ECONOMIC DATA AND GROWING GEOPOLITICAL TENSIONS DRIVE OIL PRICES UP

 El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

The performance of the US economy, which showed a surprising growth of 3.3% in the 4th quarter, and 3.1% for all of 2023, has temporarily returned the bullish spirit to the oil market. The change in market direction, although modest, in terms of price is appreciably reinforced by a combination of factors, both industry fundamentals and geopolitical. Among them, we must highlight the growing tensions in the Middle East, which originated in the Israel – Hamas conflict, but are seasoned by other interests, in particular, the tenacity shown by the Houthis when it comes to disrupting maritime traffic; Added to this are the hidden harassments of Iran using its “proxies” in the region. On the other hand, an escalation of hostilities between Russia and Ukraine focused on Russian energy infrastructure, the economic stimulus measures announced by China, and the greater-than-expected drop in US crude oil inventories, also contributed to an increase in the perception of supply risk.

Red Sea navigability

Indeed, despite multiple attacks on Houthi positions, they continue to attack ships transiting near the coast of Yemen. Although several of the militant group's missiles have been neutralized, including one launched directly at one of the US Navy ships, a UK-linked tanker, the Marlin Luanda, is on fire near the Gulf of Aden after being hit by a missile. These events continue to push shipping fleet operators to avoid the area, imposing additional costs and time on the supply chain.

Iran and its tentacles

Iran's involvement in driving the current instability in the region is more than evident, to the point that the US asked China to urge Tehran to stop the Houthi rebels and to remove its support for terrorist activities in Iraq. Syria and Lebanon; The expectation is that China can influence Iran, given the importance of their commercial relationship. At the time of this column's closing (January 28), an attack on a North American base on the border between Jordan and Syria was reported, leaving three soldiers dead and more than thirty wounded. The Biden administration believes that the attack, attributed to the Islamic Resistance group, is ultimately the responsibility of Iran. This latest development undoubtedly increases the risk of direct conflict between the Iranians and the Americans.

Ukraine, again a factor

Meanwhile, Ukrainian forces have directed their actions at reducing Russia's oil export capacity, on which its ability to finance the war depends. At least four oil centers and refineries have been attacked with drones. The latest attack targeted Rosneft's Tuapse refinery on the Black Sea coast; The flames have consumed a good part of the inventories and some of the process facilities.

In light of these attacks, the Russian invasion of Ukraine once again takes on relevance in the international hydrocarbon supply process; Although the extent of the damage is not fully known, some analysts have speculated that these attacks could remove 500 Mbpd of products from the market.

 China and its economic stimuli

In the elements that influence global oil demand, China is beginning to show signs of wanting to resolve the economic problems that afflict it since the confirmation of Xi as supreme leader. In this sense, the government announced the implementation of 19 stimulus measures, which include the injection of funds to state banks and regional governments, as well as the reduction of the interest rate. Regardless of state measures, demand for aviation fuel is reaching record levels, above pre-pandemic levels.

 

USA, a case study

When analyzing current market trends, it is important to understand the behavior of production and inventories in the US. This week, the market reacted to the report of the fall in crude oil inventories (-9.2 MMbbls ), much higher than expected, in weekly oil inventories in the US, accompanied by an increase in gasoline inventories and a reduction in diesel inventory. The drainage of over 2.0 MMBBLS in Cushing, OK also did not go unnoticed.

The increase in production reported by the EIA in the last months of the year, of more than 500 MBPD, raising total production to record levels of 13.2 MMbpd, was a surprise factor, given that the drilling activity, reported by Baker Hughes indicated a gradual but constant reduction in the number of units dedicated to drilling – in orthodox logic, the fewer drills, the less production.

Apparently, according to information from the EIA, the increase in US production in 2023 corresponds to the unusual number of DUC wells put into production - wells drilled but not completed - increasing production by around 400 MBPD in the period - a net monthly increase of 50 MBPD.

