El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
In a week in which economic signals were more positive than expected, and given the signs of continued increase in demand, oil prices sustained a moderate rise. Some of the macroeconomic outlook showed an improving trend, such as a slowdown in inflation in the US, to a monthly rate of 0.3%, while US crude oil inventories decreased, albeit marginally. This was offset by a relative “calm” in the geopolitical scenario, and the publication of the new report from the International Energy Agency (IEA) showing reductions in crude oil demand projections and increases in supplies.
FUNDAMENTALS
The Energy Information Administration (EIA) report, published on Wednesday the 15th, revealed that commercial crude oil inventories in the US fell by 2.5 MMbbls, and that gasoline inventories also dropped, for the first time in three weeks; stronger domestic demand and a rebound in exports outpaced higher refinery output, which hit the highest rates since the start of the year. All of this push up oil prices.
Prices also reacted slightly to the publication of the April CPI figures, which revealed a 0.3% increase, slightly less than expected; raising prospects for an interest rate cut in the third quarter, although it will take more than a strong CPI report to induce the first cut, as inflation remains stubbornly above the Fed's 2% target Federal.
Markets ignored the IEA downward revision of its 2024 oil demand growth forecast. The IEA lowered its 2024 crude oil demand outlook by 140,000 bpd to 1.06 MMbpd, citing poor industrial activity and a lower diesel consumption. Notably, the IEA’s estimate is almost half of the growth forecast by OPEC, each faithful to its strategy of positioning, on the one hand, renewables, and on the other, oil.
At the long-awaited OPEC+ ministerial meeting on June 1, they will have to deal with the internal tensions that have appeared in the group. This is due, mainly, to the lack of definition surrounding the compensation plans to be applied to Iraq and Kazakhstan, two countries that have exceeded the agreed objectives. However, the group's production has remained around 41 MMbpd with a slight downward trend. The meeting will be held virtually, which signals a potential continuation of the cuts.
Xi Jinping's government announced its most forceful attempt yet to rescue China's beleaguered housing market, relaxing mortgage rules and urging local governments to buy unsold homes as central authorities grow increasingly concerned about the sector's drag to the general economy. The support package also includes lower down payment requirements for home buyers, and 300 billion yuan ($42 billion) of central bank funds to help government-backed companies buy excess housing inventory.
On the supply side, the results of the US oil activity indicate production remaining around 13 MMbpd, and with total drilling activity with little change, but with a marginal reduction in the most attractive Shale Oil basins. South Texas was subjected to hurricane force winds and heavy rains that generated power outages and affected local refineries, as well as oil production in the area, which is yet to be reported.
GEOPOLITICS
The war movements on both fronts, Ukraine/Russia and Hamas/Israel, continued active, but as an extrapolation of the events of previous weeks. Consequently, the perception of geopolitical risk has slowed down and did not move perceptibly the needle in the oil market.
In Ukraine, Russian troops are managing to advance in the northeast of the country, around Kharkiv. However, NATO maintains that Russia does not have enough forces on the ground to make a significant breakthrough.
The Ukrainian strategy continues focused on weakening the supply lines of the Russian forces. Drone attacks have caused a fire at the 240 Mbpd Tuapsé refinery and damage to oil infrastructure in the port of Novorossiysk , in the Krasnodar Krai region on Russia's Black Sea coast. This refinery and terminal constitute the most important outlet for Russian crude oil and products in the Black Sea and could therefore affect Russian exports.
As far as the Middle East is concerned, Israeli forces have continued to bomb Jabaliya in northern Gaza. Hamas said Friday that its fighters were fighting invading Israeli troops in the narrow alleys of Jabaliya. Israel confirmed the clashes and indicated that numerous Hamas terrorists had been captured or eliminated. In parallel, the much-criticized massive attack, announced by Israel to take Rafah at the southern end of the strip, seems to have been transmuted, for now, into a more surgical operation while the civilian population is managed to evacuate; more than 600,000 Palestinians have already left the area.
Activities have also increased in northern Israel, where Hezbollah terrorists have attacked Israeli military targets. The fierce fighting has caused a high number of casualties and damage to the infrastructure of the Gaza Strip, but has not affected the distribution of oil and its products;. Markets are alert to events that could raise their assessment of the resulting geopolitical risk.
