Tuesday, January 23, 2024

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.

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  El Taladro Azul    Published  originally in Spanish in    LA GRAN ALDEA M. Juan Szabo and Luis A. Pacheco    For the first time since the ...