OIL PRICES REACT TO GREATER CLARITY IN FUNDAMENTALS.

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo^[1] and Luis A. Pacheco^[2]    

The week passed with news of robust Chinese oil purchases for their inventories, a drop in US crude inventories, fluctuations in supplies, and the opening of hurricane season in the Gulf of Mexico. These were all news that pushed upwards the oil market. On the other hand, the renewed action of Yemen's Houthis against the normal functioning of shipping in the Red Sea, and Ukraine's continued and successful attacks on Russian oil infrastructure, combined to add geopolitical pressure to oil prices.

FUNDAMENTALS

The growth of oil supply, which was already giving ground to the increase in demand, must face a hurricane season in the Atlantic that is projected to be very active. Indeed, this week, Alberto became the first tropical storm of the season. The storm system made landfall in the northeastern regions of Mexico, causing heavy rain that temporarily disrupted oil operations in Corpus Christi, Texas; The effects of the rains and winds were felt as far as Beaumont. A second tropical depression has been identified and has all the characteristics of reaching the Gulf of Mexico as it feeds of the regional warm waters and if it materializes it would be called Beryl.

In the US oil sector, production levels appear to stagnate around 13.0 MMbpd, because of declining drilling activity. Baker Hughes reports that this week there was a new reduction (-2) in the list of active drills. The number of wells drilled but not completed (DUC) remains constant at around 4,500, a sign that operators remain on guard.

The demand for oil and products seems to be responding to the increase in the displacement of light vehicles, typical of the summer months in the US and evidenced by a drop in inventories of both crude oil and gasoline. Commercial crude oil inventories, published by the EIA , showed a contraction during the week of 2.64 MMbbls and gasoline inventories of 2.3 MMbbls.

Meanwhile, news regarding Russian production remains enigmatic. The Energy Ministry said Thursday that its oil production in May exceeded quotas established by OPEC+, without providing production figures, and pledged to meet its obligations to the cartel. Unofficial sources place Russian production within the agreed levels, at 9.1 MMbpd. We suspect that the ministerial statement is primarily aimed at dismissing the effect of Ukrainian attacks on its oil infrastructure.

OPEC+ remained discreetly silent during the week, satisfied that the negative reaction to its announcements at the beginning of June had been overcome, and reaching agreements to adjust the commitments made by both Iraq and Russia. In some OPEC countries, interruptions in production operations were experienced. The most relevant was the closure of at least 50 Mbpd by the Nigerian company AITEO, when leaks were detected in the Nembe swamp, in the pipeline that connects with the Bonny Light crude oil export terminal.

Brazil, one of the countries identified in the forecasts of the International Energy Agency (IEA), as a contributor to the increase in global supply, has been a victim this year of the decline in its production. Since January, its production has declined more than 5%. Similarly, in Colombia, the decline is noticeable in both oil and natural gas production, a combination of the restrictive policies of President Petro's government, and the relative low prospectivity of the basin.

These production erosions underline the limited capacity of the current crude oil supply to close the gap (1.3 MMbpd according to our calculations) with growing demand, which is already close to 104 MMbpd.

GEOPOLITICS

Conflicts in the Middle East and Europe continue, despite attempts to establish ceasefires through diplomacy; However, contacts continue.

In Russia's confrontation with Ukraine this week, despite continued Russian bombing of civilian targets and infrastructure in eastern Ukraine, the balance appears to be beginning to tip towards the Ukrainian side. The combination of Western military equipment and Ukrainian prowess has managed to inflict damage on refineries and fuel depots on Russian soil, as well as to the Russian fleet stationed in Crimea. This is an effort to slow down the Kremlin's war machine. Damage to terminals and refineries and the volumes of oil and fuel incinerated in the attacks, are affecting Russia's ability to supply the army on the battle fronts, also affecting export levels. The Russian military is pressing hard along the front line in eastern Ukraine, where a shortage of Ukrainian troops and ammunition has left defenders vulnerable.

In the Middle East, Israel continues to hit Hamas facilities in Rafah, southern Gaza. The fierce defense that Hamas is opposing to the final seizure of this stronghold, points to the relevance of this enclave for the terrorist organization. As if the war between Israel and Hamas were not enough, it appears that a confrontation between Israel and Lebanon's Hezbollah group is taking shape. A full-scale confrontation between Israel and Hezbollah could directly involve Iran, currently distracted by the death of its president, which would have potentially significant effects on the oil market.

The oil market is also being impacted by the dysfunctional management of shipping in the Red Sea because of the continuous attacks by Yemen's Houthi rebels: this week they sank a bulk ship.

