El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
In the second half of the 20th century, any conflict in the Middle East, regardless of its scale, caused the price of oil to begin to escalate in response to the threat, real or perceived, of supply cuts. The oil market at the beginning of the 21st century had very different characteristics, whether due to the diversification in supply sources, or the geopolitical weight and the diversity of the countries that dominate demand. Perhaps that is what explains why oil prices, although they have reacted upward to the Israel-Hamas conflict, are not skyrocketing uncontrollably, at least for now.
However, as Israel's response to last week's Hamas attack escalates, with airstrikes and even incursions into the Gaza Strip, the chances of the conflict expanding regionally increase. Israel announced that the objective is to rescue more than a hundred of its citizens and at the same time try to eliminate the military capacity of Hamas. However, the human casualties caused by the operations, civilians, and combatants, fuel the arguments for other actors, such as Hezbollah, to become involved in the conflict. Hezbollah is nothing more than a frontman for Iran, hence the concern of a regional expansion of the conflict, as the leaders of Iran and Hezbollah have already warned. The presence of the North American aircraft carrier Gerald Ford, and its combat force, is precisely aimed at trying to dissuade Iran and its “proxies” from getting involved in the already complex situation.
What is happening in the Gaza Strip and Israel, in addition to its potential repercussions in the Middle East, is already having consequences as far away as the war in Ukraine, the US, Russia and China. In the US Congress, for example, there is debate about how to finance Israel, without reducing aid to Ukraine; all this amid the political crisis around the election of the speaker of the House of Representatives. Meanwhile, Russia has increased its counterattacks in Ukraine, trying to corner the US into a sort of “Sophie's Choice”. In an extreme scenario, which for now is unlikely, the situation could lead to a generalized confrontation, with unforeseeable consequences, including, of course, the price of energy.
Although the parties involved in the conflict, Hamas, Israel, and neighboring countries, are not relevant oil producers, the geopolitical friction between the countries that have direct and indirect interests in the conflict suggests the possibility of the conflict expanding and impacting the oil market. In addition to Iran and the United States, the interests of China, Russia, and the European Union (EU), to mention the most relevant, also play a role in this tangled situation.
· Iran, subject to US sanctions, is interested in high prices and has the geopolitical objective of weakening/eliminating Israel. In addition, Iran can block the Strait of Hormuz, through which 17 million barrels a day are exported.
· Saudi Arabia wants high oil prices, but not to destroy demand. On the other hand, it is interested in preserving the recently reestablished relations with Iran and would prefer that the conflict does not spread, as it would be forced into taking sides.
· Russia needs high prices to finance its war with Ukraine and would welcome a conflict that will entangle and distract the US, but it cannot engage in an additional war theater, despite Putin’s calls for a war with the West.
· China wants a secure oil supply at reasonable prices. It also wants to preserve relations between Saudi Arabia and Iran to reinforce its agenda of forming an alternative international economic order. It is not interested in an expanded conflict, but would not mind if the US had another problem to keep it busy while it ponders how to play the Taiwan card.
· The EU, apart from condemning Hamas' aggression, can do little and would be the most affected if oil and natural gas flows were disrupted as a result of the conflict; Qatar has already threatened to restrict the flow of gas if hostilities continue. Not to mention the potential domestic instability due to the not-insignificant Muslim population in Europe
· The United States has a little or a lot of the above. But, as the 2024 presidential elections approach, another overseas conflict, particularly with high oil prices, would be disastrous.
As if all of the above were not enough, the movements in the demand/supply balance, that make the market move day by day, continue to act: inflation in different parts of the world; the growth indicators that drive the monetary policies of central banks, and changes in the level of crude oil and product inventories.
During the week, it was reported that US inflation rose, and Germany's fell. US inventories behaved in reverse from the previous week: an increase in crude oil volumes and a decrease in products, both gasoline and distillates. Central banks seem to agree on keeping interest rates high for a longer period.
In China, oil imports fell slightly last month, but not as an indicator of lower consumption, but rather due to the suspension of the process of filling its strategic reserve, which is onerous at current prices – this can change quickly.
Additionally, the US decided to strengthen the compliance of sanctions imposed on Russia and Iran, which is inadvertently contributing to higher oil prices. So far, two tankers have received sanctions for transporting Russian crude oil, violating the established price ceilings ($60/BBL), and the market assumes that there will be more sanctions against Iran amid the confrontation between Israel and Hamas.
The market tends to react to daily variations in these elements instead of analyzing trends, which would reduce price volatility.
Also contributing to the relatively modest price strengthening was the announcement that the US and Qatar decided to deny Iran access to the $6.0 billion in funds recently transferred from South Korea. In addition, Saudi Energy Minister Abdulaziz bin Salman's announcement that the Kingdom's voluntary reduction in crude oil production will continue for as long as necessary, which could include an extension until 2024, worried the market.
An element that deserves further analysis is related to crude oil production levels in the US. The EIA surprised with its weekly statistics, reporting that: “United States crude oil production reached a record of 13.2 MMbpd, which signals that growth may exceed 1.0 MMBPD this year”; that is, higher levels than the best years of the Shale Oil revolution.
