the swing producer.

The Chinese economic situation does not look very healthy. Information released by its Customs Administration indicates a further drop in exports, while imports are also falling in response to weak local demand. However, analysts maintain that, eventually, the government will apply stimuli to reverse this trend.

The strained relations between the two largest economies in the world continue to worry, especially regarding the supply of technology and sophisticated equipment, which are also a part of the equation. The North American analyst, Daniel Yergin, in a recent interview,  noted the importance of the Chinese economy on oil prices. He warned about the vision of some North American executives and investors who would like to decouple the two economies: “Conscious Decoupling”. This, says Yergin, is a force that not only promotes the deglobalization of the world but ignores how integrated the two economies are and the reciprocal damage that would be caused by the decoupling.

Even so, oil demand remains immune to the pessimistic Chinese news and resistant to the expectation of more recessive measures by central banks; showing an increase to 103 MMbpd, a historical record and consistent with the increase in demand forecast by the OPEC.

The demand, although surrounded by latent threats, and with supply under the control of OPEC+, has maintained the upward trend, but with volatility to accommodate the interpretation by the market of eventual news that could affect prices.

Thus, prices closed, for the seventh consecutive week, with a slight increase despite a drop in the middle of the week. Brent and WTI were trading at the close of the markets on Friday the 11th, at $/b 86.81 and $/b 83.19 respectively.

Other news of interest for the energy market:

·      Iran hopes to increase its oil production by 250,000 barrels per day (bpd) to reach an output of 3.5 million bpd by the end of next month, the NIOC president said. Iran and the US have reached an agreement to exchange prisoners and eventual access to $6 billion frozen in South Korean banks. This is in contrast with the recent US warning to tankers to avoid Iranian territorial waters due to tensions between the two countries.

·      ExxonMobil is reviewing its oil and gas operations and interests in Argentina's Neuquén basin. Officially, its Argentine subsidiary is looking for investors to “Farm Down” its participation, but the sale of its assets is not ruled out. Other sources report that Exxon is not satisfied with the progress of its activities at Vaca Muerta in the Neuquén Basin. The news, rather than being interpreted as an individual action by Exxon, is an indication of the complexity of developing resources in this part of the world, and could affect the activities of other companies in the area.

·      Droughts not only modify the navigability of the Rhine River in Germany. There is a much more severe effect on the operations of the Panama Canal. The dry season is wreaking havoc on the water levels in Gatun Lake, which has severely limited the use of the canal. Transportation difficulties result in high fuel prices.

ENERGY TRANSITION - Lithium.

 

When the issue of lithium is addressed, we find ourselves with one of the most crucial materials to facilitate the energy transition. The transformation of the world’s transport, system from a model based on internal combustion engines to one based on electric mobility, depends on the massive use of batteries; they in turn depend on the availability of this soft alkali metal silvery-white metal.

 

Lithium (Li, by its chemical symbol) was discovered in 1817 by the Swedish chemist Johan August Arfwedson, while he was studying the mineral petalite in the laboratory of Jöns Jacob Berzelius. Arfwedson detected traces of a then unknown element, which Berzelius named “lithium” derived from the Greek word for stone,“ lithos ”. Petalite had been discovered in the late 18th century, by the Brazilian chemist and statesman José Bonifácio de Andrade e Silva, in a mine on the island of Utö, Sweden. It was not until the British chemist Augustus Matthiessen isolated lithium, using electrolysis of lithium chloride, that the element was produced in usable quantities.

 

During the “Cold War”, in the 1950s, the use of lithium in thermonuclear weapons as a solid fusion fuel gained importance. The United States government became the main producer of lithium at that time.

 

In the 1970s, lithium emerged as a key component of rechargeable batteries. The electrochemical potential of lithium made it ideal for high-energy-density batteries. However, these early lithium batteries were not commercially viable due to safety concerns and a lack of knowledge about the intricacies of lithium-ion chemistry. It was later improved upon by Stanley Whittingham, John Goodenough, and Akira Yoshino, who developed the modern lithium-ion battery in the 1980s.

 

It wasn't until the 1990s that Sony and Asahi Kasei launched the first commercial lithium-ion battery, paving the way for lithium-ion batteries to revolutionize portable electronics. Today it is used in a wide range of applications, including smartphones, laptops, and wearable devices.

 

It is in the first decade of the 21st century that electric vehicles and energy storage systems begin to use lithium-ion and lithium-polymer batteries, which caused the demand for lithium to skyrocket and is expected to grow into the future.