All this activity on the war fronts, with no clear exit, is once again increasing the geopolitical risk, putting upward pressure on prices.

In other news

·      India's oil imports from Russia hit a record high of about 2.1 million barrels per day (bpd) in May, driven by widening discounts on Russian oil due to declining demand from China.

·      By contrast, imports from Saudi Arabia plummeted to a 10-month low, due to Saudi Aramco's decision to raise forward prices for the second consecutive month in May.

·      Citibank predicts oil prices will plunge to the $60 range by 2025 as inventories build after a tight market this summer, signaling a bearish outlook despite current strong demand and higher prices. Most banks expect oil prices to remain above $80 a barrel this summer and decline in the fourth quarter and early next year to the $70 range.

·      The US Senate overwhelmingly approved a major bill on Tuesday, June 18, to make it easier, cheaper and faster to allow and build new nuclear reactors. The ADVANCE Act, which passed with only two senators voting against, is now waiting for President Biden's signature, which he is expected to do. For many, a decision in the right direction

PRICE BEHAVIOR

Oil price benchmarks were headed for a second week of solid gains, with Brent Crude rising nearly 4% since last Friday. Prices reached levels not seen since the end of April of this year, because of the combination of supply limitations, increased demand, and nervousness generated by events on the war fronts. Thus, at the close of the markets, on Friday, June 21, the Brent and WTI crude markers were trading at $85.24/bbl and $80.73/bbl respectively.

 

VENEZUELA

The Game of Snatch Politics

With the electoral campaign already in full development, everything in Venezuela seems to revolve around the presidential elections. A perception that fails to understand the country that continues to stumble on the margins of politics, but inevitable given the degree of polarization.

The projections for the upcoming vote do not look favorable to the regime's candidate. Some polls show up to more than 30 points of difference in favor of the opposition candidate. The regime, contrary to what has characterized it on other occasions, is on the defensive, taking uncreative measures.

This clear threat to the future of the regime is an incentive for Maduro and his cadre to begin deploying tactics that allow him to remain in power. This week, for example, a deputy from the so-called judicialized COPEI filed a constitutional protection measure before the Supreme Court of Justice. The measure asks to suspend the elections while there are sanctions in effect against members of the executive or the government. On the other hand, Jorge Rodríguez, president of the National Assembly, proposed that the presidential candidates sign a document committing to accept, before the fact, the results of the elections. The president of the National Electoral Council, Elvis Amoroso, responded quickly to the “suggestion,” and organized a “show” with the attendance of Maduro and some minority candidates. They signed a document that was barely delivered to them at the time of signing.

Edmundo González Urrutia, the main opposition candidate, did not attend the event, arguing that he had not received any invitation from the CNE, and that this type of agreement was already contained in the Barbados agreement. He added that he had no intention of attending a meeting under duress. González Urrutia insisted that the recognition of the results of the Venezuelan presidential elections is contemplated in point 12 of the agreements on electoral guarantees signed in Barbados. These had been violated by the government by revoking the invitation to the Observation Mission of the European Union, and by increasing the persecution against opposition leaders and sympathizers. Enrique Márquez, another opposition candidate, did not attend either.

Elvis Amoroso, in a flagrant contravention of the due impartiality of the CNE, declared that the failure of González Urrutia and Márquez to sign the agreement shows “who is on their knees to other interests that are not those of Venezuela; What this indicates is that they want to ignore, destabilize and sabotage this electoral process, with or without them there will be elections on July 28.” Some analysts suggest that this may be a preamble to the sanction of these candidates and the elimination of their voting cards.

At the last minute, a CNE resolution was announced modifying the rules for the participation of witnesses at polling stations. It was established, for the first time, that witnesses must be registered at the voting center where they will perform their duties. This is an additional obstacle that the opposition must overcome to defend the votes on election day.

The economic aspect also did not bring joy to the regime and its intentions to perpetuate itself. To stabilize the exchange rate around 40 Bs./$, they had to inject a greater amount of foreign currency than what is usual. This is at a time when income from hydrocarbon sales is faltering, which is the result of the replacement of OFAC licenses on export. Consequently, a reduction in public spending was recorded, precisely when the campaign was in full swing.

Hydrocarbons Sector

Baker Hughes reports 3 active drilling rigs in the country, a figure that continues to underline the fragility of the industry. PetroIndependencia, PetroMonagas and PetroVictoria are the joint ventures where these units operate - in the previous edition we had erroneously reported PetroMiranda, but PetroVictoria is the correct information. Chevron completed the seventh well at PetroIndependencia and is beginning the process to incorporate a second rig into its operations.

