El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
CRY WOLF! OIL PRICES AND ELECTIONS IN VENEZUELA
In the fable attributed to Aesop, it is told how a shepherd boy, to overcome his boredom while shepherding, began to shout, “here comes the wolf!”, to attract the attention of the inhabitants of his village, who came out of their houses ready to help him, only to realize that it was a practical joke, since there was no such wolf.
The money and oil markets seem to be reacting to a modern version of this fable, in which until now the eventual threat has proven to be imaginary. This time, the market is reacting to a series of more negative than expected US macroeconomic data, compounded by a build-up in crude oil inventories; a decline in refining margins added to those signs of heaviness in the market. Further to this is the perception of lower political risk in the Middle East, given reports of ceasefire negotiations between Hamas and Israel, and Iran's apparent position of not escalating the conflict.
This combination caused a notable decline in oil prices this week, with WTI and Brent Crude losing more than $5/BBL. The majority of the losses occurred on Wednesday, May 1, when prices fell more than a 3% with EIA 's announcements of increased US crude oil inventories, which underscored concerns about demand growth.
A wolf that at first glance seems real but could be just another bad joke.
Fundamentals
The behavior of oil prices has increased the probability that OPEC+ will extend current production cuts until the third quarter of 2024 and possibly for the rest of the year. On the other hand, ADNOC , the state oil company of the United Arab Emirates, announced that its crude oil production potential increased to 4.85 MMbpd, moving one step closer to its target of 5 MMbpd by 2027. This reality of this type of announcement is very difficult to verify, until the need or opportunity to produce arises. It is interesting to note that this news is made within the framework of what the OPEC countries describe as their responsibility to meet a growing demand for energy.
US production remains essentially constant, around 13 MMbpd, with a slight downward trend, at least that is what the reduction in drilling activity indicates; according to Baker Hughes , 8 units stopped drilling in the last week. However, some oil events in the US could catalyze a revival of activity in the near future:
· After facing regulatory scrutiny, ExxonMobil (NYSE:XOM) closed its acquisition of Pioneer Natural Resources for approximately $60 billion. This transaction, the largest in “Shale” oil, will reshape production processes in the vast region of the Permian Basin. ExxonMobil is thus consolidating itself as the large company and main producer of oil and gas in that basin.
· On the other hand, Marathon Oil, Occidental, Continental Resources and other operators are identifying new drainage points below the traditional Permian geological horizons. Everything points to the existence of deeper areas of the basin, competitive with shallower developments, which could extend the life of the Delaware sub-basin of the Permian.
Another contribution to the supply is a major Canadian event. After 12 years and $25,000 million of investment, Canada's Trans Mountain (TMX) pipeline expansion project began commercial operations, a significant milestone that is expected to transform access to global markets for producers in that country, particularly to the Far East market. Pipeline constraints have forced Canadian producers to limit production and sell discounted oil, but TMX will nearly triple crude oil transport capacity from Alberta to Canada's Pacific coast to 890 Mbpd.
These events in North America, combined with the growth in supply from Brazil and Guyana, could make it possible to cover the gap between supply and demand for the next two years, especially if the renewed projections of lower demand materialize.
Completing the picture of future oil demand perception, job growth in the United States slowed more than expected in April, and annual wage increases cooled. Although these signals of a more relaxed labor market are good news for the markets and the Federal Reserve, the FED decided to keep rates at their current levels and delay the rates cut until later.
The persistence of high inflation may just be a delay in the reduction in inflation and not necessarily a derailment of the process, which the central banks have conducted with maximum discipline.
Geopolitics
In the Middle East, the talks between the parties and the return of Hamas to Egypt have had an impact on the perception of the risk premium in the oil market, eroding it. Israel and Hamas appear to be seriously negotiating an end to the war in Gaza and the return of Israeli hostages. A leaked truce proposal hints at compromises from both sides after months of stalled talks, although the situation remains tense as Israel prepares for a ground offensive in Rafah. However, this Sunday, May 5, the talks encountered new obstacles that suggest a tortuous path forward.
Israeli utilities have deployed backup electrical generators, filled water reservoirs to the brim and beefed-up cyber defenses in case the Gaza conflict triggers a war against Israel on multiple fronts. Let us remember that the clashes in Gaza forced Israel to close its offshore natural gas platform, Tamar, for a few weeks. An all-out conflict with the Hezbollah movement in the north would raise concerns about the security of the Leviathan natural gas field in Mediterranean waters.