The DUCs are an integral and necessary part of the exploitation system of the “Shale Oil and Shale Gas” basins. In the normal course of operation, these wells have been drilled to their full depth, but have not been fractured or completed, which allows the operator to maintain a type of inventory that allows it to react in volume and timing to changes in the market. , while also optimizing drilling economies. Depending on the decline in producing wells and market conditions, the operator can choose to increase its inventory of DUC wells or reduce it (putting it into production), optimizing cash flow and stabilizing its production level.

Our analysis indicates that the DUC well pool is now at its lowest level since the Department of Energy began publishing that data in 2014. Therefore, we believe that further production increases will have to come from increased mining activity. drilling, since it will be difficult to repeat the strategy of activating the declining number of DUC wells. Much of the use of DUC has been a loan to the future that will have to be repaid over time due to the need to reestablish an optimal level of this type of well, which in turn affects the capacity for production growth – at least at current prices. Ironically, this 2023 achievement, which partly masked the effects of OPEC cuts, is a factor that today contributes to the market's bullish outlook looking to 2024.

 

Inflation and Central Banks

On the side of economic growth and despite various headwinds, including still very high-interest rates, the US economy remains buoyant. Conversely, inflationary pressures, including increases in energy costs, continue to weigh on the prospects for early rate cuts and economic growth. So, the Federal Reserve and the European Central Bank have tried to cool market enthusiasm about the timing and number of rate cuts during the year.

Thus, oil prices gained ground compared to the previous week, showing the highest prices recorded since October of last year. As markets closed on Friday, January 26, Brent and WTI crude markers were trading at $/BBL 83.55 and $/BBL 78.01 respectively, an increase of more than 6% from the previous week. This Monday, despite the attacks on the North American base in Jordan, prices fell.

Other news in the oil field are:

·      Sunoco LP (NYSE: SUN), the largest fuel distributor in the United States, will acquire NuStar Energy LP (NYSE: NS), an independent liquid terminal and pipeline operator, for approximately $7.3 billion in an all-stock transaction.

·      Angola's National Agency for Oil, Gas, and Biofuels (ANPG) has published the list of winners of the 2023 bidding round for onshore blocks in the Congo and Kwaza basins. The round failed to attract international interest, and only 4 of the 12 blocks offered will enter into negotiation with the classified companies (all Angolan) before being awarded.

·      The Canadian company, Trans-Mountain Corp, has begun filling up the Trans Mountain pipeline expansion, in a process that is expected to be completed in April. When operational at capacity in late 2024, it will provide Western Canadian crude oil producers with an additional 590,000 barrels per day (bpd) of oil transportation capacity.

·      Chevron (NYSE: CVX) announced it has increased its investments in deepwater Nigeria and has acquired a stake in the OPL 215 oil block, amid the Nigerian government's effort to retain IOCs operating in the country.

 

VENEZUELA

Political/Economic Situation

After two months of maintaining the procedural suspension, the Supreme Court of Justice (TSJ), ignoring any appearance of legality, “ratified the disqualification” that the Comptroller General of the Republic had allegedly imposed on María Corina Machado. In a shameful exercise in legal fiction, the court took the opportunity also to accuse Ms. Machado of non-existent crimes and thus tried to justify the unpresentable nature of the decision.

The US administration published a brief statement stating that the decision of the Venezuelan Supreme Court of Justice of January 26 is inconsistent with the commitment made by representatives of Nicolás Maduro to hold competitive Venezuelan presidential elections in 2024, and expressing which is reviewing its sanctions policy against Venezuela.

Until now, the White House has been reluctant to go back on the concessions granted to the regime, so it is difficult to predict what this review means, which, on the other hand, they have been announcing for weeks; one would have expected them to be prepared for this contingency of total disrespect for what was agreed.