Production last week averaged 790 Mbpd, like the previous week and distributed geographically as detailed below:

·       West                 169 (Chevron 67)

·       East                              141

·       Girdle                           480 Chevron 96)

·       TOTAL                          790 (Chevron 163)

Refining activity showed a reduction because of operational problems at El Palito, which translated into a reduction in load at Cardón; The El Palito refinery's feed is vacuum gas oil (VGO) supplied from the Cardón refinery. The average processing for the week was 222 Mbpd, crude oil and intermediate products. Gasoline production reached 70 Mbpd while diesel production remained at 73 Mbpd, again reducing the volumes supplied to the domestic market. The shortage of gasoline in the State of Barinas, during Maduro's visit, earned Minister Tellechea a slap on the wrist.

The export of the month continues to point towards average crude oil export of 630 Mbpd for June, with a similar composition to previous weeks.

 

---

[1]International Energy Analyst

[2]Baker Institute Non-Resident Scholar

AMIDST CONTRADICTORY PREDICTIONS, PRICES RECOVER

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo^[1] y Luis A. Pacheco^[2]  

Over the past few weeks, the oil market has navigated a labyrinth without a clear map of which direction to take. Recently, market players have chosen to shy away from adverse news and be positive in response to what we can consider evidence supporting solid demand and supply fundamentals. This, despite what currently seems like a sterile diatribe between the International Energy Agency (IEA) and OPEC, each reinforcing their positions regarding demand and supply in separate reports. This repeated discussion was accompanied by reports of increases in crude oil and fuel inventories in the US, and by a positive global macroeconomic environment in terms of controlling inflation. The market continues to read the latter as the possibility of an early reversal in the restrictive monetary policies.

Fundamentals

The IEA, whose mission is to advise industrialized countries, has migrated to a position of promoting the environmental agenda. In its latest report, brought forward the date of peak oil demand after having said in October 2023 that it would occur in 2030.

In stark contrast to OPEC's perspectives, the IEA report forecasts peak oil demand at 105.6 MMBPD for 2029, the date on which it would begin to contract. This because of the application of regulations that would increase use of electric cars, improvements in efficiency, and the growth of energy (free of emissions) of Greenhouse Gases (GHG)). The IEA also forecasts that crude oil supply capacity would reach almost 114 MMbpd by 2030, 8 MMbpd above projected demand (106 MMbpd).

“The projections in this report, based on the latest data, show a significant supply surplus emerging this decade, suggesting that oil companies may need to ensure that their strategies and business plans are prepared for the changes ahead” said IEA Executive Director Fatih Birol. The report adds that demand growth would be mainly driven by emerging economies in Asia, especially road transport in India, as well as jet fuel and petrochemicals in China.

In parallel, OPEC does not see a peak in oil demand in its long-term forecast and expects demand to grow to 116 MMBPD by 2045, and may be higher, Secretary General Hathaim Al Ghais, qualified the IEA report as “a dangerous comment… This is an unrealistic scenario, which would negatively affect economies around the world”

OPEC+, which brings together Saudi Arabia led OPEC, and other producing countries, including Russia, has made a series of production cuts since the end of 2022 to support the market in the face of short-term variability, but maintaining the ability to respond to growth in the medium term that they continue to envision.

According to the IEA report, the US would contribute about 2.1 MMBPD to this growth of non-OPEC producers. For now, reality contradicts Birol, since far from growing rapidly, the US maintains its production of 13.0 MMBPD throughout this year and with signs of relatively little growth for next year. The decline of about 300 MBPD since the end of last year is due to the continuous reduction of active drilling in the most prolific basins (this week Baker Hughes reports another reduction of 4 units), and the anti-hydrocarbon policies promoted by the Biden administration. The possible modest growth estimated for the coming year will come from the synergies of the corporate consolidation process that is advancing in the Shale Oil basins in the US.

Related to the environmental pressures in the U.S., the American Petroleum Institute (API) and others filed a lawsuit in a Washington, D.C., appeals court challenging the U.S. Environmental Protection Agency’s (EPA) light and medium-duty vehicle emissions standards for model years 2027 through 2032. API alleges that EPA has overstepped the authority granted by Congress with a regulation that will eliminate most new gasoline-powered cars and traditional hybrids from the U.S. market in less than a decade.

“Today, we are taking steps to protect American consumers, American manufacturing workers, and our nation's hard-won energy security from this intrusive government mandate,” said API Senior Vice President Ryan Meyers.

