El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo y Luis A. Pacheco
The oil market had a week of ups and downs that, for a while, threatened to change the positive trend that had been developing recently. Prices of benchmark crude oils Brent and WTI hit 10-month highs, only to decline following hesitant announcements from some central banks: the US and UK paused their interest rate hikes, while others, such as China, lowered them. These announcements, added to economic news from different countries, indicate to the market that inflation continues to be a concern that could affect demand.
The week began with the well-known concern about the gap between demand and supply, driving up prices. Mid-week, prices fell in response to the US Federal Reserve's (FED) narrative on interest rates and were on track to post a loss for the week of nearly $3/BBL.
The announcement of Russia's decision to ban fuel exports for an indefinite period drove up product prices, and in turn, the price of crude oil, offsetting the economic concerns from earlier in the week.
The Russian government announced that it is temporarily restricting its gasoline and diesel exports, seeking to stabilize fuel prices in its domestic market. This ended weeks of speculation about whether Russian authorities would limit exports in the face of rising prices, shortages in its domestic market, and the weakness of the ruble. Belarus, one of Putin's few allied countries, has been supplying incremental volumes of gasoline and diesel to help Russia with its domestic market problem. Less diesel supplies from Russia would not only reduce Putin's income but would also restrict the global diesel market, which was already showing signs of being undersupplied before Russia's change in policy.
Regarding economic news, we should mention that even though the FED paused raising interest rates, it reiterated that they will remain high for longer. In Europe, the ECB must be analyzing its policy in the face of the almost certain contraction that is looming in Europe for the rest of the year.
The economic scenario postulated by the president of the FED, Jerome Powell, could, however, end up being very optimistic. The call to strike by the United Auto Workers union at the GM, Ford, and Stellantis plants, searching for structural increases in wages and benefits, is a dark cloud on the horizon. On the other hand, the possible shutdown of the federal government, pushed by some Republican members of Congress, which could begin as early as October 1, is a significant threat to the economy.
Meanwhile, the Biden administration appears to be more focused on building relations with Iran to achieve a prisoner swap and with Venezuela to negotiate sanctions, than on strengthening its energy security. With strategic oil reserves at worryingly low levels, it has failed to give the domestic hydrocarbon industry enough confidence to increase its investments. Indeed, what we interpreted last week as the industry's logical reaction to rising crude oil prices, by incorporating nine additional drills, did not sustain momentum this week; Baker Hughes reported a reduction of 11 rigs in the most prolific basins. So far this year, companies operating in the US have been reluctant to take advantage of high prices, or they may be playing; It is not difficult to extrapolate that this strategy will continue in the months to come.
What we can call the “oil underworld of the Far East” deserves particular analysis. Following the global divide between Western and Eastern alliances, depending on the position on the Russian invasion of Ukraine, it is no coincidence that two of the largest oil consumers are leading the alliance sympathetic to Russia. China and India, important oil consumers, have been importing large quantities of Russian crude oil that has been displaced from its traditional markets, mainly Europe. China already has experience in trading sanctioned crude oil, through its relationship with Iran and Venezuela. Of course, the help provided is not an act of charity, violating Western sanctions has its price. Russia has had to sell its crude oil at prices heavily discounted from crude oil of comparable quality. In this way, China, mainly, but also India, is acquiring crude oil at lower prices than Western consumers. Consequently, these countries refine products for their domestic market at lower prices than in other markets, without having to make use of costly subsidies, while they can generate greater income than their competitors through exports of the said products. Paradoxically, this trade in sanctioned crude oil is having a collateral effect, which consists of greater economic growth in the countries involved, which translates into increased demand for oil and transfers benefits to the global market.
So, the dynamics in this “Far Eastern oil underworld” help China overcome part of the economic vicissitudes it is facing, and although it may seem counterintuitive, we could argue that the sanctions, indirectly, have boosted oil demand. Conversely, sanctions limit supply growth, at least in terms of making it difficult to offset declining production in Russia.
Thus, and despite the volatility in oil prices, the trend remains upward, and only OPEC+, or relevant changes in the situation in Ukraine, can materially affect the fundamentals of the oil market. The Brent and WTI crudes, at the market close on Friday, September 22, were trading at $93.83/BBL and $90.33/BBL, slightly below last week's close.
