EL TALADRO AZUL Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
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.
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