The EPA issued new tailpipe emissions rules in March that will force automakers to produce and sell more electric vehicles to meet the new standards. Under the rule, the administration estimates that up to 56% of all auto sales will be electric between 2030 and 2032.

On the other hand, the Department of Energy (DOE) announced that it will acquire about 6 MMbbls, to continue filling the strategic reserves (SPR), providing some support to crude oil prices.

On the other side of the world, in China, economic growth is forecast at 4.5% in 2024. Domestic demand has remained relatively weak, contributing to low inflation, while room for policy stimulus is limited. Weak business confidence, driven in part by the slowdown in the housing market, continues to weigh on growth. This sustained slowdown appears to extend into the medium term, reflecting adverse demographics, tepid productivity growth, and growing limitations of a growth model driven by debt and state investment. Structural reforms are needed to revitalize the economy towards more balanced and high-quality growth.

India, like China 20 years ago, has become the locomotive of the Asian region. According to LSEG Oil Research, the region is expected to import 27.81 MMbpd in May, compared to 26.89 MMbpd in April. This represents an increase of 920,000 bpd, with India being a significant contributor, increasing its imports to a record 5.26 MMbpd, compared to 4.55 MMbpd in April.

Brazil, another of those mentioned by the IEA to contribute to the increase in supply, has declined by about 250 MMbpd so far this year from the 3.45 MMbpd produced at the beginning of the year. It will not recover until the start-up of the next FPSO, estimated for the 4th quarter of the year. Guyana's production is similar at 645 MMbpd in May and will only take the next step in its accelerated growth in the 2nd quarter of 2025, when it will reach about 900 MMbpd.

Canada is the only country on the non-OPEC growth list, which has maintained the gradual increase since the start of the “Trans Mountain Expanded System” pipeline, bringing production to 4.8 MMBPD in May 2024.

 

GEOPOLITICS

In both the Russia/Ukraine and Israel/Hamas conflicts, hostilities continued with intensity, despite offers of ceasefires being made known on both fronts.

President Putin made an offer, which he called the “Peace Plan,” with conditions clearly unacceptable to Ukraine, especially since it sought to formalize new borders. Ukraine called the offer “dictatorial propaganda.” On the other hand, the use of weapons received from the West has given a second wind to the Ukrainian forces in their response to the Russian advance.

Ukraine attacked a military air base in Russia with at least 70 drones, confirmed Lieutenant General Kyrylo Budanov, head of Ukraine's Defense Intelligence Directorate. The massive attack was launched at the Morozovsk air base in Russia's Rostov region, nearly 200 miles (ca. 322 km) from the Ukrainian border. A security source said the Ukrainian attack was designed to target aircraft that Russia has used to drop powerful gliding bombs on Ukraine.

At their meeting in Italy, the group of countries known as the G7 agreed to use frozen Russian assets as collateral to raise $50 billion (£39 billion) to help Ukraine fight invading Russian forces. Putin reacted by calling the measure a “theft” that “would not go unpunished.”

Furthermore, at the G7 summit, Ukrainian President Volodymyr Zelenskyy and President Biden signed a 10-year bilateral security agreement, hailed by Kyiv as “historic”. The agreement establishes military and training collaboration with Ukraine but does not commit Washington to send troops to fight for its ally.

In the Middle East, the United Nations Security Council has endorsed President Biden's step-by-step plan to end the war between Israel and Hamas in Gaza. But Hamas ultimately did not accept the terms of the agreement and its incremental demands were not accepted by Israel; So, Israel continued its attacks on Rafah, where the Israeli army found and destroyed 800 meters of tunnels housing combat equipment and missiles very close to the border with Israel.

In the waters of the Red Sea, the Tutor ship was hit by a water explosive launched by Yemen's Houthi rebels, the first time a ship has been targeted by this type of marine drone. The crew abandoned the vessel and were rescued by a US Navy ship; The freighter is slowly taking on water, with two ships en route to try to rescue it. In a second attack, a Houthi ballistic missile hit the Tavvishi, a Swiss-owned and operated Liberian-flagged container ship, in the Gulf of Aden; Although it reported damage, it continued its journey.

A rare geopolitical event is configured by the presence of a nuclear submarine accompanied by Russian warships in Cuba. The US Navy dispatched one of its nuclear submarines along with several warships to Guantánamo, Cuba. This rare maneuver, intended to irritate the West, could have consequences on international relations between East and West.

