El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
February began with reports, not entirely confirmed, about an imminent ceasefire and a prisoner exchange between Israel and Hamas, dragging oil prices down. The market interpreted this high potential for hostilities as likely to ease geopolitical tension in the Red Sea and supply risks. The news emanating from the last meeting of the OPEC+ ministerial panel, that they would not review their production cuts strategy until March, also contributed to the decline in prices. The negative market sentiment was also reinforced by the 1.2 MMBBLS increase in US crude oil inventories, and the return to operation of the two refineries that had suffered unplanned shutdowns.
Middle East
On Thursday the 1st, Majed al-Ansari, spokesman for Qatar's Foreign Ministry, said there was hope for “good news” that a ceasefire could be reached “in the next two weeks” between Israel and Hamas. If this news finally materializes, it will lead to an exchange that would release all Israeli civilian hostages in exchange for several hundred prisoners in Israeli hands, during a truce that would last six weeks. A key element in this negotiation would be the inclusion of guarantees that Houthi attacks against commercial maritime transport are part of any agreement, an issue that at the close of this note seems quite unlikely.
We can conclude that this week's geopolitical and market elements became, for now, the mirror image of last week’s situation, and prices reacted accordingly.
However, regional tensions have not subsided. On the contrary, they could be exacerbating. As markets prepared for their weekly close, the US began strikes against targets in Iraq and Syria in retaliation for the three soldiers killed in the drone attack on its base in Jordan. In all, 85 targets were struck in Iraq and Syria, including command and control centers, intelligence centers, rocket and missile centers, and unmanned aerial vehicle warehouses. Logistics and ammunition supply chain facilities of sponsored militia groups by the Iranian Revolutionary Guard were also attacked.
On Saturday, the US and UK carried out strikes on 36 Houthi targets in 13 locations in Yemen, in an effort to “disrupt and degrade the capabilities” the Houthis have used to attack ships in the Red Sea.
Russian Deputy Prime Minister Alexander Novak stated on Thursday, after participating in the OPEC+ meeting, that the situation on the oil market is stable, leaving little doubt that the cartel will not act until its next meeting.
Other Developments
In the economic sphere, there were other announcements that we believe give signs of global trends, but that did not impress oil market players:
- On Monday, January 29, a Hong Kong court ordered the liquidation of China Evergrande, the world's most indebted real estate developer. More than a million people in China have paid the company for homes that were never built. This latest development is a sign of the complicated problems facing the Chinese economy and its recovery.
- Saudi Aramco said this week that Saudi Arabia's leaders ordered it to stop work on expanding its maximum sustainable capacity to 13 million barrels per day, keeping it at 12 million bpd instead. Saudi Arabia may have surprised markets with the announcement, but the decision has been in deliberation for at least six months – this may indicate that the Kingdom expects lower demand for its crude on the horizon.
- In the U.S., non-farm payrolls rose by 353,000 last month, following upward revisions in the previous two months, a report from the Bureau of Labor Statistics showed on Friday. The unemployment rate remained at 3.7%. Salaries accelerated compared to the previous month and increased to their highest value since March 2022.
- The Federal Reserve (FED) and the European Central Bank (ECB) kept interest rates unchanged but paved the way for cuts to begin, probably sometime this year. Jerome Powell, president of the FED, declared that he needed more data “more data”, even after acknowledging that things are going well. “We are not going to declare victory at this time”. “We think we have a long way to go.”
- In another weekend event, a new fire was reported at a Russian refinery, caused by Ukrainian drones. This is one of the largest refineries in Russia, the Volgograd refinery, operated by Lukoil and located 600 km from the border with Ukraine.
The oil market will have the weekend to reflect on the direction that the conflict is taking in the Middle East. If the ceasefire between Israel and Hamas is confirmed, other economic events could go unnoticed by the oil market.
Thus, oil prices showed a drop during the week of 7% ($5.88/bbl Brent), more than neutralizing the gains of the previous week. It appears that we are in a scenario of sinusoidal reactions, which diminish the oil industry's ability to plan on solid bases.
At the close of the markets, on Friday, February 2, Brent and WTI crude oil were trading at $77.67 /bbl and $72.41/bbl respectively. With a prospect of a modest rebound due to the events recorded during the weekend—or at least that is what we would expect.
