El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
The combination of continued high interest rates, a further rise in US crude oil inventories, and a confusing economic and geopolitical environment continued to weigh on oil prices this week, taking them to their lowest since February.
Indeed, oil prices fell for four consecutive days, pushed by the reluctance of the Federal Reserve (US Central Bank) to commit to interest rate cuts this year, as well as another atypical increase of 1.8 MMBBLS in US commercial crude oil inventories. On the last day of the week (May 24), the downward trend was reversed, but not enough to avoid a week of lower prices.
FUNDAMENTALS.
Comments from Federal Reserve officials earlier in the week, along with the content of the minutes of the most recent meeting of the Federal Open Market Committee (FOMC), raised doubts about the plans to reduce interest. The minutes note that the Federal Reserve (FED) continued to expect inflation to return to 2% in the medium term, but that reducing inflation would take longer than previously thought. An interest rate cut looks increasingly unlikely until September, and hopes of multiple interest rate cuts this year have evaporated. The Personal Consumption Expenditures (PCE) Price Index will be released on May 31, and will likely confirm the validity of the FED's interpretation of the documents.
The European Central Bank has all but promised to cut its deposit rate from an all-time high of 4%. But they keep markets guessing to what level, and how quickly, it will reduce borrowing costs after that. Economists at Société Générale predict that the ECB will cut rates in June and September, but then pause to wait for the Federal Reserve to implement its first rate cut.
Attention was also refocused on the early June meeting of OPEC+, where member countries will discuss whether to extend their 2.2 MMbpd production cut. The decision to hold the meeting virtually indicates that the group would maintain the current production policy; The decline in prices during May practically eliminated the probability that member countries would begin to undo the cuts. The only flash point within the group is the disagreement with Iraq and Russia for their failure to comply with their commitments.
In particular, the export figures published by Russia are unreliable, as is the case of Venezuela and Nigeria, due to the multiplicity of export terminals used and the use of its “ghost fleet”, which sometimes acts as floating inventory for months. By correlating the different sources, including reports of tanker movements, we conclude that part of the Russian export ended up in Cuba: Russian shipments have been replacing Venezuelan shipments to the island. It is estimated that, from March until now, some 70 Mbpd of Russian crude oil and products were unloaded in Cuba. Until now, OPEC has tended to turn a blind eye to Russia's lack of compliance.
Regarding the US, the Energy Information Administration Agency (EIA) reported an increase for the week of 1.8 MMbbls in its inventory of commercial crude oil, excluding the Strategic Reserve (SPR), an indicator highly valued by the oil market. The market's overreaction to this relatively smaller increase is due to the contrast with analysts' estimates of a reduction of 2.5 MMbpd.
On the other hand, EIA figures showed a reduction in gasoline inventory of almost 1.0 MMbbls, despite increased refining runs. This material increase in gasoline demand is due to the beginning of the high consumption season with the arrival of “Memorial Day.” In addition, demand for aviation fuel is showing marked growth, with passenger numbers exceeding 2019 (pre-pandemic) records by more than 10%, according to the Air Transportation Administration (TSA).
Crude oil production in the US continues at the same levels, around 13 MMbpd. However, the natural decline, which is not being offset by replacement activities through well repair and drilling, has resulted in reduced production somewhat. Evidence of this slow deterioration is the continued reduction of active rigs in the US territory; this week, according to Baker Hughes, another 4 rigs were withdrawn from activity.
One piece of news that cannot be ignored, due to its potential impact on oil facilities in the Gulf of Mexico, is the weather forecasts. It is predicted that up to seven major hurricanes could form in the Atlantic in an “extraordinary” 2024 season, beginning June 1. It is a forecast that exceeds the previous worst years, such as 2005 that generated hurricanes Katrina and Rita.
As for China, the government's policies to resolve the housing market crisis have not yet borne fruit. What is undeniable is that China's growth has been disappointing this year. There is not much evidence that there are substantial opportunities in the economy that strong stimulus can successfully address. On the contrary, it appears that China's sustainable growth rate has slowed.
On the supply side, in operations in Guyana, the Liza Destiny oil production vessel produces approximately 160,000 barrels per day. ExxonMobil Guyana recently revealed that peak production at the Liza Unity FPSO was 252,000 barrels per day, as a result of optimizations introduced by the company. The other side of the coin is that there is concern in Guyana whether ExxonMobil is carrying out this process safely. Meanwhile, growth forecasts in Canada and Brazil have been undermined by weather conditions and delays in project execution.
GEOPOLITICS
The week that has just ended has been very eventful from a geopolitical perspective. While war confrontations continued their destructive dynamics, the international scene was dominated by events far from the battlefields.