PRICE BEHAVIOR

Crude oil prices were little changed on Friday, heading for solid gains for the week, recovering from losses following the OPEC+ meeting earlier in the month.

As if the diatribe between IEA and OPEC was not enough, Goldman Sachs added to the cacophony by indicating in its latest report that it expects a supply shortfall of up to 1.3 million bpd by the third quarter of 2024, as travel demand and temperature increase during the summer. Although Goldman Sachs' opinion is a short-term reference, while the IEA and OPEC projections are long-term, the bank seems to favor, at the beginning of the period, the OPEC assumptions and not those of the IEA. Goldman Sachs maintains its average price forecast for Brent at $84 and for WTI at $79 per barrel for 2024.

Another element that the market possibly interpreted as positive was the reiteration by Russia, Iraq, and Kazakhstan of their commitment to comply with the obligations acquired in OPEC+ to reduce production, including compensation cuts for previous overproduction.

On the negative side, weak refining margins continue to weigh on sentiment, while FED policy remains uncertain regarding the start of rate cuts, despite slightly better than expected inflation results.

Thus, crude oil prices reacted favorably to the accumulation of events and information processed. At the closing of the markets, on Friday, June 14, the Brent and WTI crude markers were trading at $82.62/bbl and $78.45/bbl respectively.

VENEZUELA                                                                            

The Scenario of the Impossible

The fiction that the National Electoral Council was a collegial and harmonious organization was abruptly exposed by the statements of one of the opposition representatives in the CNE. The rector Juan José Delpino assures that Elvis Amoroso, president of the Council, makes decisions without any type of consultation with the board of directors, in clear violation of the council’s rules. One of the most delicate resolutions that Amoroso took without consultation, says Delpino, was to revoke the invitation extended to the European Union mission to exercise international observation in the presidential elections of this July 28. A measure that violates what was signed in the Barbados Agreement.

The evident nervousness of the regime in the face of the advance of the opposition has been manifested in decisions of the CNE that openly favor the official candidate; as well as in various tricks such as projecting Maduro propaganda in PDVSA service stations. Added to the obvious advantages of keeping the electoral registry practically unchanged, is the elimination of electoral observation, changes in voting centers and polling stations and electoral witnesses. This is a cocktail to encourage and produce abstention in the opposition camp, who has so far shown tenacity and ignored these provocations.

In the economic front, things are not so different. The regime executes an economic strategy designed to obtain benefits during the electoral period through the advantageous use of the government budget, in what is clearly an illegal use of public funds.  Public assets are used without reservation for the official candidate's campaign.

Government spending remains high and a good part of it is allocated to the sectors that the regime knows could bring greater electoral benefits, harming the rest of the sectors. With precision, they have managed the injection of foreign currency into the exchange market, maintaining the rate at 40 Bs./$, maintaining monthly inflation between 1.5% and 2%.

Hydrocarbon revenues have recovered from the downs of April and part of May, with high exports by Chevron and transactions with other private companies, mostly in the form of barrels bartering and debt repayment. To finance the rest of the budget, SENIAT collection remains at high levels, giving it some budgetary slack.

Hydrocarbons Sector

There are 3 drilling rigs operating in the country, concentrated in the Orinoco belt. With drilling activities and efforts to reduce deferred production, especially in fields that already have redevelopment programs licensed by OFAC, production showed a further increase. During the last week, production averaged 793 MBPD, distributed geographically as detailed below:

·       West                 169 (Chevron 67)

·       East                  141

·       Orinoco Belt      483 (Chevron 98)

·       TOTAL              793 (Chevron 165)

In refining, relatively high processing levels have also been maintained. The four refineries, Cardón, Amuay, El Palito and Puerto la Cruz are operating, although not at their capacity, averaging 246 Mbpd for the week, processing crude oil and intermediate products. Gasoline production reached 81 Mbpd while diesel production remained at 73 Mbpd.

The export is shaping up towards an average for June of 620 Mbpd of crude oil. A decrease in exports to China and an increase in crude oil sent to India is estimated, with the rest of the customer base maintaining their previous levels.

A new business related to the reactivation of wells was advertised. According to the publication that appeared in the semi-official newspaper, Últimas Noticias, it involves the reactivation, in a first stage of 600 wells in the Orinoco Belt, reaching 3,000 in a year and a half. The favored company, according to rumor, already has pre-approval from OFAC. A memorandum of understanding was signed with the company Sunergon Oil, according to Alejandro Terán, president of the Latin American Association of Oil Businessmen of Texas, ALEP.