Among the possible responses, the US could review and/or cancel part or all of the licenses granted by OFAC. In practice, License 44, which automatically expires in April 2024 unless explicitly extended earlier, emerges as the obvious answer, requiring only inaction. The effects of a review of this type would reactivate the sanctions on Venezuelan hydrocarbons that are not covered by License 41 granted to Chevron or by the barter mechanisms authorized through individualized comfort letters, as in the case of ENI/Repsol. Chevron would also have to evaluate the advisability of continuing with its investment plans.

Likewise, the non-extension of General License 44 would put an end to the possibility of importing gasoline from the US. The recently negotiated agreements between PDVSA and Maurel & Prom, Repsol, and other minor operators would remain frozen. Altogether, this could total a reduction in foreign currency income of around $2.3 billion, in addition to deepening the loss of value in the oil sector.

During January, despite the political crisis, control of the exchange rate, a crucial element of the economic program ahead of the elections, has achieved its objective. Thus, the parity has remained limited to 39 Bs./$, with an annualized inflation of around 188%, the result of restricted public spending, although in January there seems to be a turning point.

Hydrocarbon Sector

Operations in the oil sector continue in a strangely stable scenario, which in turn reflects the lack of investment for the recovery of oil production.

Efforts to encourage private participation and investment in the hydrocarbon industry have not translated into relevant activities in the short term. The announced associations with Ecopetrol and Pemex do not seem to be the ideal mechanism to recover the national industry, and the agreements announced with companies or consortiums of lesser importance do not have a material impact on the country's oil activities. The exaggerated importance that has been given to the recovery of inactive wells to attract operators does not have the materiality or the technical support to add sustainable barrels to production.

Crude oil production during this week remained at 760 Mbpd, geographically distributed as follows, in MBPD:

·       West        139 (Chevron 56)

·       East                            149

·       Girdle                        472 (Chevron 84)

·       TOTAL                       760(Total Chevron 140)

The increase in production of 2.0 Mbpd, week by week, corresponds to modest increases in light crude oil production in the West and East of the country. The arrival of imported diluent has shown a certain delay so the mixture of Merey 16 continues to be a process of logistical alchemy.

In Venezuelan refineries, 182 MBPD of crude oil and intermediate products were processed and reprocessed, with a yield in terms of gasoline and diesel of 60 and 74 Mbpd respectively. Despite the arrival of imported gasoline, rationing in the interior of the country continues.

Based on the data available for January, crude oil exports will average 550 Mbpd and product exports 60 Mbpd. Export destinations remain unchanged, with India becoming relevant regarding volumes shipped.

The official prices of the Venezuelan basket have not shown the expected increase. We believe that, with the strengthening of deliveries to India, January may show an increase compared to December 2023. Foreign currency income from the sale of hydrocarbons, in January, is estimated at $620 million.

CONFLICTING NEWS AND EVENTS GENERATE DISCONCERT IN THE OIL MARKET.

El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

 

If we were to look for some simple description of the behavior of the oil market currently, we could say that it is in the middle of a tumult and that its reaction to the stimulus of various events is one of bewilderment. The situation in the energy market in general, and the oil market in particular, seems to be an example of the much-cited “Murphy's Law” – everything that can go wrong, will go wrong.

China's economic growth in the fourth quarter of 2023 has been weaker than expected, underscoring concerns among many about the broader global economy, which should lead to weakening oil demand and prices. However, some, Wood Mackenzie for example, expect China to be the largest oil consumer, accounting for more than a quarter of new global oil demand in 2024.

On the other hand, and also affecting the market, the North American aerial attacks on the Houthi rebels have not stopped their attempts to obstruct maritime traffic in the Red Sea; the US Navy intercepted a ship from Iran loaded with military equipment, including missiles and guided warheads destined for the Houthis of Yemen, a clear sign of Iran's involvement in the conflict. The extreme winter in North America temporarily affected oil and gas production and refining. The IEA and OPEC generated divergent supply and demand forecasts, raising market uncertainty. Iran and Pakistan exchanged bombing raids on the border between the two countries. All these events point to an increasing risk to the region's oil supply and, therefore, to an increase in prices.