On the other hand, the Houthi rebels announced that they had attacked a US warship and a cargo ship, but US sources reported that the ships had not been hit by enemy fire. However, on Saturday, the Greek-flagged tanker M/T Wind, transporting Russian crude oil to China, was hit by a Houthi missile in the Red Sea.
This situation of quasi geopolitical stability and the tight fundamentals of supply and demand have led to a discrete increase in prices, with a weekly gain of around 2% compared to the previous week.
At market close on Friday, May 17, Brent and WTI crude oil were trading at $84/bbl and $80/bbl respectively.
IN OTHER NEWS
· Mergers and Purchases (M&A) transactions continue in the Shale Oil basins. This time it is Crescent Energy (NYSE: CRGY) that will buy SilverBow Resources (NYSE: SBOW), an operator in the Eagle Ford basin. A transaction valued at $2.1 billion that will create the second-largest E&P company in Eagle Ford, with a production of around 250 Mboepd (thousands of barrels of oil equivalent per day).
· Colombia's Trans-Andean pipeline is expected to remain out of service until December, the chief executive of Colombia's state-owned Ecopetrol said. Earlier this month, reporting its first-quarter financial results, Ecopetrol said it had been transporting crude oil through Ecuador since November 2023 to combat oil theft. In Colombia, it is common for large volumes of oil to be stolen and used in clandestine refineries to produce a fuel, known as “pategrillo”, which is used in the production of cocaine or in illegal mining.
· Brazilian President Lula da Silva will replace Petrobras CEO Jean Paul Prates with Magda Chambriard, former head of Brazil's oil and gas regulator, ANP, according to information from the Ministry of Mines and Energy. Petrobras shares, listed in New York, fell more than 6% when the news of Prates' departure and also that of the state company's CFO became known. Chambriard's appointment is a sign that the government is seeking better alignment between Petrobras and its political objectives. However, to the investment community, it is a deterioration in the governance of the state-owned company, which will imply a potential change in the stated investment plan and greater interference and political control of the company. This type of occurrence once again brings to the fore the issue of whether private participation in state oil companies is sufficient to guarantee less discretionary management and their viability over time. The examples of PDVSA, YPF, Ecopetrol and Pemex do not give rise to much optimism, although the size and technical complexity of Petrobras' operations makes it a somewhat different case.
· Chevron announced it will exit its UK offshore business in the North Sea, beginning the process of selling its remaining assets in the area. The planned divestiture, confirmed to Reuters on Thursday, comes as Chevron prepares for its $53 billion acquisition of rival Hess, which it previously said will include $10 billion to $15 billion in asset sales worldwide.
· For the first time in its 128-year history, the “Blue Chips” Dow Jones Industrial Average closed above the 40,000 mark. Stocks posted their longest weekly winning streak since February, after inflation reports revived hopes of early interest rate cuts.
· Russian Deputy Prime Minister Alexander Novak reported that Russia and China will soon sign a contract that will allow the completion of the “Power of Siberia-2” gas pipeline, which will transport Russian natural gas to China. The agreement is the product of years of negotiations, but the cancellation of gas supplies to Europe raised Russian interest. The gas pipeline will transport well over fifty billion cubic meters of natural gas per year, from the Yamal region in northern Russia, precisely where it was supplied to Europe, to China through Mongolia.
· At the time of going to press, it was learned that the Iranian president's helicopter crashed to the ground near Varzaqan, northern Iran, amid adverse weather conditions. President Ebrahim Raisi, his chancellor, and other officials were returning from an inauguration ceremony for a dam near the border with Azerbaijan. In the early hours of Monday, after 15 hours of searching, Iranian rescue teams located the remains of the helicopter: “There were no signs that its crew members were alive”, said the head of the Red Crescent. Next, state television and the official IRNA agency announced: “The President of Iran, Ebrahim Raisi, and the Iranian Foreign Minister, Hosein Amir Abdolahian, have died in a helicopter crash in a mountainous and difficult-to-access area in the northwest of the country”. This event will have important repercussions on the future of Iran and its international relations, given the controversial personality of the deceased president and the strong internal dissidence in the regime.
