Tuesday, March 05, 2024

OIL REACTS TO OPTIMISM ABOUT INTEREST RATES AND OPEC+ ANNOUNCEMENTS.

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 



 

The price of crude oil benefited during the week from the publication of data on the personal consumption index (PCE), the preferred inflation indicator of the Federal Reserve (FED), which, as expected, decreased in January. This has generated, even though the index remains well above the FED's annual target, some hope that the Federal Reserve will consider reducing rates as inflation cools, thereby boosting economic activity in the largest oil consumer in the world.

Meanwhile, in the eurozone, inflation fell to 2.6% in February, from 2.8% in January, but both the headline figure and core inflation, which excludes volatile food and fuel prices, barely met analysts' expectations. These figures also create hope that a rate cut is on the table. On the other hand, the European Central Bank (ECB) appears to be concerned about the economic problems of the largest industrial economies in the Union.

The information, which had been leaked from OPEC+, was confirmed on Sunday morning with an announcement from Saudi Arabia, extending the current production cuts until the middle of 2024. The Russian Federation gave the same message in the mouth of the minister. Alexander Novak. The confirmation will have little effect on prices when the market opens on Monday; We believe that this extension of the cuts was already discounted by the market. The next formal meeting of the OPEC+ Joint Ministerial Monitoring Committee is scheduled for April 3.

On the supply side, both Brazil and Guyana are at production plateaus until the start of additional developments with the incorporation of new floating production units (FPSOs). This will occur at the end of the year in the case of Brazil, and next year in the case of Guyana. OPEC members produced 26.88 MMBPD in February, an increase of 110,000 bpd from the previous month, although when including partner countries, the expanded cartel met the agreed cuts.

Meanwhile, in the US, production is constrained by the number of active rigs in the appropriate basins and the depletion of the DUC well pool (uncompleted drilled wells in the Shale basins). Moreover, the relatively high number of companies involved in M&A transactions affects the scheduled flow of capital investments. EIA inventory data showed sustained growth in crude oil, but that was offset by declines in gasoline and distillate inventories, mitigating the market's natural downward reaction to growing crude oil inventories.

Demand prospects remain uncertain, especially given the difficulties the Chinese government is experiencing trying to promote growth and bring order to the real estate sector. China's manufacturing purchasing managers' index (PMI ) reached 49.1% in February, down from 49.2% in January, a slight decline that could be a consequence of the Lunar New Year holiday last month and below the threshold that could indicate a recovery. The uncertainty in China has been offset by increases in demand in India and some items, such as distillates, in the US and Brazil.

 

Geopolitics

The wars in Europe and the Middle East keep political risk premiums high due to the potential collateral effects on the supply of hydrocarbons to the market and the nervousness associated with the expansion of conflicts.

In the case of Russia's invasion of Ukraine, the delay or reduction of US military aid is leaving the Ukrainian army short of ammunition, which explains the progress the Russians have made recently. Thus, the Ukrainian strategy has changed to attacking Russian energy and air infrastructure. As a result, Russia has suspended gasoline and distillate exports for six months to stabilize its domestic market. This measure represents a reduction in Russian supplies to the international market.

In the other conflict, the framework of Israel, Hamas, Houthis, Hezbollah, and Iran remains complicated. The Biden administration is pressing Israel to delay its military escalation in southern Gaza to protect civilians surrounded in Rafah. In the north, Hezbollah threatens to attack Israel. Sources indicated that Israel had agreed to a ceasefire for six weeks, a period that would begin with the handover of several “vulnerable” hostages, presumably the sick, elderly, and women. The agreement was reached in meetings in Doha, and now they are moving to Cairo to continue negotiations.

The effects on the maritime transport of crude oil due to the Houthi attacks, which are intertwined with this conflict, are manifested in reductions in inventory levels in developed countries (OECD), putting the energy security of some countries at stake. There are new reports that Yemen's Houthis have destroyed some undersea telecommunications cables linking Europe and Asia, although the extent of the damage remains uncertain.

All these elements, and especially the solid physical fundamentals that point to a precarious demand/supply balance, influenced market perception, and prices increased close to 3% compared to the previous week. At market close on Friday, March 1, Brent and WTI crude oil were trading at $83.55/bbl and $79.97/bbl, respectively.

In other news

·      Over the past week, active drills in the US have increased marginally, adding two units to drill in Alaska and one in New Mexico. In the rest of the world, during February, drilling activity showed a reduction of 7 units, mainly in the North Sea and Colombia.

·      ExxonMobil (NYSE: XOM) said this week that the terms of its partnership with Hess Corp. (NYSE: HES) warrants them (and its third partner, Chinese company (CNOOC) the right of first refusal in acquiring the Hess Corp. in the Stabroek block. This concerning the announced purchase of Hess by Chevron (NYSE: CVX). Without Guyana's assets, the alliance between Hess and Chevron would make little sense. On the other hand, unofficial sources indicated that the Guyana government wants the Hess/Chevron agreement to come to fruition.