In the Middle East, tensions are rising as Israeli forces advance south against Hamas, dismantling the militant group's military and logistical capabilities. The risk of confrontations in the north and east of Israel, with Iranian “proxies” in the region, persists. US military forces carried out several attacks this week against Houthi targets, which may have degraded their offensive capabilities, with their attacks on ships noted to have been more sporadic and using projectiles of smaller size and complexity.

The rerouting of a growing number of ships around Africa to avoid possible attacks in the Red Sea is disrupting refueling patterns and driving demand for fuel in remote ports around the African continent, as well as in Singapore and Rotterdam. These new routes affect 15% of global maritime traffic and add 12 to 20 additional days to the usual route through the Suez Canal.

Although not directly affecting oil supplies, for now, Pakistan and Iran have exchanged missile attacks, the Shiite and Sunni rivals accusing each other of harboring terrorist cells in their territories. Iran also carried out attacks in Iraq and Syria. Both events increase the likelihood of a more expanded conflict.

Another unforeseen element was the Arctic storm that impacted the US, dropping temperatures to record levels that, among other things, shut down 650 Mbpd of crude oil production in the Bakken Basin in North Dakota and closed some refining capacity, mainly in the Port Arthur, Texas area, due to power outages. Likewise, natural gas production is suffering from the severe storm, with a temporary reduction of 1.6 Mfd. Authorities hope to return to normal in 7 to 10 days. The temporary nature of these production cuts explains, to a certain extent, the scant reaction to the report of the fall in crude oil inventories in the US.

In terms of forecasts and projections, OPEC and the International Energy Agency (IEA) have just published reports on the oil market. Although the two documents forecast growth in global oil demand and supply by 2024, they differ substantively on the scale of that growth. The IEA expects a widely supplied market this year and showing signs of transition, while OPEC speaks of a much tight and growing market by 2025. However, just as we consider OPEC's forecasts, published on January 17, biased, similar behavior is exhibited by the forecasts of the IEA, which in recent years has taken the role of champion of the energy transition and executioner of investments in fossil fuels.

The comparison of both sources, as well as our estimates, are shown in the graph that follows. We have not been able to replicate the figures used by the IEA on the supply side, in which it factors increases in production in half a dozen countries, but seems to ignore that there are also countries with declining production, such as Russia, Mexico, Indonesia, and Colombia, to name just a few. In the case of the increase in supply, our figures coincide with the increase that the IEA has assigned to the 6 countries of growing production. However, when combined with the declining production of other producers, the increase in supply would be less than the projected growth in demand in any of the cases considered. Our supply differential estimates are shown in the accompanying graph. Although the figures in the OPEC report are more granular, they must also be taken with caution.

With all these elements acting on the perception of the market, the disorientation of participants, both in the physical and paper markets, is not surprising, as geopolitical, meteorological, and forecasts with a high range of variability are mixed: with effects that seem to cancel each other out.

Against this complex backdrop, oil prices have remained in a relatively narrow trading range as major players have balanced the risks of a military escalation against the demand risks posed by the IEA, avoiding an escalation or sudden drop in prices.

Crude oil futures fell after late Friday's sell-off, eroding the week's modest gains that largely came after delayed EIA data showed a drop in U.S. crude inventories during trading on Thursday. So, Brent and WTI crude oil, at the close of the markets on Friday, January 19, were quoted at $/BBL 78.56 and $/BBL 73.41, with a weekly gain of 1 and 3% respectively - modest if the risks to supply from the Middle East are considered.

We cannot fail to mention some events that, despite not affecting the market in the short term, may help us understand energy market trends. Among these we can mention:

·      Norway on Tuesday awarded stakes in 62 offshore oil and gas exploration licenses to 24 energy companies, including Equinor – the state-owned company. This opens a new opportunity for hydrocarbon development in the Nordic country. The annual granting of 47 licenses surpassed that of a year ago when 25 companies received licenses. This time it included drilling permits in the Arctic Barents Sea, adjacent to the Norwegian Sea. While Norway supports the Paris Climate Accords and the global goal of moving away from fossil fuels, the country also says the world will need access to oil and gas for many years to come.

