El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
The week began following the upward trend in oil prices of the previous week, after several weeks of declines. The EIA announcements indicating a modest but unexpected draw from US crude oil inventories, coupled with news on Chinese imports and signals in the geopolitical sphere in the Middle East and Eastern Europe, supported that upward momentum. However, at the end of Friday's session, oil prices gave up the gains accumulated during the week, amid a late sell-off.
FUNDAMENTALS
Oil prices reacted in response to US inventory figures, indicating a tighter physical market: the US crude oil inventories report showed a decrease of 1.36 million barrels, which although not significant, surprised the market due to the change in trend. Additionally, the Biden administration raised the price it is willing to pay to replenish the country's depleted strategic oil reserve to $79.99/bbl—higher than the existing informal limit of $79/bbl — and announced the purchase of 3.3 MMbbls. The price was tempered by the announcement of an increase in inventories of refined products, including gasoline stocks, which rose by 915 MMbbls.
Additionally, the market reacted to official statistics from China, released on Thursday, indicating that crude oil imports increased by 5.45% in April, compared to the same month last year, approaching 11 MMbpd. Although imports were somewhat lower than in March, they confirm China's tactic of adjusting its purchase volumes to supply its refineries at the lowest prices.
On the OPEC+ side, everything indicates that it will renew the cuts for another quarter, helping to sustain the market's rising perception. Goldman Sachs commented that it no longer expects OPEC+ to announce a partial reversal of voluntary production cuts in June. OPEC+ members will meet in Vienna on June 1 to decide whether to extend their voluntary 2.2 MMbpd production cut beyond the second quarter.
Concern about the reduction in global demand dissipated to some extent with the news of the strong demands shown by India and other developed countries. China received 1.5% more crude oil from the US than the previous month.
In the US, companies kept their oil operations on “autopilot”, with production of 13 MMbpd; drilling activity continues to decline: Baker Hughes reports that this week 3 more units stopped drilling in the “Shale Oil” basins (-2 in all basins). On the other hand, and indirectly related to crude oil production, the surplus of natural gas was reduced as demand increased as a result of higher average temperatures, which was reflected in price levels that were 22% higher since the Biden administration limited LNG export volumes.
Another development that could affect the level of global supply is the US strategy to reduce Iran's ability to market its sanctioned crude oil. Iran has developed a supply chain through Malaysia-based service providers, transshipping crude oil in the Straits of Malacca and Singapore, then shipping it to China as Malaysian crude. The US Treasury Department is increasing its attention to this form of sanctions violation, focusing on Iran's financing, through Southeast Asia, of terrorist groups.
GEOPOLITICS
Actors in the oil market renewed their perception of greater geopolitical risk, considering additional attacks on Russian refineries by Ukraine and complications for the sale of Russian crude oil due to sanctions. This week, a drone hit the Neftekhim Salavat refinery in the republic of Bashkiria, one of the largest in the country. The facility is more than 1,000 km from the Ukrainian border, a sign that Ukraine can attack Russia deep within its territory. Ukraine also claimed responsibility for two other drone attacks during the night of the same Thursday, which affected oil deposits in the Russian city of Krasnodar, southeast of Ukraine.
These attacks are in addition to 20 similar attacks since the beginning of the year. Military analysts say they are an attempt by Ukraine to disrupt the Russian military's logistics routes and combat operations, attacking facilities that supply fuel for its tanks, ships, and planes. However, as a side effect, they have impacted supplies to the Russian domestic market and its export capacity. These results could explain the recent “reshuffling” in the Kremlin, where Putin replaced the defense minister with a trusted civilian.
Regarding the other focus of war activity, the war between Israel and Hamas, Washington tried to exert pressure by delaying a shipment of bombs to Israel – a nominal move, since numerous weapons remains available for delivery. The idea was to warn Israel against an invasion of Rafah in the Gaza Strip, but Prime Minister Benjamin Netanyahu ignored it, instead announcing that the Israelis would get by even without US collaboration.
Pro-Palestinian demonstrations in the US, which already extend to universities on the old continent, were also not impressed with the measure. Meanwhile, hopes of achieving a ceasefire in the short term appear unfounded. For its part, the General Assembly added to the confusion by endorsing the proposal for Palestine to become a full member of the UN.
Israel warned people in Rafah to evacuate and head to what it calls an expanded humanitarian zone in Al-Mawasi, in a further indication that the IDF is pressing ahead with plans for a ground attack. An Israeli military spokesman also urged people in the Jabalia area of northern Gaza and 11 other neighborhoods to immediately go to shelters west of Gaza City, indicative of an imminent Israeli attack, to establish the whereabouts of what remains of Hamas terrorists.
On the other hand, the Houthis militant group increased their threats to maritime transport, including the Mediterranean as a target for their attacks on vessels.
In relation to China, new tensions with the US are appearing on the horizon. The Biden administration is reportedly prepared to impose tariffs on China next week. The new tariffs will focus on products such as electric vehicles, batteries, and solar cells. In Europe, China is losing some of its shine as a top investment destination, with a survey showing EU companies' appetite for China investment falling to an all-time low. A concern that would add to the still uncertain recovery of the Chinese economy.
Thus, the crude markers, Brent and WTI, at the close of the markets on Friday, May 3, were quoted at $82.26/bbl and $78.6/bbl respectively. We estimate that after the “sell off” on Friday, oil prices will resume their upward trend. The elements that will have to be observed are the behavior of inflation at a global level, the US labor market (unemployment claims are the highest in eight months) and the interest rate decisions that Central banks keep postponing.
IN OTHER NEWS
· The North American oil company, Chord Energy (Nasdaq: CHRD) appears to be close to materializing the $4 billion deal to acquire Enerplus Corp, an operator in the Williston Basin in North Dakota. At the same time, they are working on perfecting their innovative program for drilling 5 km lateral wells, which, although pricier, would recover greater volumes of oil and gas.