In previous installments, we have noted the importance of US oil production, whose growth is supported by directional drilling technology coupled with multistage hydraulic fracturing in unconventional formations. That growth strategy was questioned by the financial world, perceiving that the perpetual cycle of reinvestment and growth did not appropriately remunerate shareholders and that companies were taking on too much debt to finance the growth.
Over time, these pressures took effect and pushed most operating companies to adopt a more disciplined investment policy, which attenuated growth levels; Furthermore, the increasingly restricted sources of financing, as a result of ESG controls, have not helped to maintain activity at optimal levels. Additionally, the Biden administration's anti-fossil policies have put a dent in the shale oil and gas industry's investment incentives.
US production has remained constant, with small variations dictated by price movements, new platform startups in the Gulf of Mexico, and the consolidation process that has been present all these years.
As it is, a 1.0 MMbpd growth, while the active drilling rig count has been steadily going down(-130 units to date), seems unlikely. Our analysis indicates relatively constant production for the US, but as the EIA makes corrections on an ongoing basis, these figures must be kept under observation.
Except for potential disruptions in the Middle East, there are no material changes in global crude oil supply on the horizon, and concerns about loss of demand in some countries are more than offset by the 6.5% growth in India and others.
This week, ExxonMobil Corporation (NYSE: XOM) and Pioneer Natural Resources (NYSE: PXD) jointly announced a definitive agreement for ExxonMobil to acquire Pioneer. The merger is a stock transaction valued at $59.5 billion, which, if it materializes, could change the dynamics of the North American oil industry.
Based on everything described, crude oil futures rose strongly on Friday, but remain volatile amid uncertainty over the geopolitical situation and mixed economic signals, reflexively responding to any news emanating from the war-torn region.
Thus, at the close of trading on Friday, October 13, in a market clearly on tenterhooks, Brent Crude was trading at $90.89/BBL, while WTI was trading at $87.69/BBL. An increase compared to the previous week, but still below the peak of September.
Note: This Monday, October 16, Brent and WTI prices fell, a sign that the market is betting, today, that the conflict in the Middle East will not spread.
Natural gas prices were also affected by the events. On the one hand, the closure of the Tamar gas field in Israel, to avoid potential Hamas attacks against the processing and distribution center, located just a few kilometers from the coast of the Gaza Strip; the closure is affecting gas deliveries to Egypt. Additionally, Finland is investigating whether the leak in the gas pipeline between Estonia and Finland was a result of sabotage and also suspects that the damage to an underwater telecommunications cable between the two countries is related to this external event. In any case, natural gas prices increased due to supply cuts and the uncertainty that these project on international gas trade. Natural gas prices in Europe hit their highest point since March on Thursday, with the price of Dutch gas futures contracts, the European benchmark, rising as much as 14.2% to €53 per megawatt hour.
Venezuela
Political Events
The opposition primary elections and the apparent agreements reached between the regime and the Biden administration share prominence in the Venezuelan political arena.
Faced with a clear victory for María Corina Machado (MCM), Freddy Superlano (Voluntad Popular) and Henrique Capriles (Primero Justicia) announced their withdrawal from the race; Superlano said his party would support Machado, while Capriles said he left the decision to the conscience of the militancy. The perception of a certain victory for MCM could result in low participation in the primaries, which would be an undesirable result after the gigantic effort of the opposition to reach this goal.
Regarding the agreement between the Maduro and Biden administrations, details are being revealed, but so far, nothing has been confirmed by the parties. The negotiation is three-way, direct contacts between the regime and the US are made in Qatar, and the proposals or agreements are later taken by the US to the unitary platform of the opposition.
It is said that the US proposal is based on easing sanctions on the oil sector (in the Chevron model), in exchange for political concessions that will allow the path to free and verifiable presidential elections. The key to an agreement is how to guarantee that the regime complies with what is in the accord.
Sanctions relief would allow more companies and countries to import Venezuelan crude and could provide relief to energy companies that for years have tried to collect outstanding debts in Venezuela. In the longer term, they could contribute to increasing production levels, although it remains to be seen what changes would be necessary to attract the necessary investments.
On the economic side, the regime maintains a delicate balance between public spending and the injection of foreign currency into the foreign exchange market to prevent inflation from getting out of control. In the parallel market, the dollar was quoted at 36.94 Bs/$.
Hydrocarbons Sector.
Production has shown increases and reductions because of problems related to power outages and complexities inherent to diluent logistics: remember that diluents of Iranian origin and diluents brought by Chevron for its consumption must be separately managed.
The week registered a reduction in production, reaching 735 MMbpd, 2% lower than the previous week. Only one drilling rig is active, operating in PetroMonagas.
Production: the geographical distribution of production for the last week is shown below:
• West: 126 (Boscan 53)
• East: 151
• Orinoco Belt: 58 (Chevron 77)
· Total: 735 (Chevron 130)
Chevron's production is in line with recent levels.
Refining: 330 Mbpd of crude oil and intermediate products were refined in Venezuela. The gasoline production operation has remained constant compared to the previous week. A shipment of 300 MBBLS of gasoline arrived in Cardón, from Italy, as part of the crude barter for debt reduction and fuel supply. This gasoline will be used to increase the availability of gasoline for the domestic market
Exports: The export levels corresponding to the first 11 days of October are consistent with the projected export plans of around 550 MBPD.
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