First, the President of Iran, Ebrahim Raisi, died on Sunday in a plane crash. Foreign Minister Hossein Amir-Abdollahian and 7 companions also died in the accident, in the middle of dense fog in a rugged area near the border with Azerbaijan. Raisi was the potential replacement for Iran's aging supreme leader, Ayatollah Ali Khamenei, making the power struggle sour. Presidential elections have been called for July 28 – they coincide with the Venezuelan elections and may dilute global attention on the Latin American country.
A possible side effect of the upheaval in Iran and the complexity of the Middle East is a rearrangement of the relationship with the groups that carry out violence on behalf of Iran: Hamas, Houthis, Hezbollah, and countries like Lebanon and Syria; Syria has shown a willingness to reach out to countries outside the Iranian sphere.
In the context of the case that South Africa brought to the International Court of Justice (ICJ), accusing Israel of genocide, the judges ordered Israel to immediately stop its military attack on the city of Rafah, in Gaza. While the International Court of Justice has no means to enforce its orders, the decision is a further sign of Israel's global isolation over its military campaign in Gaza, particularly since it began its offensive against Rafah this month.
The Israeli government responded with indignation. Finance Minister Bezalel Smotrich said that those demanding Israel stop the war were also demanding that it cease to exist, something Israel would not accept. The leader of the Israeli opposition, Yair Lapid, described the order as “a collapse and a moral disaster,” for not linking the demand to stop the fighting with the demand that Hamas release the Israeli hostages.
On the other hand, Spain, Norway, and Ireland announced that they would recognize a Palestinian state on May 28 and urged other European states to follow their example. The three countries said they hoped their decision would accelerate efforts to secure a ceasefire in Israel's war against Hamas in Gaza, which is now in its eighth month.
News has also been recorded on the Ukrainian front. Vladimir Putin is reportedly willing to stop the war in Ukraine with a negotiated ceasefire that recognizes the borders drawn on the battlefield, Russian sources told Reuters. Putin is reportedly prepared to continue fighting if Kyiv and the West do not respond. Putin's offer seems like an elegant way of declaring that the invasion objectives cannot be achieved, since the proposed borders incorporate recently conquered lands.
For its part, Ukraine, with the use of the recently received military equipment, reports that it has successfully repelled the Russian push, and has even gained some ground compared to the time when Putin generated the offer. On Saturday afternoon, Russia bombed a shopping center in the city of Kharkiv, with 200 people inside, precisely in the region where the Ukrainian army was pushing back the Russians. The truth is that Russia has not been able to stop Ukrainian attacks on its energy infrastructure, neither on its territory nor on the Crimean Peninsula, controlled by the Russians since 2014.
These two conflicts have placed a kind of double moral standard on multinational organizations: Could it be that the thousands of Ukrainian civilians who have died due to the unjustified Russian bombing are not a matter of concern to South Africa or the International Court of Justice?
At the G7 meeting in Italy, which began on Friday the 24th, the issue of the reconstruction of post-war Ukraine will be discussed. G7 finance chiefs are not expected to agree on the details of a loan for Ukraine, leaving much work in the coming weeks or months to secure more financing for the war-torn country. The U.S. has been pressuring its allies to agree to issue a loan backed by future receipts from about $300 billion of Russian assets frozen shortly after Moscow invaded Ukraine in February 2022. A European official said that the statement at the end of the meeting would probably include an agreement in principle on a loan, but he did not provide details. A reconstruction of the proposed magnitude would have a positive impact on energy demand, at least in the medium term.
All these variables, interacting with the perception of the oil market actors, generate a somewhat unstable balance, which tilts prices to one side or the other, in response to news that seems minor. Thus, the market adopted a somewhat somber stance, which at the close of the markets on May 24, in preparation for a long weekend, showed the price of Brent and WTI crude markers at $82.12/bbl and $77.72 /bbl respectively. A drop compared to the previous week of around 2.5%.
VENEZUELA
Political/Economic Aspects
Naturally, on the eve of the July 28 elections, politics is taking over the national dynamic. All speech and actions are done to try to convince the population to support one or the other of the sides of the current polarization. Incidentally, the regime makes enormous efforts to hinder, discredit, and demotivate the surprising cohesion of the opposition and its decision to make elections its main strategy.
The duo Edmundo González Urrutia (EGU) and María Corina Machado (MCM) have been successful in maintaining hope among citizens for political change. On the one hand, MCM has continued with the campaign of encouraging people even in the most remote parts of the country, to talk about the unstoppable change. He has managed to appear in all regions even though the regime does not allow her to travel by plane and her road trips are hindered by road and bridge closures. These obstacles have only underlined the epic nature of his ability to draw massive crowds, wherever she goes. On the other hand, EGU has maintained a simple speech, calling for a great national reconciliation, which has also resonated. After all, almost every family in the country has been affected, divided, and separated by ideological polarization, persecution, and violence.