Meanwhile, on the Ukrainian front, Ukrainian gunners conduct limited operations against advancing Russian forces along the Eastern Front, while waiting for new ammunition, after the US approved $60 billion in military aid. British Foreign Secretary David Cameron pledged £3bn in annual military aid to Ukraine “for as long as it is necessary”.
Gazprom, the Russian state natural gas monopoly, posted its first annual loss since 1999, as gas shipments to Europe declined, with a cash deficit of $6.9bn, as the gas giant builds a major new pipeline to China.
The length of the war in this region, and the considerable losses caused on both sides, suggest that Ukraine and Russia will have to negotiate to end the war. Although Zelensky and Putin have repeatedly ruled out sitting down to talk, the economic repercussions seem to be reaching extremes; even though Russia appears to have found ways to get around sanctions on its crude oil.
With all these economic and geopolitical elements at play, prices reacted with a drop of more than 5% during the week. At the close of the markets on Friday, May 3, the Brent and WTI crude markers were trading at $82.96/bbl and $78.11/bbl respectively, almost $7/bbl less than the previous Friday.
Political/Economic Aspects
In the tropical version of the wolf story, which we hope this time becomes reality, the political opposition seems to have found, in Edmundo González Urrutia and María Corina Machado, an effective duo and strategy to confront the regime.
Much of the Venezuelan population, who had lost hope in the face of so many setbacks, has dealt them with the use of repression and control of the powers of the state, seem to believe today that there is a route towards the beginning of a change. There is still a long way to go to election day, but having the opposition aligned around a candidate approved by the CNE, looks like an important step forward.
The polls, which we know in Venezuela are not very robust, they quantify Gómez Urrutia's advantage over Nicolás Maduro as considerable, and suggest that, even on the regime's side, there are many who want change.
On the economic side, we must emphasize that the immediate effect of replacing the LG44 with the LG44-A has been stronger than expected, as described later. Oil exports were significantly reduced, which will be reflected in a reduction in income this month and next, affecting the regime's ability to maintain the policy of controlling the inflation rate through the Bolívar/$ exchange rate.
Hydrocarbon Sector
Oil production showed a small increase, averaging 782 Mbpd in the week, mainly due to increases in the fields operated by Chevron. According to Baker Hughes, 3 drilling rigs continue to operate in the country. Crude oil production showed a geographical distribution as detailed below:
• West 158 (Chevron 61)
• East 146
• Orinoco Belt 478 (Chevron 92)
• TOTAL 782 (Chevron 153)
Refining remained at 214 Mbpd, with a gasoline production yield of 63 Mbpd, and around 75 Mbpd of diesel. Gasoline imports through barter maintained levels close to 50 Mbpd, mainly the agreements with Repsol/ENI and Chevron.
Venezuela's oil exports fell more than 35% in April after some customers withdrew tankers waiting to load in the face of revived oil sanctions.
Exports corresponded to 389 Mbpd of Merey-16 crude, 78 Mbpd of Boscán crude, and 85 Mbpd of Hamaca crude, for a total of 552 Mbpd of crude for April, almost 100 Mbpd less than the previous month: 262 Mbpd were sent to China, 70 Mbpd to Spain, 220 Mbpd to the US, and there were no shipments to India or Cuba; It is unknown if Reliance (India) is attempting to obtain a special license from OFAC. This represents a drop of $150 million in monthly income.
Chevron sent, to the Gulf of Mexico coast (PADD 1 and 3), a record volume of crude oil of 220 Mbpd, corresponding to 150 Mbpd of production, 24 Mbpd of diluent, the rest of inventories. 53 Mbpd of products were also exported, mainly residual fuel destined entirely to the Far East.
Note: This Monday, May 6, Maurel & Prom (Euronext: MAU), the French oil company, announced that it has received a specific license that it had requested on September 1, 2023, from the Office of Foreign Assets Control (“OFAC”). The license is in connection with its joint venture Petroregional del Lago, which operates the Urdaneta Oeste field on Lake Maracaibo in Venezuela.
The Specific License, granted on May 3, 2024, for two years, allows US entities and banks to interact with M&P in relation to its activities in Venezuela. As a result, M&P is able to continue operating in accordance with the set of agreements signed with PDVSA. M&P did not provide details of its investment plans or production expectations.
This announcement is an indication that OFAC is willing to grant licenses beyond License 44 A, thereby establishing a path for other companies to operate in Venezuela. Although the time it took to approve it (it was requested in September 2023) makes it difficult to correlate it with the current political situation in Venezuela.
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