Other news related to the oil market are:
· British Prime Minister Rishi Sunak announced changes to Britain's plans to address climate change on Wednesday, arguing that these changes seek to protect citizens while maintaining long-term objectives. In a decision with obvious electoral overtones, Sunak, among other things, announced the postponement until 2035 of the ban on new gasoline and diesel car sales and said he would relax the mandatory transition from gas boilers to heat pumps in British homes. Unsurprisingly, most reactions to Sunak's announcements were adverse.
· The BP and Shell consortium has reached an agreement with Trinidad and Tobago to explore three deepwater blocks, 25a, 25b, and 27, announced Energy Minister Stuart Young. Due to the location of the Blocks, it could be looking to explore the continental slope, similar to the discoveries in Guyana.
Energy Transition
The Noisy Agency
The International Energy Agency was founded in 1974 as an autonomous intergovernmental organization following the global oil crisis of 1973. The crisis, caused by Saudi Arabia's oil embargo on Western countries supporting Israel in the Yom Kippur War, caused a massive economic disruption and underlined the world's dependence on Middle Eastern oil producers. In response, the Organization for Economic Co-operation and Development (OECD), which brought together the world's largest economies, created the IEA to help countries coordinate a collective response to major oil supply shocks.
The IEA began with 26 founding members, made up of advanced economies in North America, Europe, and Asia Pacific, which were members of the OECD and major net importers of oil. This allowed coordination on energy security among the main oil-consuming countries. Over time, the IEA expanded its membership to 30 countries to encompass new member economies such as Korea, Mexico, and Poland.
The IEA's original role focused on oil security. Its priority was an emergency system to allocate oil supplies among its members in the event of a disruption. Member countries committed to maintaining emergency oil reserves equivalent to 90 days of net oil imports. This obligation to hold stocks was reduced to 60 days in 2015. Beyond physical stocks, members agreed to participate in the allocation of oil supplies and the rapid exchange of oil market information in a coordinated response.
While oil security remains a core mission, the IEA's mandate has expanded significantly over the past five decades. It has become a leader in monitoring energy transitions, providing market data and analysis, promoting energy efficiency, and supporting technological collaboration. The IEA conducts in-depth research and produces flagship publications that provide data and recommendations. Serves as an advisor to the governments of member countries to achieve energy policy objectives.
In 2021, the International Energy Agency published a report outlining how the global energy sector can achieve net-zero carbon emissions by 2050. This highly ambitious scenario, titled Net Zero by 2050, outlines more than 400 milestones across all parts of the energy system, in the next three decades, to achieve carbon neutrality. The path outlined in the report requires an unprecedented transformation of the way the world produces and consumes energy. Renewable sources such as solar and wind would expand greatly to account for 70% of electricity generation by 2050, displacing fossil fuels. No new oil and gas fields beyond those already committed would be approved in 2021. Coal would fall from nearly 40% of energy today to just over 1% by mid-century.
Before publishing the “Net Zero by 2050” report, the IEA historically held a more incremental view of the global transition from fossil fuels. The IEA predicted that oil, gas, and coal would continue to meet a significant portion of the world's energy needs in the coming decades. Its 2018 forecast did not foresee peak oil demand until after 2040. Natural gas and coal consumption were also expected to continue rising over long-time horizons. The IEA highlighted the need to continue investing in fossil fuels to ensure adequate and affordable supply, rather than anticipating their rapid displacement.
For years, environmental advocates have criticized the IEA's forecasts as being too conservative regarding the growth potential of renewable energy and too evasive about curbing investment in oil, gas, and coal production. But by 2021, IPCC reports on global warming, agreements at COPs, falling costs of wind and solar energy, and policy changes in major member countries made unavoidable a distancing of the agency from the age of fossil fuels. This change of position in the IEA, which had its first test during the European energy crisis following Russia's invasion of Ukraine, has as many critics as followers. But it is hard to ignore it, given the interests that are represented by the agency.
In short, the IEA has evolved since its origins in the 1970s, focusing solely on oil supply disruptions. While energy security remains vital, the IEA now plays a broader role in monitoring all energy transitions, promoting efficient and sustainable energy systems, providing vital data and analysis to governments around the world, and supporting technological innovation in all energy sources. It remains the leading international energy organization involving both OECD countries and emerging economies such as China and India to enable coordinated policy action on shared energy goals.
