El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
Oil prices continue to show polite indifference to geopolitical risks and the tightness between supply and demand. For the fourth consecutive week, crude oil prices closed lower than the previous week and dropped to their lowest level since July.
In the USA, the combination of unflattering economic data, ambiguous oil inventory reports, and a cooling labor market pointed to a possible reduction in energy demand. And while both OPEC and the International Energy Agency (IEA) revised their oil demand forecasts, citing record Chinese consumption and resilient economies, oil market participants focused on rising crude oil inventories in the United States and record American oil production, reinforcing the negative sentiment that dragged down oil prices.
On the other hand, the multiple geopolitical flashpoints, risky as they are, are not moving the prices up. The Israel-Hamas war, the Russian war on Ukraine, Iranian-origin attacks against US military targets in Syria and Iraq, and Hezbollah and Yemen's Houthi firing missiles and drones at Israel do not appear to be on the market’s radar. All these armed conflicts, limited to their region, constitute a high-risk situation in which any miscalculation, in one or more of them, could trigger a confrontation that would seriously affect the supply and transportation of crude oil and products.
A possible explanation for this strange market reaction is the presence and interests of the two superpowers, the US and China, which, particularly in this situation, have overlapping interests, for different reasons. It is in China's interest that supplies from the Middle East and Russia are not affected, as they are the source of much of its hydrocarbon imports. On the other hand, the US wants to avoid at all costs a reduction in global supply to avoid, less than 12 months before the presidential elections in that country, shocks in domestic prices. For now, these countries have become the guarantors of supply stability in the region, reducing the risk of interruption, which manifests itself as a reduction in the geopolitical risk premium that the market should be including.
Nevertheless, military activity in the region continues to intensify. There was an intense exchange of missiles from the Golan Heights between Hezbollah and Israel. A US destroyer shot down a drone aimed at Israel originating in Yemen. The epicenter of the activity is in the north of the Gaza Strip, where Israeli forces are searching for and finding underground shelters and weapons depots in hospitals and schools.
The crude oil and product inventory reports in the US, reported by the EIA in its first publication after having updated its technological platform, indicate a significant increase in crude oil inventories, accompanied by drops in oil products stocks – in a magnitude similar to the growth of crude oil. Normally, a rise in crude oil inventories indicates a fall in demand, but a fall in product inventories points in another direction; an alternative explanation is that there is a bottleneck in refining, which is not the case since the percentage of refinery utilization has not changed – we will have to wait for the new information platform to stabilize.
The meeting between the presidents of the US and China in California, the first in a year, was the most anticipated political event of the week. The meeting was held under very particular circumstances. It is not only the tense geopolitical situation but also that both leaders, Biden and Xi, came to the meeting facing complex domestic problems. In Xi's case, China's economy has not shown the expected recovery, and this weakness has created social tensions that Xi now has to manage, not to mention rumors of purges in the upper echelons of the communist party. In the case of Biden, the president faces high disapproval from the electorate and is dealing with two wars, Ukraine, and the Middle East, which do not have easy solutions. Although the conflicts are not his making, managing them is becoming a budgetary and political problem. We must add to the mix China's claims over Taiwan and sovereignty over the China Sea.
The two leaders discussed various thorny issues, including wars in Ukraine and the Middle East. Biden would like to see China use its influence with Iran to prevent the Israel-Hamas war from widening, and he was expected to press Xi to use his leverage to stop North Korea from supplying weapons to Russia.
At the end of the meeting in California, there was no joint statement or joint appearance before the press, and the modest agreements that were publicized made it clear that their fundamental interests and objectives were very different. President Xi described it succinctly by saying, “Planet Earth is big enough for the success of the two countries.” The Chinese media was very positive about the meeting, even though Biden, in a press conference after the meeting, called Xi a dictator.
The State Department announced that in the meetings it had reached an agreement with its Chinese counterparts in which they committed to "accelerate the replacement of coal, oil and gas in electricity generation" with green energy sources such as wind and solar. But this agreement, in which both nations also committed to "sufficiently accelerate the deployment of renewable energy in their respective economies through 2030," was criticized by experts for its possible impact on US consumers. For one, China rarely complies with international agreements, and that country would benefit inordinately from said agreement since it controls much of the world's green energy supply chain.
OPEC+ has not revealed the considerations to be discussed at its next meeting, but rumors spread on Friday that some OPEC members are pushing for deeper cuts at the Nov. 26 meeting in Vienna, although Saudi Arabia will likely require credible commitments from other members on production and meeting quotas before taking any action.
However, the market is betting that OPEC+ will not extend production cuts. We believe that OPEC+ will not have the need or temptation to increase its cuts. In its monthly report, the cartel slightly revised its 2023 oil demand growth forecast by 20,000 barrels per day (bpd) from last month's estimate, and now forecasts that global oil demand will grow this year by 2.5 million barrels per day, thanks to upward revisions to China's oil demand in the second half. By 2024, global oil demand is expected to grow by a healthy 2.2 million bpd.
However, if prices remain close to or below $80/BBL (Brent), Saudi oil minister Prince Abdulaziz would be eager to pull another “trick” out of his hat and catch off-guard the financial actors who liquidated long positions to go massively “short”, whom he accuses of speculative ploys.
In the same vein, some analysts maintain, and may have convinced the market, that the US will continue to increase its production despite the reduction in drilling rigs, which are down to 618 units - a drop of 164 in the last twelve months. However, we are of the idea that there has not been such sustained growth, but rather a maintenance of the “status quo” with an average crude oil production of 12.1 MMbpd this year (13 MMbpd including condensates). The theory of continued growth based on drilling efficiency, now that the DUC inventory (wells drilled but not completed) has essentially been exhausted, does not have much support until the benefits of the synergies of the recent mergers (ExxonMobil-PIONEER and Chevron-Hess) begin to develop their investment plans.