 

Lithium possesses distinctive properties, including its exceptionally low density of 0.53 g/cm³, its low melting point at 180.5 °C, and its high electrochemical potential that favors lightweight, high-energy-density batteries. Lithium-ion batteries store 3 times more energy than lead-acid batteries of the same weight. This allows for longer-range electric vehicles.

 

Its low density and high resistance make lithium a valuable material in aerospace and satellite applications, and in the production of ceramics and glass, improving alloys in metallurgy. Furthermore, lithium is used in the chemical industry and has applications in air conditioning systems, among other uses. Its contribution to the stabilization of the mood of human beings makes it an essential component in pharmaceutical products to treat conditions such as bipolarity.

 

Lithium is found in various geological formations worldwide, primarily in the form of lithium-rich minerals or as dissolved lithium in underground brine deposits. In some geological contexts, especially in areas with high levels of mineralization, there may be an overlap between lithium and copper deposits. This coexistence may have implications for mining operations and processing, as well as the economic viability of extracting both metals from the same deposit.

 

The most common sources of lithium are:

Hard Rock Deposits (Lithium Minerals)

Spodumene: This is the most common lithium-bearing mineral. Large deposits of this mineral are found in Australia, as well as in other countries such as Canada, China, and Zimbabwe. The minerals are processed, concentrated, and converted into lithium compounds. This is currently the most common source and represents more than 60% of the world's lithium production.

Brine Deposits:

Saline Lakes: Some of the largest lithium reserves in the world are found in brine deposits in saline or saline lakes, particularly in the “Lithium Triangle” region of South America, which includes Argentina, Chile, and Bolivia. The process involves pumping lithium-rich brines underground to the surface and evaporating the water in extensive pools for 12 to 18 months. The remaining lithium compounds are then processed.

 

 

Based on preliminary data released by the US Geological Survey (USGS), estimated global lithium mining production in 2022 was ~130,000 metric tons of lithium (excluding US), up 21.5% from 2021 (107,000 tons). Total reserves are estimated at 26 million metric tons for the same year. The countries with the largest lithium reserves and production are ^[1]:

 

Country	RESERVES[2] mtm	Production TM
Chili	9300	39000
Australia	6200	61000
Argentina	2700	6200
China	2000	19000

 

The same report states that the global lithium end-use markets are batteries, 80%; ceramics and glass, 7%; lubricating greases, 4%; flux powders for continuous casting molds, 2%; air treatment, 1%; doctor, 1%; and other uses, 5%.

 

As with other metals associated with the energy transition, China emerges not only as an important producer but also as the main processor of this metal. According to the International Energy Agency (IEA), the Asian giant controls 65% of processing capacity.

 

On the other hand, the IEA also forecasts that lithium demand will grow to 1,209 Mtm by 2050 (13 times today's demand) to meet global warming mitigation scenarios – 85% of that new demand will be driven by electric cars. It should not be forgotten that this type of projection does not consider the impact of new technologies, price fluctuations, supply complexities, or consumer behavior. Recycling lithium-ion batteries will also be crucial, not only to ensure the supply of raw materials but to mitigate the environmental impact of new mining.

 

The interest in lithium is such that the big oil companies are directing initiatives in that direction. ExxonMobil (NYSE: XOM) CEO Darren Woods recently told analysts that the oil company can produce "lithium at a much lower cost than traditional mining." For its part, Chevron Corp. (NYSE: CVX) said recovering lithium falls within the company's "core capabilities."

 

Existing lithium reserves appear to be able to support projected demand and more. In fact, the USGS estimates that there are additional resources of the order of 98 million tons globally, both in traditional producing countries and in countries such as Bolivia, Germany, and Congo, among others. To access these resources, geopolitical, economic, environmental, and community issues will have to be resolved.

 

Substitution of lithium compounds in batteries, ceramics, greases, and manufactured glass is possible. Examples are calcium, magnesium, mercury, and zinc as anode material in primary batteries; calcium and aluminum soaps as stearate substitutes in fats; and sodium and potassium fluxes in the manufacture of ceramics and glass.

 

Thus, lithium is in the crosshairs of a world that has self-imposed to stop, or at least mitigate, its addiction to fossil fuels, replacing the inventions of the Germans Otto and Diesel, with the electric motor. In this new energy economy, as the figures show, there is an essential opportunity for the Latin American region. It would be inexcusable if we do not prepare ourselves to take advantage of the potential of this new “gasoline”, by preparing to manage the social, environmental, and political costs that this exploitation, and preferably industrialization, would undoubtedly entail.