Some analysts cast doubt on whether the success of citizen rallies will be reflected in the organization necessary to mobilize the vote and safeguard it. Another thing that must be analyzed carefully is the apparent lack of programmatic content on both sides of the dispute; Beyond general wishes, the campaign has focused on emotions.
The regime is at a crossroads, which is why it continues to have contacts with representatives of the Biden administration, mainly related to the granting of licenses by OFAC. More importantly for the regime’s officials, personal sanctions and sanctions are on the table, as well as post-electoral guarantees.
Citizens' preferences seem clear, but how they materialize on voting day remains to be seen. The regime has a series of cards to play, some obvious and others that we may not even imagine, that could force a result that is not in line with the current trend. Things are not going well for the regime, which makes them capable of anything to retain power.
The uncertainty caused by the replacement of OFAC licenses, LG 44 with LG 44-A, has limited oil revenues, at least while the sanctions' outlook becomes clearer or prices recover. India's purchases of Venezuelan crude oil were suspended, although they apparently resumed recently, probably authorized by OFAC. The reduction in income kept public spending down, including fewer CLAP boxes to distribute. The injection of foreign currency into the exchange market was insufficient to keep the Bs./$ exchange rate constant, which slid just over 2%. Power outages have continued, and gasoline shortages once again generated long lines in the interior of the country.
BP, the British oil company, announced the suspension of negotiations for the joint development of the Cocuina natural gas field until express authorization is received from OFAC. On the positive side, Repsol, the Spanish oil company, received the special license that it was waiting to begin the development of the fields included in the area extension of PetroQuiriquire.
We cannot fail to mention the visit and tour of the president of PDVSA and Minister of Petroleum, Colonel Pedro Tellechea, through the Expo Fedeindustria 2024. The minister offered a press conference and made a presentation of the country's oil plans. Tellechea emphasized that the supply of fuel to the domestic market was assured by the new fleet of tanker trucks and service stations that were in “optimal conditions”, capable of supplying 102 MBPD of gasoline. However, he did not mention where was PDVSA to obtain such volumes.
The most striking thing about the presentation is that it detailed that in a year and a half of activity, they had managed to increase Venezuelan production by 60 Mbpd. He added that from May to December the production would reach 1.23 Mbpd, that is, almost 300 Mbpd more. These projections are more the result of voluntarism than of technical analysis, but as they say, the paper holds up to anything. When establishing credibility, it must be emphasized that the production figures until April presented by Tellechea do not coincide with the production volumes sent directly to OPEC by his ministry.
Hydrocarbons Sector
Crude oil production maintained its level from the previous week, averaging 784 Mbpd, distributed geographically as detailed below:
• West 163 (Chevron 65)
• East 144
• Orinoco Belt 477 (Chevron 93)
• TOTAL 784 (Chevron 158)
Chevron continues with its drilling program in the PetroIndependencia joint venture; They hope to reach 160 MBPD by June.
Meanwhile, Maurel & Prom (the French oil company) and Repsol will begin their efforts to begin development activities in their respective fields.
Repsol will surely look for synergies between the infrastructure it is receiving under the extension of the PetroQuiriquire block, with those already operated by the mixed company. The sum of the resulting productions could reach around 25 MBPD, a volume that Repsol will handle and export in the form of heavy and medium crude oil if it keeps the old and new fields segregated. Under this scheme, similar to that of Chevron, you will be able to begin repaying the outstanding debt with PDVSA. We do not rule out that Repsol is analyzing the feasibility of exporting its production through the Salina terminal, on the eastern coast of Lake Maracaibo, for the export of its crude oil. Maybe also the production managed by Maurel & Prom.
Meanwhile, Maurel & Prom remains limited to doing minor jobs that do not require drilling rigs. Their team faces the challenge of getting one or more rigs that can drill and make major repairs in the flat waters on the western side of Lake Maracaibo. It is estimated that it will take at least 6 months to condition one of the rigs that remain in the lake. An additional complexity is that the remaining potential in the Cretaceous reservoirs, in terms of light crude oil and gas, has a high content of hydrogen sulfide (H 2 S). Therefore, this potential can only be reactivated by putting into operation the desulfurization plant built by Shell in the early 2000s – more investment and time.
Refining operations reached 210 Mbpd, with a gasoline production yield of 64 Mbpd, and around 68 Mbpd of diesel, hence the need to resort to gasoline rationing in the domestic market, a marked contrast with the announcements made by the minister Tellechea.
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