El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
Oil prices continued their quasi-lateral movement dynamics in a range between $82/bbl and $84/bbl, in terms of Brent Crude. Positive signals coming from China and impressive oil demand from India did little to change this dynamic, perhaps due to the continued rise in US crude inventories. The extension of OPEC+ production cuts also did not impress the market, not only because they were expected, but because they were taken as a sign of not very robust demand. The market's reaction to US crude oil inventories is a puzzle. Crude oil inventories increased by just over 1 MMbbls, reflecting an increase of 0.9 MMBBLS in imported crude, while gasoline inventories decreased by just over 5.0 MMbbls. Although this situation does not indicate a negative effect on global demand, after the EIA announcements prices fell to their lowest level of the week.
Economy
Jerome Powell, the president of the Federal Reserve (FED), attended this week to testify in front of the Financial Services Committee of the House of Representatives of the North American Congress. In his remarks, Powell said rate cuts “can and will begin” in 2024, which was seen by many analysts as the most unequivocal comment to date on the start of interest rate cuts. His comments also helped boost the broader financial sector with equity markets in the US challenging new highs, with gold rising to a record high of over $2,150/tm. However, Powell was careful to state that reducing interest rates “too soon or too long” could cause inflation to reignite, forcing it to raise rates even more than planned. But by the same token, he noted that cutting rates “too late or too little” could slow economic growth and hurt the labor market.
In that context, the Department of Labor announced that 275,000 non-farm jobs were added in February and the unemployment rate increased to 3.9%. Analysts had expected figures of 198,000 jobs and an unemployment rate of 3.7%. The effect of the addition of jobs was diminished by the fact that the increases announced during recent months were revised downwards on each occasion, reducing the reliability of the indicator.
Basics
Iraq continues to produce more than its OPEC quota, despite the country's oil minister pledging not only to meet its quota but also to make up for January's overproduction. This overproduction contributed, in part, to the decline in prices, even though the rest of the group remained within expectations.
Fuel consumption in India, the world's third-largest oil importer and consumer, rose 5.7% year-on-year in February, government data showed, largely due to growth in manufacturing activity. Fuel consumption, an indicator of total oil demand, rose to 4.98 MMbpd in February, compared to 4.74 MMbpd consumed in January.
On the contrary, according to some, China's oil demand growth this year could be half of pre-pandemic levels (2019), when the dynamics of its economy supported demand growth of more than 1. 0 MMBPD annually; The central government of the world's second-largest economy is battling an economic slowdown. The construction and automotive sectors, key drivers of oil demand, now appear to be the focus of economic woes, limiting annual growth in demand to less than 0.5 MMbpd, or half the growth during the golden years.
The other major consumer and producer of oil, the US, is showing no signs of materially affecting oil balances, either on the supply or demand side, for now. This week drill activity fell again, after a two-week hiatus, the bulk of the reduction and rearrangement of drills occurred in the state of Texas, the US-producing state par excellence.
Geopolitics
We see a widespread deterioration of conditions in the Middle East. Negotiations between the warring parties are at a standstill, while efforts to provide humanitarian aid to civilians in Gaza face significant difficulties. In addition to the unacceptable human tragedy, the conflict seems to increasingly impact the global oil and gas balance.
The maritime transport situation around Yemen, in the Red Sea, has shown a marked deterioration. The first recorded deaths were reported after the attack by Houthi militants on the cargo ship, “True Confidence”, which will likely accelerate the already sharp decline in oil tanker traffic through the Red Sea. The cargo ship, “Rubymar,” which was being towed to port after suffering damage from Houthi attacks on February 18, sank. In addition to the potential environmental damage of its cargo, it is estimated that the dragging of its anchor caused the breakage of three underwater communication cables.
This weekend, the US military reported that US, French, and British forces shot down dozens of drones in the Red Sea area, after Houthi rebels attacked the bulk carrier “Propel Fortune” and US destroyers in the region.
In the confrontations between Russia and Ukraine, the Ukrainians have chosen to attack industrial targets inside Russia, with some success. In the first two months of 2024, key targets achieved include the Ust-Luga fuel export terminal on the Baltic Sea near St. Petersburg and major oil refineries in Yaroslavl and Volgograd. They have also attacked manufacturing plants for goods that are difficult to replace due to the economic sanctions. This week was no exception, two Ukrainian unmanned aircraft attacked fuel tanks and the Mikhailovsky GOK iron ore processing plant, owned by Metalloinvest, one of the largest in Russia. Fuel production in Russia is reported to be reduced compared to last year, due to damage to refineries, which will take some time to repair.
In that European scenario, Sweden joined NATO, two years after the Russian invasion of Ukraine forced them to rethink its traditional national security policy. Sweden concluded that the support of the alliance was its best guarantee of security. The incorporation of Scandinavian countries into NATO is one of the unexpected consequences of the Russian invasion.