It is difficult to analyze a transaction with so little information, but it seems propagandistic and unrealistic to allocate 3,000 wells in the belt, where most of the wells are from existing joint venture. This is especially so after the formation of PetroRoraima and the incorporation of a new private partner in PetroCedeño.

CITGO

Thursday 11 was the deadline for the Special Master appointed by the court in Delaware to receive binding offers for the auction of the shares of PDV Holding, the PDVSA company that owns the parent company of CITGO Petroleum. This is a crucial step in the judicial process against the Bolivarian Republic of Venezuela, which seeks payment for past expropriations and debt defaults during the administrations of Hugo Chávez and Nicolás Maduro. The deadline to complete the auction process, including awarding round winners, is July 15, barring new variables.

However, behind the scenes, efforts continue to postpone this process because of its potential influence in the presidential elections in Venezuela; It is no surprise that the regime and its allies seek to extract advantages from this unfortunate process. As an example of the above, this week, for the first time since the initial decision against the republic in the Delaware courts, in August 2018, a regime official, Colonel Tellechea, president of PDVSA, showed some interest in the process. He demanded that the auction be suspended.

THE MARKET SEARCHES FOR CLARITY AFTER THE CONFUSING MESSAGE FROM OPEC+

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo^[1] y Luis A. Pacheco^[2]  

OPEC+'s announcement on its strategy for managing production cuts, far from fulfilling the intention of giving clear signals to the oil market, ended up having the opposite effect. As we had seen during the week, the market interpreted it as a negative signal about demand and the possibility of oversupply.  

Thus, the week began (Tuesday, June 4) with an oil market weakened by the uncertainty of OPEC+ announcements and by an alarming report published by the American Petroleum Institute (API), showing an unexpected increase in crude oil inventories. The next day, the reaction was mitigated by the data published in the weekly report of the Energy Information Administration (EIA) on Wednesdays, which showed crude and product inventory figures closer to those expected. By Thursday, it was obvious that the market reaction had been excessive. The oil markets caught their breath, partly because Saudi Arabia and Russia insisted that the gradual return of crude oil to the markets should be considered a positive signal and not a bearish one.

FUNDAMENTALS

OPEC+ produced about 270 Mbpd more in May than the previous month, which added to the downward perception that the organization's announcements had generated on Sunday night. As expected, the OPEC+ leaders took on the task of repairing the damage caused by their confusing announcement. Speaking at the Russian Economic Forum in St. Petersburg, Saudi Energy Minister Prince Abdulaziz bin Salman said he disagreed with the bearish interpretation that Western analysts had given to announcements about the gradual reversal of voluntary cuts from some OPEC+ members (2.2 MMbpd). The Saudi minister stressed that OPEC+ can pause or reverse oil production increases if the market weakens.

The Chinese economy began to give certain indications of improvements. China's oil imports rebounded last month against expectations that several refineries would complete major maintenance processes. The latest customs data showed that total crude oil imports in May rose to 11.06 MMbpd, an increase of 1.6% compared to the previous month, but still 8% less than in the same month in 2023.

The US crude oil production continues to hover around 13 MMbpd, with a tendency to decline in light of the continued erosion of the drilling rig fleet. This week, Baker Hughes reports a reduction of another 6 units, in the states of Oklahoma (oil) and Pennsylvania (natural gas).

The inventory reporting saga between API and EIA contributed to the market confusion this week. US inventory data showed, according to the EIA, a relatively minor increase in commercial crude oil inventories (+1.2 MMbbls), well below the API estimate of a 4-million-barrel increase. US gasoline inventories also added 2 MMBBLS last week, because of the decline in domestic demand after Memorial Day and an increase in refined volumes, which outpaced the rebound in exports.

According to Energy Secretary Jennifer Granholm, the much-announced replenishment of the Strategic Petroleum Reserve (SPR) could accelerate as maintenance of deposits on the Gulf Coast of Mexico is completed. This year, the Energy Department has been buying about 3 million barrels of oil per month for the SPR, after having sold 180 million barrels in 2022 to try to slow rising prices and bring the reserve to historic lows.

Continuing with the US, the non-farm payrolls, an index closely followed by the markets, showed the creation of 272,000 new jobs in May, well above the forecast of 185,000.

Internationally, the expected interest rate cut by the European Central Bank (ECB) has provided some macroeconomic support to oil prices, raising hopes of a possible interest rate cut by the Federal Reserve in September. The ECB delivered its first interest rate cut since 2019, cutting its deposit rate to 3.75% from a record high of 4.0%.