·      Shell has given financial approval to the development of the Victory gas field in the British North Sea, the latest development aimed at boosting the energy giant's production in the mature basin. The Victory field, when it comes online by mid-decade, is expected to produce up to 25,000 barrels of oil equivalent per day, or 150 million standard cubic feet per day of natural gas, Shell said in a statement.

·      China's Sinopec Corp announced that the Chinese government had recently certified 46 trillion cubic feet of proven geological reserves of natural gas in its area in the southwestern Sichuan Basin. This new reserve, certified by the Ministry of Natural Resources, marks the birth of another important gas field in compacted sandstone strata with very low permeability.

·      The US Treasury Department said it has imposed sanctions on a shipping company based in the United Arab Emirates for violating the $60/BBL price ceiling imposed by sanctions on Russian crude oil exports; It is his first action of this type this year. The company sanctioned was Hennesea Shipping Co Ltd., owner of 18 oil tankers, mostly old, acquired at the end of 2022.

·      TotalEnergies and its partners applied for a 30-year production license for Block 11B/12B off South Africa's southern coast on September 5, before their exploration rights expire. The deep-water Orange Basin off the western coast of South Africa contains the Brulpadda and Luiperd gas discoveries. The French company and Shell have made important oil discoveries in Namibian waters that underline the potential of the Orange basin. In October, the South African government approved TotalEnergies' bid to drill test wells in the Orange basin, which extends into Namibia, starting next year.

·      Shell announced its exit from Nigeria's onshore and shallow water operations after agreeing to sell the business to a consortium of five mostly local companies, opting to focus future investments on less problematic deep offshore fields. Nigerian authorities support the decision and will grant the necessary regulatory approval.

·      Ford will lay off almost 700 workers who built the F-150 Lightning, the electric version of its best-selling truck. The layoffs are the result of the slowdown in demand for electric vehicles, a situation that was also evident in other markets.

 

VENEZUELA

Political/Economic Situation

THE TSJ (Supreme Tribunal) has not issued its decision in the case of the disqualification of María Corina Machado; More than a month has passed since MCM presented its appeal, which is supposed to be resolved with the speed of constitutional protections. The changes in the directive of the Supreme Tribunal do not point towards a positive resolution either. The CNE (National Electoral Council) also remains silent on the electoral schedule and all the elements related to the election, such as international observation, the renewal of the electoral roll, and the participation of abroad.

In his annual message to the National Assembly, Nicolás Maduro announced the increase to $60 in a monthly bonus that public workers receive in bolivars at the official exchange rate. With this increase, the so-called "indexed comprehensive minimum income" rises from 70 to 100 dollars. None of the bonuses are considered “salary,” which is the basis for calculating employment benefits such as benefits and vacations; the minimum wage remains at Bs 130, which today does not reach $4.

This salary and bonuses must be analyzed in an environment in which independent sources estimate that the basic food basket, for a family of five people, exceeds $500/month. It is no surprise that the meager salaries of public employees, including teachers, have been the cause of protests throughout the country, for the second time so far this year.

Meanwhile, negotiations between the Biden and Maduro administrations are presumed to continue at an unknown location: some talk about Doha, and others mention Davos. One of the elements that most complicate reaching agreements is that President Biden will be replaced as the Democratic candidate or that the Republicans will achieve a victory in November, in both cases any agreement could suffer changes. But this risk might not worry the regime, since its primary interest is to keep the OFAC licenses functioning – which is almost assured – and to institute an electoral process that keeps it in power. The latter is what keeps the regime indecisive about issues that could become its Achilles heel, such as the disqualification of MCM.

Of course, there is always the wild card of canceling the elections because of exceptional circumstances. Although the conflict with Guyana, as a reason for declaring a state of emergency, seems to be receding; Venezuela has been left alone in its attempts to use force as a conflict resolution mechanism. It is in this context that the regime's announcement of the dismantling of four conspiracies against it, supposedly supported by Colombian actors, must be analyzed.