·      French oil company TotalEnergies (NYSE: TTE) is moving full steam ahead with plans to make a final investment decision (FID) for a large oil project in Block 58 off the coast of Suriname. , at the end of 2024. Following the evaluation of two major oil discoveries (Sapakara South and Krabdagu) in Block 58, combined recoverable resources of nearly 700 million barrels were estimated, in water depths of less than 1,000 meters for the two fields. TotalEnergies is the block operator, with a 50% stake, along with APA Corporation (NASDAQ: APA), which owns the remaining 50%.

·      According to leading Russian coal traders, new US sanctions on Russia look set to reduce India's imports of thermal coal from Russia. Russia increased shipments to India after Western sanctions against Moscow for its invasion of Ukraine. The latest US sanctions include Russia's payments system, financial institutions, and energy production.

 

VENEZUELA

Political/Economic Situation

The board of the National Assembly (AN), led by Jorge Rodríguez, has delivered to the National Electoral Council (CNE) a “national” agreement that addresses general principles, calendar, and expansion of electoral guarantees for the 2024 presidential election. The agreement, signed by political organizations allied to the regime and by others of the “opposition”, it aims, according to the announcements, to replace the agreements of Mexico and Barbados. This is a clear strategy to exclude the political forces brought together by the “disqualified” María Corina Machado, while they decorate the stage for their international and national allies.

In every event, the regime seems to want to be on good terms with God and the Devil, ignoring its commitments in the Barbados Agreement, but maintaining conversations with its counterparts in that agreement. It is speculated that there have been meetings this week and that the conversations between Jorge Rodríguez and Biden's new representatives continue. The purpose of the regime is to try to convince the “gringos” that the disqualification of MCM is not a violation of the Barbados Agreement, since she may well appoint a substitute candidate; an argument with which they hope to achieve the renewal of the License 44 from OFAC. In this same context, non-governmental actors advocate for the license to be renewed.

Meanwhile, the long-awaited increase in public spending has already begun, especially in those elements that may have the greatest effect on popular favoritism, such as the increase in CLAP boxes.

Internationally, Maduro suffered a setback when an appeal filed by the regime before the International Criminal Court (ICC) was dismissed, in which he demanded that the progress of investigations against him for possible crimes against humanity be halted. Judge Marc Perrin de Brichambaut read the unanimous ruling, in which “The Appeals Chamber rejects the arguments presented by Venezuela.” Hence, the process continues to its next phase.

Hydrocarbon Sector

PDVSA announced this week two events of little relevance, but which we report here for the information of our readers. On the one hand, the start of production of the A-162 well in the Ambrosio Field, operated by the joint company PetroWarao (PDVSA and Perenco), in Lake Maracaibo, was announced. The announcement details that the condensate produced will be used as a diluent and the natural gas will be sent to Tía Juana – the announcement does not mention volumetric figures. Perhaps the news is because every drop counts in an environment of chronic shortages of diluent and natural gas. On the other hand, a joint PDVSA and Chevron visit to the PetroPiar upgrader was reported to “verify” the safety, reliability, and production levels of the plant.

Additionally, PDVSA also reported that its president was visiting Repsol in Spain, presumably to advance the potential reactivation of the PetroQuiriquire joint venture.

Oil production continued to be affected by a shortage of diluent, despite the arrival of Russian light crude oil, and by power outages in a system overloaded by demand. The delay in blending crude oil to export specifications limited loading operations at the Jose terminal, creating congestion of tankers anchored outside the terminal, waiting for crude oil. As a partial solution, the export of crude oils that do not require dilution and treatment, Boscán and Hamaca, was maximized.

Under these boundary conditions, production for the week was 754 Mbpd distributed geographically as follows:

·       West                       138 (Chevron 55)

·       East                        148

·       Orinoco Belt            468 (Chevron 88)

·       TOTAL                    754 (Chevron 143)

National refineries processed 194 Mbpd of crude oil and intermediate products. Gasoline production was 66 Mbpd and 74 Mbpd of diesel. In the coming weeks, gasoline production could reflect the use of oxygenates produced in the east. However, the domestic gasoline market continues to depend on product imports through barter with Chevron.

Crude oil exports for February averaged 605 Mbpd, due to the limitations mentioned above: 32 MBPD were exported from inventories, 15 MBPD from Boscán and 17 Mbpd from Hamaca, which raised the crude oil destined for the US to 195 Mbpd; 395 Mbpd were shipped to Asia (China and India) and about 10 Mbpd (a shipment of 300 MBBLS) left, possibly destined for the Netherlands, but this could not be confirmed.

The availability of drilling rigs is emerging as an obstacle to the announced increase in production. Around fifty units are in the country: two that are operating in the Orinoco belt, nine stored in the yards of private contractors, and 39 that belong to PDV Servicios. Of the earth drills, 41 require major maintenance and/or have been cannibalized. Only two are lake drills, but they are not in condition to be operated.

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