VENEZUELA
In a sort of cat and mouse game, the regime intensifies its measures of harassment and repression of the opposition, as the support for Edmundo Gonzales Urrutia and Maria Corina Machado surges. The latest actions in this regard have been the closure of hotels where the opposition candidate, Edmundo González, or María Corina Machado have stayed, as well as the suspension of radio stations that have interviewed the opposition candidate. The Argentine Foreign Ministry reported that the safe conduct requests for political asylum seekers at its embassy in Caracas were denied by the regime. Let us remember that all asylum seekers are part of the MCM political team.
Also, Jorge Rodríguez, in his well-known habit of violating the independence of public powers, urged the CNE to withdraw the invitation to the European Union to exercise the function of verification and observation of the electoral process. Such presence would obviously be uncomfortable if the regime were to manipulate the election results.
Satellite photographs, shown in a CSIS report, show the mobilization of military personnel and equipment to the border with Guyana. This was possibly done to keep the controversy hot and to be able to take advantage of it if the electoral conditions warrant it.
As a result of some buyers refraining from buying Venezuelan oil, upon learning of the replacement of OFAC License 44 with 44 A, the government's oil revenues have decreased. This period of uncertainty could be prolonged, given that, according to reports, the US would prioritize the issuance of licenses to companies with existing oil production and assets in the country; not to those that would seek to enter Venezuela for the first time. The measure seems designed to respond to the needs of companies that have projects waiting to be restarted to recover outstanding debt and add oil to global markets, such as the Italian ENI and the Spanish Repsol,
The regime use of oil revenues has to be a precarious balance between financing public spending (electoral) and trying to keep the Bs./$ exchange rate under control as an inflation control mechanism. Public spending has shown a contractionary trend. The exchange rate, although slowly, has already exceeded 40 Bs/$ in the parallel market. Another parameter with electoral repercussions, that the regime has handled with great caution, is the supply of fuel to the domestic market. The exchanges of crude oil for gasoline and diesel have been reduced; long lines are already observed at service stations, and some are closed due to lack of fuel. The shortage is being carefully managed to avoid affecting centers with large populations, such as Caracas.
In the most recent chapter of the auction of PDV Holding shares in CITGO (the proceeds will go to pay part of the debts created by the administrations of Hugo Chávez and Nicolás Maduro), the judge in the case, Leonard Stark, decided to continue with the process. Stark dismissed the latest objections from the lawyers representing the Venezuelan state company. The trustee in charge of the auction, Robert Pincus, had established that holders of the PDVSA 2020 bonds, whose claim is still being disputed in the New York courts, could benefit from the auction. PDVSA's lawyers argued that this intention would not only complicate the auction unnecessarily, introducing debts that have yet to be defined in the courts, but would also reduce the funds resulting from the auction for other creditors. In any case, this latest decision by Judge Stark paves the way and the second round of offers for PDV Holding shares is still scheduled for June 11.
Hydrocarbons Sector
Oil activities were carried out without major problems, except for some blackouts in different parts of the country, with very limited effects on oil results.
Crude oil production fell slightly compared to the previous week. The average for the week was 782 Mbpd, distributed geographically as detailed below:
• West 163 (Chevron 65)
• East 144
• Orinoco Belt 475 (Chevron 93)
• TOTAL 782 (Chevron 158)
Chevron continues its drilling program at PetroIndependencia, which has brought its production to 158 Mbpd. Meanwhile, Repsol continues negotiating contracts with PDVSA and waiting to receive a private License from OFAC; Maurel & Prom, already in possession of a private license with a duration of 2 years, is trying to extend its duration and in parallel is focused on the search for a drill usable in the flat waters of Lake Maracaibo.
On the natural gas front, Trinidad and Tobago and Shell also received a license from OFAC last year to develop a gas field with Venezuela. However, Shell requested an individual license that would also authorize developments on the Deltana Platform southeast of Trinidad.
Refining remained at 200 Mbpd, with a gasoline production yield of 60 Mbpd, and around 67 Mbpd of diesel, hence the need to resort to gasoline rationing in the domestic market, since the volumes of products imported by barter have also been reduced.
Exports continued at the same pace as previous weeks, with no crude oil sent to India or Cuba. However, PDVSA assumes that India will receive authorization to restore purchases of Venezuelan crude oil. A diluent shortage could also develop, due to OFAC delays in issuing licenses. It is not ruled out to turn to Iran again for the supply of condensate.
[1] International Energy Analyst
[2] Nonresident Fellow, Baker Institute
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