Thus, combining the economic and geopolitical elements and the traditional Demand/Supply equation, we conclude that the oil market is once again focusing on the fundamentals of supply/demand. Our analysis, perhaps more art and experience than science, tells us that the price of Brent Crude Oil will increase during the second and third quarters of this year to remain in a range between $86/bbl and $92/bbl.
During the week, the Brent and WTI crude markers, at the close of the markets on Friday, March 8, were trading at $82.08/bbl and $78/BBL, respectively, after reaching $84/bbl and $80/bbl earlier.
In other news
· Geneva-based trading house Montfort Group is in talks with Sinopec's fuel oil division, Sinopec Fuel Oil, for the sale of part or all of its 65 MBPD refining facility in Fujairah, United Arab Emirates. The refinery produces VlSFO (very low sulfur fuel oil).
· ENI announced a significant discovery of oil, gas, and condensate, offshore of the Ivory Coast. This is the Murene-1 exploratory well. Preliminary results indicate potential resources of up to 1.5 MMMboe (billion barrels of oil equivalent). The exploratory success follows the Baleine discovery, which ENI is currently developing.
· Saudi Arabia has transferred 8% of Aramco to the Kingdom's sovereign wealth fund, Saudi Crown Prince Mohammed bin Salman said Thursday. This transfer strengthens the strong financial position and credit rating of the Public Investment Fund (PIF); The chairman of the board of directors is the crown prince. The 8% stake in Saudi Aramco is currently worth about $160 billion. The transfer is between state-owned companies but will give the fund the capacity to finance the Crown Prince's Vision 2030 program. Once the transfer is completed, PIF, which already owned 8% of Aramco, will double its stake in the Saudi oil giant. About 2% of Aramco is in the hands of private investors, following the company's IPO in December 2019, however, Saudi Arabia is rumored to be working with advisors to make another public offering of Aramco shares.
VENEZUELA
Political/Economic Situation
We are in the presence of a unique week, as will surely be many of the weeks to come, in the political/economic management of the country. Undoubtedly, everything is aimed at implementing elections tailored to the regime, while feints of “controlled amplitude” are made to impress the international community to try to get the OFAC License 44 renewed and the European sanctions lifted.
The regime continues to insist, echoed by a sector of the “opposition”, that a replacement must be chosen for the “disqualified” María Corina Machado, knowing that will stoke quarrels, interests, and egos.
Meanwhile, the traditional methods of increasing public spending aimed at certain components of the population, services, and CLAP funds, whose financing will require, at least until July of this year, growing oil revenues to be sustainable. That explains the contortions the regime has been making to please the Biden administration.
With the electoral schedule severely shortened, the incremental oil revenues resulting from the granting of License 44 would maintain the flow of income until close to the peak of “public electoral spending,” even if it were not renewed. For exports made before April 18, the date on which the license would expire, income would be received until early June.
Hydrocarbon Sector
The production of Merey 16 crude oil has become the Achilles heel of the oil chain, from production to export. We must infer that the market is not willing to buy the DCO substitute crude oil (a mixture of extra heavy crude oil, 8.5 API, with naphtha) except at enormous discounts, which is why it has been all but abandoned.
Merey 16 crude oil, a heavy crude oil mixture, requires light crude oil of around 30 degrees to achieve the specifications that the market accepts, mainly related to sulfur content. Light crude oil, traditionally produced in the north of Monagas and Anzoátegui, is declining and is also required to feed the Puerto la Cruz refinery.
Enough heavy naphtha has been imported for the dilution requirements, but for some reason, the only cargo of light crude suitable for blending Merey 16 crude, the 2.0 MMBBLS cargo of Russian Ural crude, is being unloaded and stored in the Amuay area. It is possible that, through cabotage, part of this light crude oil may reach Jose, to be used in the mixing plants. Meanwhile, Merey 16 crude availability problems will continue to cause delays at the Jose terminal, limiting production and export.
Production for the week remained unchanged, averaging 757 Mbpd, distributed geographically as follows:
· West 139 (Chevron 55)
· East 148
· Orinoco Belt 470 (Chevron 88)
· TOTAL 757 (Chevron 143)
·
National refineries processed 202 Mbpd of crude oil and intermediate products. Gasoline production was 70 Mbpd and 75 Mbpd of diesel. According to users nationwide, the gasoline supply situation shows some improvement.
It is too early in the month to set export levels for March. However, the programming indicates that it should reach around 650 Mbpd of crude oil and about 40 Mbpd of residual fuel. Reaching the crude oil export figure depends on the solution given to the limitations of producing Merey 16 crude oil. In theory, the balance suggests a volume of produced crude oil available for export of 610 MBPD; net of refining and considering the use of Ural crude oil in Paraguaná, which together with 40 MBPD of diluent would serve the schedule.
Oil revenues during February were $600 million, and the monetary equivalent of barter was slightly more than $100 million.
Given that the Iranian presence in Venezuelan refineries has been announced for months, our attention is drawn to the announcement by Iran's deputy oil minister. He announced that his country has managed to manufacture 80% of all the oil parts and equipment in the country, despite being under Economic sanctions.
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