 

 

Venezuela

Political Events and Others

The economic and political situation in Venezuela is complex to analyze, given the multivariable crisis: when something works, other things stop working, and if it is a matter of fixing, other things are damaged: the proverbial Venezuelan hell.

For example, when trying to solve the problem of supplying the domestic market, Venezuelan refineries managed to process a greater volume of crude, but at the expense of reducing exports, which affect foreign exchange earnings from the sale of hydrocarbons.

Furthermore, although the bulk of domestic gasoline is sold in dollars at $/L 0.5, which would be equivalent to more than $70/bbl, the chain of custody of this money, largely in cash, is a leaky one. Additionally, the contraband of gasoline remains a problem.

The economy begins to show signs of exhaustion, since neither the income in foreign currency nor the collection of taxes from SENIAT is sufficient to finance the levels of public spending required to prepare the electoral terrain. Also, avoid wage protests, which are once again on the rise remain unanswered.

 

The strategy of trying to revive the economy through public spending, the only tool remaining in the regime's bag, will cause higher levels of inflation, increased costs, and further erosion of the purchasing power of Venezuelans. Renowned economists estimate that inflation and the exchange rate, by the end of the year, will reach 400% and 60 BS/$, respectively.

 

This situation has mobilized the representatives of the regime to try to shore up economic conditions, but without room to manipulate, with an eye on the elections.

In Portugal, the courts decided in favor of the regime, which will now have control of some currently frozen bank accounts. Some analysts think that this is a direct result of the elimination of the “interim government” by the opposition. For now, legal success, which involves $1.5 billion, is up in the air, since accessing the accounts could be subject to OFAC approvals.

The exchange rate showed a slight improvement. On Friday, the national currency was traded in the parallel market at Bs./$33.42, a variation of -1.4% for the week, but a loss of value of 5.5% for the month.

Hydrocarbons Sector.

Production: Oil activity this week was free of power outages, and part of the lost production was recovered in northern Monagas. Thus, production was higher than the previous week, 732 Mbpd, geographically distributed as shown below:

                  REGION                              Mbpd

·      West:                        121 (Boscan 53)                       

·      East:                         155                                          

·      Orinoco Belt:            456 (Chevron 73)                    

·      Total:                       732 (Chevron 126)                  

Production by Chevron remained constant, as has been the case recently: some 46 Mbpd were upgraded at José, yielding 44 Mbpd of Hamaca crude, the rest of the crude in the belt was diluted with 9 Mbpd of heavy naphtha, resulting in 36 Mbpd of Merey 16 crude.

Refining: The four main refineries were active, processing 338 Mbpd of crude oil and intermediate products. But attempts to get the Paraguaná catalytic cracking units running have not yet achieved their goal, so gasoline production continues to be severely curtailed.

Exports: So far in August, exports seem to replicate those of last month, with a slight reduction in Chevron's exports, 136 Mbpd, due to the different combination of segregations exported from the Faja crude oil. Shipments to China and Europe are lagging, as is generally the case during the first half of the month, while 34 Mbpd have been shipped to Cuba. It is expected that close to 100 MBPD of residual fuel will be exported during the month, .

 CITGO Petroleum: The company published its results for the 2nd quarter of the year, where the following figures stand out:

Net income of $380 million and EBITDA of $642 million, compared to net income of $937 million and EBITDA of $1.4 billion, for the first quarter of 2023

Crude oil processing in the second quarter was 761,000 barrels per day (bpd) with 94% crude capacity utilization, compared to 772,000 bpd and 96% crude capacity utilization in the first quarter of 2023.

The reduction in financial results, compared to the 1st quarter, was mainly due to a combination of lower gasoline production and higher distillate production, as a result of scheduled maintenance work. This coincided with a market where gasoline showed substantially higher margins than diesel on a quarter-over-quarter basis.

Thus, the reduction in the margin of producing diesel, of -49% in the USGC (US Gulf Coast) and -31% in Chicago, could not be offset by the increase in the margin of producing gasoline of +12% in the USGC and +37% in Chicago. The other important factor was the reduction in the price difference between light and heavy crude oil, which increased the price of heavy crude oil and affected the economies of the Lemont (Chicago) and Corpus Christ (USGC) refineries.

Carlos Jorda, the company's executive president, commented: “We delivered another solid quarter, both operationally and financially”. “We are entering the third quarter in a healthy position given our strong liquidity and operating performance.”

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[1]https://www.statista.com/statistics/600309/world-reserves-of-lithium-by-countries/

[2]Mtm: thousands of metric tons. tm: metric tons