The International Energy Agency (IEA) and OPEC/OPEC+ occupy different but complementary roles within the global oil market. Despite not having a formal relationship, high-level dialogue between IEA and OPEC ministers occurs occasionally or occasionally on shared interests in energy security and market stability. However, the two organizations generally represent opposing interests and versions of the energy scenarios. Due to their historical origin of consumers versus producers, barrel prices were and continue to be the bone of contention between the two organizations. Today, in the context of the energy transition, the discussion has expanded and has become existential, no longer only towards the price of energy, but towards the sustainability of the energy system.
The IEA is a technical body, but, like OPEC+, it also represents political and geopolitical interests. Their political agendas color, if not their data and analysis, then their projections and recommendations. As analyst Javier Blas points out in a recent article: “This may seem paradoxical, but the International Energy Agency is both the gold standard in global energy supply and demand statistics and a poor forecaster of the same data. The sum of all that’s good and bad is its annual flagship report, the World Outlook—thus, take it both seriously and with skepticism.”
Venezuela.
Political Events.
An event of relative importance, such as the announcement by the Guyana government that it had received 8 offers for the 14 offshore exploration blocks tendered, generated strong rejection from the Venezuelan regime. They called the bidding round illegal, and through a statement denounced that the round seeks to invade maritime areas pending delimitation between both countries. Guyana was quick to respond. Amid growing border tension, the president of Guyana, Irfaan Ali, affirmed that the government of Nicolás Maduro represents a threat to both regional and international peace and security. “Guyana is not going to spare any effort when it comes to defending its integrity and territoriality,” he said. This diplomatic give-and-take generated opinions in favor of Guyana from the OAS, CARICOM, and even Brian Nichols, US Undersecretary for Hemispheric Affairs.
Nichols' intervention gave the Venezuelan regime the perfect excuse to raise a nationalist flag with which it could unify all the opinions of the country since the opposition had already indicated its criticism of Guyana's oil tender. The National Assembly approved, through an emergency motion, a consultative referendum for the people to strengthen the defense of Guayana Esequiba and the inalienable rights of Venezuela over that territory.
In a move designed to hinder the opposition's primary election process, the newly appointed National Electoral Council (CNE) offered primary organizers technical and logistical support, introducing more entropy to what is already a tortuous process. The opposition responded by saying it would hold internal consultations to consider whether to accept the offer.
The Venezuelan regime also took note of the negotiations between Iran and the United States, which resulted in the release by Iran of 5 North American prisoners, tied to the unfreezing of million $6,000 of Iranian funds in American banks. Both the exchange of prisoners and the release of money were carried out using Qatar as a mediator.
The regime is drawing local parallels with the US/Iran negotiation, seeking to release frozen funds from Venezuela and structure a prisoner exchange that includes Alex Saab.
In short, revenue shortfalls, primary elections, and renewed conflict with Guyana monopolize the country's attention.
Hydrocarbons Sector.
With just six days left in September, there have been no operational events of note and production has not recovered the level reached in August.
Production: the average production for the week was 725 MBPD, distributed geographically as shown below:
• West: 122 (Boscán 53)
• East: 153
• Girdle: 450 (Chevron 74)
· Total: 725 (Chevron 127)
Refining: 306 MBPD of crude oil and intermediate products were refined, with yields little changed from last week: only a 20 MBPD increase in the amount of diesel produced. The supply of gasoline to the national market remains critical, with strong rationing.
Exports: as the month progresses, exports show a behavior similar to August. Our estimate, based on the tanker schedule for the rest of the month, indicates an average of 486 MBPD of crude oil and 57 MBPD of residual fuel exported.
Of them, 135 MBPD average of the month will arrive in the US placed by Chevron; 280 MBPD will be sent to the Far East with final destination China; 52 MBPD to Europe as part of the barter, and 19 MBPD to Cuba.
Chevron's participation in the foreign exchange market is estimated at $150 million, and its debt will be reduced by around $87 million.
In other news, it was learned that Venezuela and Trinidad and Tobago reached an agreement to develop the Dragon field, north of Paria and near the border between the two countries. The Dragon field contains about 4.0 TCF of recoverable gas, in waters about 180 meters deep. The agreement, which has a License issued by OFAC, will allow the Venezuelan gas field to be produced and then transported through infrastructure in Trinidad and Tobago, to reach the Atlantic LNG liquefaction plant, south of Trinidad in Point Fortin.