Meanwhile, business activity on the European continent has begun to recover. The Purchasing Managers' Index (PMI) from the Commercial Bank of Hamburg, considered a reliable indicator of economic development, shows that private sector production expanded in most major eurozone economies, including Germany, Italy, and Spain.

GEOPOLITICS

International discussions surrounding the Middle East crisis have focused on trying to negotiate, or impose on the parties, a lasting ceasefire. The US has been pressuring Israel to offer acceptable terms to Hamas, to the point of making offers on Israel's behalf, which were later denied by Netanyahu. The most sensitive point is the release of all the hostages, since within Israel the relatives, and the country in general, are exerting strong pressure on the military leadership around this issue.

In the assault on Hamas positions in the Jabaliya refugee camp, Israeli forces found several bodies of Israeli hostages, which increased internal tensions, interpreting that they may have died in IDF bombings. Separately, on Friday, Israel confirmed that 4 hostages were rescued in Gaza during a raid on the Nuseirat camp, in the center of the Gaza Strip, in two different locations, and in “normal medical condition.” The news was received with joy and reinforced the determination of the Israeli side to complete efforts until the recovery of all those kidnapped.

From an oil perspective, what is most relevant is the pressure that the US is putting on the Houthis. The US maintains that the peace plan for the region cannot advance if attacks in the Red Sea persist. The US and its allies, in their fight to stop attacks on ships by Houthi militants, are increasing the risks to the rebels, increasingly blocking their sources of income.

According to a report published on Thursday, Washington is seeking to block important parts of a U.N. peace plan that the warring parties in Yemen adopted in December unless the Houthis cease their attacks on international shipping routes. This latest US initiative comes as the Central Bank of Yemen, which remains under the control of the Saudi-backed Yemeni government, moved to suspend operations at banks in Houthi-controlled areas, including the region of Sana. The move, which was made with the support of the US and its Western allies, is expected to restrict the Houthis' access to foreign currency and deplete the group's liquidity.

Meanwhile, in the conflict in Ukraine, attacks on Russia with M142 Himars missiles, supplied by the US, are having an immediate effect in stopping Putin's advances in the northern region of Ukraine. These high-precision, high-power missiles, which the US eventually gave permission to use against targets on Russian territory, destroyed key missile launch sites and forced the Russians to retreat.

Russian troops are reportedly “stuck” in newly occupied villages north of Kharkiv, where they are trying to force their way into Ukraine's second city.

In Mexico, the presidential elections that we mentioned last week culminated in the clear victory of the official candidate, Claudia Sheinbaum, in what seems like an electoral tsunami. Sheinbaum will have a clear mandate and majority in Congress that allows her to change and approve laws to face the challenges facing the country and perhaps dare to experiment with more radical initiatives than his predecessor, President López Obrador.

In India, Narendra Modi and his party have once again been the most voted force, but the victory of Hindu nationalism is much less forceful than expected by the polls. Modi lost many seats compared to 2019, which forces him to govern with coalitions. The secular and left-wing opposition celebrates its second place as a triumph after a decade of ending very far from the party of the current Indian prime minister.

As we were finishing the article, the results of the elections to the European Parliament (EP) were known. In the first analysis, the growth of the right in the old continent is evident, changing the political landscape of countries such as France, Germany, and Austria. However, the balance of power in the EP does not seem to have been significantly altered. The issues of migration, the economy, and security dominated the campaign speeches.

So, the week was hectic from all points of view, and this was reflected in oil prices, reaching, in the middle of the week, the lowest levels since February of this year. During the last two days of the week, prices recovered, but the recovery lost momentum as a result of the strengthening of the dollar in response to better-than-expected North American labor numbers.

Thus, prices were unable to overcome the losses at the beginning of the week, ending with a loss of around 1.7% compared to the previous week; it is already the third consecutive week with losses. At market close on Friday, June 7, Brent and WTI crude oil markers were trading at $79.63/bbl and $75.53/bbl, respectively.

In the previous installment, we mentioned the change in market sentiment, especially due to the macroeconomic uncertainties that the indexes suggest. This week we saw market players reacting, hastily, to the announcements of the OPEC+ meeting: speculators rushed to get rid of their contracts, and then tried to make amends for the overreaction. Having a clear premise that “markets do not make mistakes” and that “the right price is what the markets determine”, it is also true that markets can overreact to biased or incomplete news, and then correct it; we find ourselves in such a situation. This may be an answer to why prices continue to fall, but it is surely an incomplete one.