Thus, during the week, prices reacted to very specific actions: 1) the liquidation of positions in the futures market, largely caused by the sharp increase in crude oil inventories in the US, and 2) concerns about demand growth.
Already into Friday, there was a significant recovery in prices as market fundamentals remain solid: demand of almost 103 MMbpd, while supply, including a recent increase of 320 Mbpd, barely reaches 101.8 MMbpd, an imbalance of 1.2 MMbpd. OPEC and the IEA agree in forecasting growth in demand, although they differ significantly in the growth rate and its persistence over time.
Thus, at the market close, on Friday, November 17, Brent Crude was trading at $80.61/BBL, while WTI was trading at $75.89/BBL, another strange and downward week.
VENEZUELA
Political Events.
The Venezuelan political environment continues to cause unease. The regime focuses its attention on two issues: 1) the understanding of what it means to comply or not with the Barbados and Doha agreements, including the warnings issued by the White House about the duration of the recently granted licenses; 2) the border dispute with Guyana and the litigation that the neighboring country is pursuing in the International Court of Justice. Both issues seem to have little political momentum, but the regime uses them to distract its followers.
In the first case, Maduro and his chief negotiator, Jorge Rodríguez, are proposing a kind of poker game with the White House to find out whether they are “bluffing.” Both parties have a great interest in ensuring that things do not get out of control. The US requirements are relatively simple. On the one hand, they demand that all opposition candidates (María Corina Machado, who is leading the polls) be qualified for the 2024 elections; to be exact, the Americans say that there must be an active process for qualification before the end of November. On the other hand, they demand that political prisoners, including US citizens, be released.
Both of these were part of the conditions agreed upon in the context of the Barbados agreements and subsequent OFAC licenses. At that time, the signatories did not expect the level of participation or results of the primaries, which ended up surprising the regime, the opposition, and the White House negotiators.
The regime may end up complying with what was agreed in terms of releasing some political prisoners, but we do not see any openness regarding the lifting of the disqualifications, at least regarding María Corina Machado, given the high level of approval that she has generated in all sectors of the population.
The regime is counting that the US, despite all warnings, is not willing to reinstate sanctions to the status before October 18 of this year. The reality is that General License 44 and the negotiations on illegal migrants partially solve two problems for the White House: 1) the deterrent effect on the continued flow of emigrants, by agreeing to repatriate illegal emigrants to Venezuela, a process that is already underway, and 2) some incremental crude will reach the US market. If the US keeps its threats fuzzy (despite the continued mention of November 30 as a breaking point), the regime will continue to buy time and benefit from additional oil revenues.
If the US decides to dismantle the licenses granted, it will probably do so by non-renewal, which allows the regime to use the incremental funds over the next six months to finance its political campaign. The US has the tools to apply pressure but has doubts as to the usefulness of using them – in a few days, we will be able to clarify what the US position is.
Regarding the border dispute with Guyana, the regime tries to hide the responsibility that falls squarely on President Chávez, who neglected to act timely on the territorial dispute with the neighboring country. In 2005, the then-president of Venezuela visited Georgetown and promised not to interfere in development activities in disputed areas.
Now, with the referendum scheduled for December 3, the regime is trying to rewrite history and appear, to the Venezuelans, as the defender of the country's sovereign rights, when it is its years of inaction that have led to the present crisis.
In the economic sphere, the policy of intervention in the currency market, thanks in particular to the role of Chevron, has been successful: the exchange rate remains at levels of 37 Bs/$ for the parallel dollar. We will see if the diversion of shipments to markets with better yields compensates for the decline in prices.
Hydrocarbons Sector.
The operational activity had mixed results. Crude oil production remained constant but refining and exports have been affected by the changes in marketing strategies permitted by LG 44.
Production: The average crude oil production this week was 746 MBPD, very similar to October and the first days of November. The geographic distribution is shown below in MBPD:
· West 134 (Chevron 54)
· East 151
· Faja del Orinoco 461 (Chevron 80)
· Total 746 (Total Chevron 134)
The small reduction in the Orinoco Belt is the result of operational problems of diluent handling. Merey 16 crude oil and DCO continue to be produced, depending on the light crude oils available and the types of diluents.
Two drilling rigs continue to operate at PetroMonagas, but incremental production barely offsets the field's natural decline.
Refining: The volumes of crude oil and intermediate products processed in national refineries have suffered little change, stumbling because of the availability of processing plants.
However, the gasoline situation is changing significantly due to the arrival of imported gasoline and gasoline components. Indeed, a tanker arrived at the Amuay refinery to unload about 250 MB of these products, as part of the barter agreement with ENI/Repsol. It is also announced that Chevron will bring a similar cargo to be unloaded in El Palito, complementing a cargo of 540 MB of heavy gasoline unloaded in Jose. These imports will be mixed with domestic gasoline to maximize availability. In evidence of the latter, two Cuban tankers with gasoline were dispatched to that island.
Exports: Chevron continues to be consistent in exporting around 145 MBPD of crude oil. The rest of the exports correspond to crude oil in barter with Europe, about 36 MBPD, and the volumes sent to Cuba, about 26 Mbpd. The rest of the exportable crude oil, which until recently was sent to China through the tortuous paths of intermediaries, has had multiple suitors. Several of the large trading houses with access to tankers have made offers to PDVSA to export directly to the markets of their preference. The information has been very scarce, but the difference in the prices that PDVSA would receive is important. It remains to be seen how the system used for sanctioned crude oil is replaced by a more transparent one.
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