· The cabinet of the Cooperative Republic of Guyana approved a bid for an offshore oil block presented by the consortium of QatarEnergy, the French TotalEnergies, and the Malaysian state-owned Petronas. The block, called S-4, is located in shallower waters and north of the mouth of the Essequibo River.
· Mexico's Treasury Department announced that it will have more say in Pemex's investment decisions in the future, as the federal government continues to restructure the oil company. Pemex has a total debt of $106 billion as of December 31, 2023. The government is studying options to absorb up to $40 billion in Pemex debt, the equivalent of what will mature in the next presidential term, as explained by the Undersecretary of the Treasury, Gabriel Yorio, to international investors in New York. Pemex continues to be a drain on the public treasury, and the AMLO government has not been able to find a way out of the oil company's debt labyrinth. A challenge for the next administration.
· Saudi Aramco reported a 23.8% increase in capital spending in the first quarter of 2024, despite scrapping its goal to expand oil production capacity by 1 million b/d in January, the company said in its quarterly results. The increase in investments was aimed at the natural gas, renewable energy, and low-carbon fuel sectors.
VENEZUELA
The feeling of hope for change returns to Venezuelans. The opponent no longer perceives himself as invincible and support is being added to the candidate Edmundo González Urrutia, which gives a kind of snowball effect to the process. A perfect harmony seems to have been achieved between the seriousness and composure of the candidate with the overwhelming favoritism of the people for María Corina Machado and aided by the party machines of the traditional opposition; Ms. Machado's mass gatherings seem to demonstrate this, while at the same time acting as an incentive to unite those who still doubt.
The Colombian president, Gustavo Petro, proposes a plebiscite in parallel to the presidential election to agree on a transition in which the loser has “certainty and security about his life and political guarantees.” This concept or something that fulfills the same purpose is beginning to be discussed to convince non-radical members of the regime to attend an electoral process that they see as an existential threat.
In any event, the regime and its party, PSUV, will use all the tricks in their arsenal, some well-known and others still to be discovered. Preventing the electoral registration of Venezuelans abroad and limiting registrations in Venezuela is but one example of their anti-democratic disposition.
The biased design of the electoral card, with preference to the regime's candidate, is another example. Furthermore, it is obvious that at least two cards with the word “unity” and the color blue, similar to the one corresponding to the MUD, the main opposition card are designed to confuse and misdirect the voters
But there is still a long way to go and obstacles to overcome. The regime keeps alive the controversy with Guyana as a possible scenario for declaring a state of emergency and, therefore, canceling the electoral contest. This week, they complained about the presence of US military aircraft in Guyana and Maduro sent the Sukhoy fighter planes and F-16s to fly over the Essequibo territory, possibly to keep stirring the controversy.
In economic matters, the decline in exports, a consequence of general license 44 A, was a blow to the regime’s electoral economic plan. The lower availability of dollars forced public spending to be restricted, and the limited injection of foreign currency into the exchange market allowed the exchange rate to slide to around 40 Bs./$.
This week it was announced that the Ministry of Petroleum granted permission to a small Colombian oil company, called Eway (founded in 2022), to import diesel, aviation fuels and low and ultra-low sulfur gasoline from its facilities in the neighboring country. Eway is in talks with Venezuelan authorities to set the sales price before importing the fuel. The interesting thing about this measure is that according to the hydrocarbons organic law, the domestic market is reserved to the State and, therefore, the apparent legal basis of this new operation must fall on the anti-blockade law – clearly an illegal operation. In any case, the announced volumes would not be significant.
It was also reported that the activities of the new Joint Company, PetroRoraima, will begin with the goal of increasing crude oil extraction to 45 MPD this year and up to 120 MBPD within three years. The investments required for such a plan, even only producing diluted crude oil, seem to exceed the capabilities of the companies involved.
General License 8N, applicable to large oil service companies, was renewed by OFAC, for an additional 6 months, under the terms and conditions of the original General License 8.
Hydrocarbon Sector
Crude oil production showed an increase because of changes in the pumping mechanism in the Boscán Field, so that it reached 787 Mbpd during the last week, distributed geographically as detailed below:
• West 163 (Chevron 65)
• East 146
• Orinoco Belt 478 (Chevron 92)
• TOTAL 782 (Chevron 157)
Refining was reduced to a processing of 200 Mbpd, due to raw material scarcity (insufficient medium crude oil and intermediate products), with a gasoline production yield of 61 Mbpd, and around 69 Mbpd of diesel. The importation of gasoline through barter complemented the volumes distributed in the domestic market; we estimate that barter gasoline is around 35 Mbpd.
Exports continued at the same pace as previous weeks, with no crude oil sent to India and Cuba. However, sales to India must be restored, as Reliance indicated that it had applied for a license from OFAC. Sales to China could be hindered by the pressure that the US is exerting on Malaysia to avoid handling sanctioned crude oil.
CITGO Petroleum released its Q1 2024 results, reflecting good management and market dynamics. Some of the most relevant results were:
· Net profit of $410 million, EBITDA of $709 million. Total liquidity at the end of the quarter was $4.5 billion. Total processing of 830 Mbpd, achieving the third quarter with the highest average daily throughput in the company's history. High reliability of the refineries during the quarter, with crude oil processing at 95% of their capacity; a significant figure considering the impact of the planned extraordinary maintenance activities of the plants in the period.
It is important to remember that the auction process for the shares of PDV Holdings, the parent company of CITGO Petroleum, continues in the courts of Delaware, USA. There is also a high probability that the asset will pass into other hands because of the irresponsible debts of the administrations of Hugo Chávez and Nicolás Maduro.
