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.
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