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.
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.
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