El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
The history of conflicts in the Middle East has traditionally indicated that the noise of cannons induced price increases due to the risk of supply. But the events of recent months seem to indicate that these atavisms have lost relevance. The swing in oil prices recently undoubtedly reflects the uncertainty surrounding the conflict in the Middle East, particularly the possibility of an extended confrontation between Israel and Iran. In the absence of direct impacts on oil operations, however, the market has reacted with qualified realism.
Initial reports of Israeli attacks on Isfahan province, in response to Iranian attacks, sent Brent above $90/bbl, before falling back to $86/bbl, after statements from Tehran that appeared to rule out a military response. On another scale, but relevant in these latitudes, the reactivation of oil sanctions against Venezuela had a similar effect, although at a much lower level. The initial market reaction to the announcement was of an upward trend, however, when the text of the new conditions was disclosed, the market ruled out its relevance.
Middle East
Israel responded to last week's Iranian attack with a timely and precise attack on the heart of Iran: Isfahan, a region that is home to important Iranian military infrastructure, such as a large air base, a large missile production complex and several nuclear facilities. The attack, not confirmed by Israel, was apparently intended to demonstrate that Israel can bypass Iranian defenses and hit targets inside that country with precision. It served as a nominal response to the Iranian attack, but without escalating the situation to an all-out war between the two countries and their neighbors. Seen in a more global context as well, it also raises questions about the effectiveness of anti-aircraft defense of Russian origin. In all events, the result of this semi-skirmish is the verification that Israel's defense systems passed the test, while Iran appeared vulnerable.
Additionally, the defense of Israel during the Iranian attack had the cooperation of Jordan, Egypt, and Saudi Arabia. This cooperation should not be taken for granted, but has turned out to be an important factor in the stability of the region. This alignment probably has a high component of the ancestral confrontation between Sunnis and Shiites, but it should not be taken as permanent either. Iran will most likely return to its traditional role of financing and acting through its network of “proxy” terrorists and not getting directly involved in regional conflicts.
Iran, as expected, called the attack a failure, and conveyed the message that there would be no response, even though hours earlier Iranian Foreign Minister Hossein Amir-Abdollahian told CNN that if Israel took military measures against Iran, its response would be “immediate and at the highest level.” The market, and analysts, interpreted that there will be no escalation, at least for now, which translated into a reduction in the regional geopolitical risk premium, which in turn generated a drop in oil prices.
Ukraine
The US House of Representatives approved an aid package to Ukraine of about $61 billion. The measure had stalled in Congress and affected Ukraine's ability to contain Russian advances. Despite limited ammunition and defense equipment on the Ukrainian side, Russian forces continue to experience very high death and injury rates in Ukraine; Throughout February they reportedly experienced the highest rate since the beginning of the full-scale invasion: a total of 983 casualties per day. This, to a large extent, reflects Russia's commitment to conventional infantry and attrition warfare; The BBC speaks of more than fifty thousand Russian casualties. Ukraine rarely comments on the magnitude of its battlefield deaths. In February, President Volodymyr Zelensky said 31,000 Ukrainian troops had been killed, but estimates, based on US intelligence, suggest higher losses. No other attacks on Russian oil infrastructure have been reported this week.
Market Fundamentals
OPEC+ continues to watch the bulls from the sidelines. So far it has shown no signs of beginning to reduce its cuts; Saudi Arabia and other OPEC members in the Middle East were estimated to have well over 4 million barrels per day of idle production capacity in March, according to the US Energy Information Administration (EIA). We estimate that it is a considerably lower figure.
In the US, production continued its slow decline, confirmed in EIA reports. The Biden administration's oil policy generates few incentives for companies to invest. On the one hand, it announces the beginning of refilling the strategic reserve (SPR), today at its lowest historical level, and then changes course to remove more crude oil from the SPR to control gasoline prices this summer.
In parallel, President Biden moved Friday to limit both oil and gas drilling and mining in Alaska. State officials said the restrictions will cost jobs and make the U.S. dependent on foreign resources, but they will please environmentalists. The Interior Department finalized a regulation to block oil and gas development in 40% of Alaska's National Petroleum Reserve to, the administration says, protect the habitats of polar bears, caribou and other wildlife and the way of life of indigenous communities.
On the supply side, none of the countries identified as contributing to the increase in production in the coming years shows important incremental developments in the short term, perhaps except for Brazil, which is scheduled to start up an FPSO (Floating Production, Storage and Off-loading) during this year.
So growing demand, which is approaching 103 MMbpd, is not being matched by increases in supply. It will be necessary to dip into inventories, which in turn will put upward pressure on crude oil prices, or for OPEC+ to change its strategy.
Prices
As we already mentioned, volatility was what characterized the price behavior this week. The fundamentals are consolidating a deficit oil market, constantly pressured by the changing perception of political risks coming from the Middle East.
Prices remained high at the beginning of the week, as the market digested the Iranian attack of the previous week, only to fall once international pressure seemed to have convinced Israel not to carry out a retaliatory attack. Surprised by the unexpected Israeli “attack” in the early hours of Friday, prices rose momentarily until the market internalized the temporary pause of the “give and take.”
At market close on Friday, April 19, Brent and WTI crude oil markers were trading at $87.29/bbl and $83.14/bbl respectively, down 3.5% and 4% relative to the previous week.
VENEZUELA
Policy
The Unlikely Agreement
This Friday the 19th, on the eve of the end of the deadline to introduce changes to electoral nominations, something happened that seemed impossible just a few hours before. In a meeting between María Corina Machado, the representatives of the PUD and the governor of the state of Zulia, Manuel Rosales, a unanimous agreement was reached regarding the nomination of a single candidate.