We are convinced, given what we know today, that supply will find obstacles to meeting demand, and that OPEC+ will manage closed production according to market needs, and not beyond. We are of the idea that the cartel does not have the levels of spare production that they boast about. Not only that, but we think that prices will remain on average between $80 and $90/bbl, with the volatility imposed by the macroeconomic, political, and operational events that the market has to process daily.

 VENEZUELA                                                                           

The bumpy road to the Election

Within the shortened electoral campaigns, the space is occupied by Maduro and Edmundo González/Maria Corina Machado. The so-called “chiripero” (the plethora of candidates with little or no chance in the election) have made no impression whatsoever. The opposition continued to mobilize large numbers of people around the country, despite the obstacles put in place by the regime. While eyewitnesses tell of the relative lack of mobilization and apathy of Maduro's followers, although photographs of the events are published showing large crowds; According to analysts, they appear to be doctored photos. In this era of post-truth, anything is possible.

Perhaps the regime does not need large political concentrations and believes that their control of the electoral institutions, CNE and TSJ, assures them of victory. As an example, we are already hearing about people who have recently been relocated to a different voting center without their consent and other manipulations that they have in their power as “owners” of the process. Considering the evident lack of popularity of the regime, a series of conjectures have been woven, ranging from the disqualification of González Urrutia's candidacy to the declaration of a state of emergency caused by an armed conflict with Guyana.

Presidents Lula and Petro, have insisted with Maduro on the importance of international observation, especially that of the European Union. As we described last week, the European Union mission had been invited and then uninvited at the request of the president of the national assembly, Jorge Rodríguez, in another example of the absence of separation of powers. As it happened, the EU indicated that it was already too late to be able to integrate an observation team like the one commonly sent. Colombia and Brazil, perhaps taking advantage of the absence of the EU, announced that they would not send electoral observers: a way of looking the other way, revealing their real preferences.

In the economic environment, the regime is making an extraordinary effort to be able to stretch resources until the elections. The regime is keeping public spending high because of its electoral importance and keeping the exchange rate under control by the dollar market. Once the elections are over, we will pay the costs of such actions. On the oil business side, income was reduced due to lower average prices and the return of shipments to Cuba.

 

Hydrocarbons Sector

Licenses

The OFAC (Office of Foreign Assets Control of the Treasury Department) has so far issued individual licenses for the purchase of oil and its products to Reliance of India and Global Oil Management Group; Other traders, as well as investors in joint ventures, are still waiting for news from OFAC. The companies already licensed are Chevron, Repsol, Maurel & Prom, Shell with the Trinidadian national gas company, BP, and finally Ecopetrol for the import of gas from Venezuela. Forty other requests are awaiting a response from OFAC. The new JV, PetroRoraima, has not received a license yet. PetroCedeño, which now has a new “B” partner, Jindal Power Ltd., is in the same situation. 

Operations

This week, average production increased by 4.0 Mbpd compared to the previous week, through a reduction in the volume of deferred production and the entry into production of new wells drilled by the only three active rigs; according to Baker Hughes one in PetroIndependencia, one in PetroMonagas and another in PetroMiranda, in Zuata.

The weekly average production reached 789 Mbpd, distributed geographically as detailed below:

·       West                 165 (Chevron 67)

·       East                  141

·       Orinoco Belt      483 Chevron 96)

·       TOTAL              789 (Chevron 163)

The 163 Mbpd of crude oil produced by Chevron is in line with its forecast of producing 174 Mbpd by the end of 2024.

A survey among oil service companies indicates that another 9 drilling rigs could be conditioned in the short term for use.

In the refining sector, the Amuay catalytic cracking plant was restarted, with an increase in gasoline yield. The refinery run reached 246 Mbpd, processing crude oil and intermediate products. Gasoline production reached 80 Mbpd while diesel production remained at 75 Mbpd.

Concerning exports, an improvement is reported in pumping rates at the Jose terminal in eastern Venezuela. However, the only tankers that enter and leave without delay are those transporting crude oil for Chevron, Repsol, and Maurel & Prom. Monthly export is estimated at 650 Mbpd, destined for China, India, the US, Europe, and Cuba.

CITGO

Regarding the auction of the shares of CITGO's parent company (PDVH), which continues as ordered by Judge Stark, efforts have been made to lobby the Biden administration to extend executive protection, thus avoiding the potential interference of the auction with next month's presidential elections. The voice of a bipartisan group of representatives and senators of the US Congress has been added to the PDVSA ad hoc administrative board, as well as some communications from Venezuelan citizen associations. So far, there has been no reaction from the administration. The deadline to receive offers from interested parties in the court ends on June 11.