Political/Economic Situation
February 2, 1999, marks the beginning of a period in the history of Venezuela, which, upon turning 25 years old, we can describe without much doubt as one of unprecedented institutional, economic, and moral destruction. The anniversary of Hugo Chávez's arrival to power also reveals the political exhaustion of the Chavista model, which lacks a popular base to remain in power through democratic processes. Thus, the regime, facing the 2024 presidential elections, has had no alternative but to isolate itself from international opinion, and prepare to face the consequences derived from non-compliance with the Barbados agreement.
The decision to ratify the disqualification of Mara Corina Machado put the regime in flagrant violation of the Barbados Agreement and forced the US to review the sanctions program and its liberalization. We say “forces”, for until now, the Biden administration has demonstrated little firmness in managing relations with Caracas. As an initial step, the OFAC license that serves as the legal floor for the state gold trade, License 43, was revoked. It was also announced that License 44, which gave broad latitude to oil activity temporarily, would be allowed to expire – it will take effect on April 18, 2024, unless there is a change in circumstances.
The effects of these decisions have been widely debated in the Venezuelan media, but in an environment of misinformation, a product of the opacity of the agreements associated with this license. In any case, we must emphasize that, for now, only the renewal of License 44 is at stake, since License 41, which authorizes the activities of Chevron and the JV where it participates, is not being reviewed.
Thus, the oil activities that would be affected are those that were agreed upon or are being negotiated based on License 44, including the purchase, sale, and barter transactions of oil products on the open market. The latter would take us back to a scenario of exports with heavily discounted prices, in the dark marketing process associated with sanctioned crude oil.
The approximate effect would be the loss of income in the order of $2.5 billion during the year 2024 (the figure changes depending on the expectations one had with LG 44); in addition, the problems represented by the lack of gasoline and diluent for the local market will deepen.
TankerTrakers, a firm that monitors oil tankers, has reported that a significant volume of Russian hydrocarbons are heading to Venezuela, probably heavy naphtha, to replace Iranian condensate, which according to the source has had payment disagreements with its Venezuelan counterpart. It is rumored that the disagreement is related to the new price of crude oil, now not sanctioned, that Venezuela wanted to apply to barter. Paradoxically, the Iranian energy minister was visiting Caracas during the week.
The US has sent high-level representatives to Colombia and Brazil, seeking allies to pressure the Maduro regime. But we believe that the regime has already crossed that bridge, and despite the meetings, pressures, and mediators, it is unlikely that it will turn back. It will be interesting to see the reaction of President Petro, who experienced a similar political disqualification. The disqualification was eventually reversed by the I/A Court H.R., allowing him to run in the election that led to his being elected president of Colombia.
Hydrocarbon Sector
The second half of January was affected by frequent blackouts and instability of the national electrical system, slightly affecting oil operations. On the other hand, operational problems at the Caribbean Terminal of Jose limited the loaded volume of crude oil, and by early February there was a fleet of at least 30 tankers anchored waiting to be loaded.
Crude oil production this week fell, due to electrical problems and a shortage of diluent, to 748 Mbpd. Geographically distributed as follows:
· West 135 (Chevron 54)
· East 148
· Faja del Orinoco 465 (Chevron 84)
· TOTAL 748 (Total Chevron 138)
The delay in the arrival of diluent, mentioned last week, is due to Iran's refusal to continue with the barter.
In Venezuelan refineries, 176 MBPD of crude oil and intermediate products were processed and reprocessed, with a yield, in terms of gasoline and diesel, of 58 and 73 Mbpd respectively. During the week, a slight improvement was observed in the domestic supply of gasoline as a result of the arrival of imported gasoline.
The volumes available for export remain in line with last week. The modest reduction could be offset by inventories at the terminals, but the bottleneck at Jose may limit exports during February.
On January 29, 2024, the Ministry of Petroleum published, in Official Gazette No. 6793, the approval of the gas license, for 30 years, for the exploration and exploitation of free gas in the Dragon field, offshore north of the Paria peninsula.
The license is granted to the National Gas Company of Trinidad and Tobago and the Shell company. The conditions revealed by the publication are that the applicable royalty is 20% and that 70% of the exported gas will be dedicated to the liquefaction plant and 30% to petrochemical projects in the neighboring country. Natural gas prices will be set based on a basket of international natural gas markers and a basket of international ammonia and methanol price indicators, respectively. The project would come into operation in the first half of 2026.
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