The Venezuelan opposition chose Mr. Edmundo González Urrutia as its candidate. The diplomat, who has the support of the main parties and the leaders María Corina Machado and Manuel Rosales, will be Maduro's main rival in the presidential elections of July 2024. González Urrutia, a career diplomat, was ambassador to Argentina and Algeria. Although little is known about him outside the opposition corridors, it emerges today as the option that would carry forward the hope for change of more than 80% of the population.
Governor Rosales aspired to be the candidate, but apparently, he could not obtain sufficient support from the rest of the parties that constitute the Unitary Platform and, fulfilling his earlier promise, he stepped aside. Some of those present revealed that González Urrutia did not have that designation in his personal plans, but he finally accepted and hence becomes Nicolás Maduro's main rival for the presidential elections on July 28. With this move, new scenarios open, but we will see what the regime has up its sleeve.
Oil Sanctions
The most anticipated news recently, displaced by political events, arrived late in the afternoon of Wednesday the 17th, when the Office of Foreign Assets Control (OFAC) announced and subsequently published The General License 44-A , replacing LG 44, which expired on April 18.
The initial reading of the new license suggests that the status of sanctions against PDVSA (which is what LG 44 deals with) was restored to the state before the promulgation of LG 44 on October 18, 2023. Further, it grants a period of 45 days so that businesses in progress under the authorizations of LG 44 can have a safe closure.
In general terms, this means that the following activities covered by LG44, among others, must be winded-down in an orderly manner:
1. the production, extraction, sale, and export of oil or gas from Venezuela, and the supply of related goods and services
2. the payment of invoices for goods or services related to operations in the oil or gas sector in Venezuela.
3. the delivery of oil and gas from Venezuela to creditors of the Venezuelan government, including creditors of entities in which PDVSA owns, directly or indirectly, a 50% or more interest, for the purpose of repaying debt.
General License 41, which covers Chevron's activities from 2022, was not modified and continues.
The new scheme, according to the press release from the Department of State , allows companies that choose to continue marketing, purchase/sale activities and investments in hydrocarbon developments, to request Individual Private Licenses, which OFAC would consider. This could result in a delay in activities. As it stands in the licensing system, opaque businesses, briefcase companies and other artifices would probably not receive licenses from OFAC, and the dark export route and the anti-blockade law would be reactivated.
Economy and Oil
In the economic aspect, a slight increase in the exchange rate was recorded, exceeding Bs40/$, which puts pressure on inflation, which had a turning point at the beginning of the month. Public spending, although it remains high, shows a decline compared to previous weeks, probably due to the greater volume of foreign exchange injection required to control the exchange rate.
The regime's National Assembly approved two new oil projects. This is the formation of a new mixed company that will replace the current PetroSanFelix, corresponding to the original PetroZuata, nationalized when ConocoPhillips was expropriated. This EM will be made up of 51% PDVSA and 49% of a company called A&B Oil and Gas, a consulting and project management company. It is rumored that there is a Brazilian company behind this company, larger but without oil experience. The probabilities of a real reactivation of the project are low due to the enormous investments required to recover it.
The second approval corresponds to the expansion of the PetroQuiriquire block, in the western region, in which Repsol has a 40% shareholding. Currently, the block has the Mene Grande, Barúa and Motatán fields. The approved extension to the south incorporates the La Ceiba, Tomoporo and Ceuta fields, the latter in Lake Maracaibo. These three fields, currently operated by PDVSA, are the most prospective in the Lake Maracaibo basin. The wells are deep and expensive but have the potential to bring the field to a production exceeding 70 MBPD of medium and light crude oil. These two legislative decisions, at the request of the executive branch, represent the largest privatization of the oil industry of the revolutionary era. We imagine they will require OFAC licenses, or in any case “comfort letters”, to be able to make investment decisions.
Operations in the Hydrocarbons sector
Oil operations have not shown major shocks, the only area that was pressured was export, due to the rush to load the largest number of tankers before the end date of the LG 44 period.
The electrical problems had only minor effects on refining activities.
Production in the last 7 days averaged 773 Mbpd, very close to last week's levels, distributed across the national geography, as follows:
• West 152 (Chevron 58)
• East 146
• Orinoco Belt 475 (Chevron 88)
• TOTAL 773 (Chevron 146)
Chevron is about to begin drilling its third well at PetroIndependencia, in the Orinoco Belt. The mixing operations of the Merey 16 segregation continue to have issues due to the lack of light crude oil.
The refining process managed to process 194 Mbpd with a gasoline production yield of 42 Mbpd. National production, along with gasoline imported through barter, supplied approximately 80% of what was demanded by the domestic market.
The export for the month of April is heading towards a crude export of around 650 Mbpd and 55 Mbpd of average products for the month. Until now, it is unknown whether Reliance of India will suspend its purchases of Venezuelan crude oil upon changing the sanctions regime or, on the contrary, will request a Special License to continue as a client of Venezuela. The decision will probably be linked to price conditions.
Hedge Fund Elliott Investment Management is reportedly structuring a bid to participate in the U.S. court-ordered auction of shares of Citgo Petroleum Corp's parent company. Investment bank Centerview has been hired to draft a potential bid on behalf of investors and creditors (which could include ConocoPhilips) pursuing Venezuela's foreign assets now in auction by federal court in Delaware. The auction seeks to recover claims for expropriations and debt defaults incurred by the Republic and PDVSA in the administrations of Chávez and Maduro.
No comments:
Post a Comment