At the economic level, the increase in public spending for electoral reasons and stagnant oil income are beginning to translate into an increase in parity in the parallel currency market: the dollar was sold at 39 Bs/$.

Hydrocarbon Sector

Minister Tellechea and PDVSA officials have been meeting with business missions visiting the country, supposedly to study investment opportunities in the field of hydrocarbons. However, the only agreements known to date correspond to commercial relationships and companies willing to operate and invest in their existing joint ventures, under the common objective of recovering debts that PDVSA maintains with them.

On the operational side, the month has passed without major changes, except for fuel supply to the domestic market, which continues to be erratic.

Crude oil production during this week remained at 758 Mbpd, geographically distributed as follows, in Mbpd:

·      West                138 (Chevron 57)

·      East                 148

·      Orinoco Belt    472 (Chevron 84)

·      TOTAL           758 (Total Chevron 141)

·       

For practical purposes, there are 4 active drilling rigs in the country, as the two new Chevron rigs are already in location, which is the criteria for accounting. The Baker Hughes drill report for January has not been released yet.

The modest increase in production is related to Chevron, since in the west they report a production of just over 1.0 Mbpd from Block LL-652, of the EM PetroIndependiente, and in the east, greater production is observed coming from the Carabobo area of the Orinoco Belt: the JV PetroIndependencia 4 Mbpd, and PetroMonagas 2 Mbpd.

Of the production from the Orinoco Belt (472 Mbpd), about 100 Mbpd are used to produce Hamaca synthetic crude oil in the PetroPiar upgrader, and 60 Mbpd are processed in the PetroCedeño upgrader, to produce intermediate products. The available light crude oils are mixed with 170 Mbpd of crude oil from the belt to produce the Merey-16 segregation. The imported diluent is used for the 140 Mbpd that remains to be diluted, whereas the sulfur content is controlled by supplementing the imported diluent with Hamaca crude oil to obtain additional volumes of Merey-16. The PetroMonagas upgrader is used as a crude oil blending facility, and the PetroSanFelix upgrader remains out of service. So, about 420 Mbpd of Merey-16 crude oil is produced through the different routes described. The need to import diluent has become more important with the decline in the production of light crude oil and the greater use of these light segregations in the Puerto la Cruz refinery.

In Venezuelan refineries, 188 Mbpd of crude oil and intermediate products were processed, with a yield in terms of gasoline and diesel of 65 and 73 Mbpd respectively. A shipment of gasoline is expected to arrive at the end of the month, meanwhile, gasoline rationing will continue. It is in this rationing context and the electoral campaign that we must analyze the regime's recent decree (No. 4911, Official Gazette No. 42,797) exonerating fuel imports and sales from taxes.

The nominations for the rest of the month indicate that crude oil exports will exceed 540 Mbpd: 420 Mbpd from Merey, 53 Mbpd from Hamaca, 50 Mbpd from Boscán and about 17 Mbpd of inventory. A shipment of asphalt was also exported to Brazil and residual fuel to the Far East.

Crude oil exports will be destined for the US, China, India, and reduced volumes for Europe and Cuba. As we mentioned last week, increasing sales of crude oil to India do not appear to have translated into increased revenues, as part of it is destined to pay debts and there are questions regarding the management of the sale price to Reliance.

In the continuing saga of CITGO and the creditors of Venezuela and PDVSA, OFAC decided to extend until April 16, 2024, the General License 5N, which prevents holders of PDVSA 2020 Bonds from executing the guarantee corresponding to 50.1% of shares of CITGO Holding given as collateral by the Nicolás Maduro regime at the time of the issuance of the bonds. On the other side of the coin, in Delaware, the court on Friday approved 19 claims from 17 creditors linked to Venezuela, including ConocoPhillips, Rusoro Mining, and Koch Industries, who should benefit when and if the auction of PDV Holding shares takes place.