El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
The macroeconomic figures reported from the largest economies in the world injected pessimism into the oil market, by calling into question the future robustness of future demand, causing an erosion in barrel prices in a new week of falling prices.
The increase in automobile and air traffic associated with Memorial Day, which traditionally shows an increase in gasoline and aviation fuel consumption, failed to drive a sustained increase in fuel demand, adding downward pressure to oil prices.
Data from the Energy Information Administration (EIA) revealed a reduction in commercial crude oil inventories in the US, a sign that would normally drive prices higher. Still, markets preferred to focus on the increase in gasoline inventories. Due to lower fuel prices, which have been a feature throughout May, weak refining margins have sparked speculation that refiners will reduce summer production, affecting crude oil prices.
Likewise, inflation figures in both the US and Europe did not meet central banks' expectations, increasing the likelihood that the long-awaited interest rate reduction in the US will not occur. In Europe, the European Central Bank (ECB), which had decided to start the rate reduction, is reviewing that decision. In China, the official PMI index (measurement of the manufacturing sector) surprised with a decrease of almost 2%, underlining the problems that the world's second economy is going through. The sum of all the above fuels the concerns of the oil market.
FUNDAMENTALS
OPEC+: This week's price pullback removed uncertainty surrounding OPEC+ policy. Following a series of ministerial meetings in Riyadh, the group has decided to maintain its formal crude oil production targets until the end of next year, the OPEC secretariat said. This includes what was the 2 million b/d cut in the official production quotas agreed in October 2022.
Two sets of “voluntary” cuts to some group members have also been extended, different from the formal production policy. The first, amounting to 1.66 million b/d, was originally agreed in the first half of 2023 and had been set to extend until the end of 2024. It will now be in effect until the end of 2025.
The second set of voluntary cuts, amounting to 2.2 million b/d, were announced between June and November 2023 and had been scheduled to extend until the end of this month. These will now be extended for a further three months until the end of September, after which they will be phased out in stages over 12 months. Starting in October, eight countries (including Saudi Arabia, the United Arab Emirates, Russia, and Iraq) will gradually increase oil production in monthly increments until 2025.
This decision of the expanded poster can have two interpretations. On the one hand, the market will strengthen as it believes that producers will continue to manage supply, seeking stability, or, on the contrary, it will weaken as it recognizes the decision as a sign that demand remains fragile.
It is also news that Saudi Arabia decided to put 0.69% of its state oil company, Aramco, in the stock market, while the kingdom continues with Crown Prince Mohamed bin Salman's plan to diversify the economy. Saudi Arabia is offering 1.545 million shares and the offering period will begin on June 2, and is expected to raise more than $11 billion.
USA: the EIA reported a reduction of 4.2 MMBBLS in commercial crude oil inventory and an increase of 2.5 MMBBLS in products. The market focused more on the increase in gasoline inventories and concluded that it was due to the traditional summer demand not materializing. However, factors such as record refining processing and lower product exports may not have been factored into that conclusion.
Meanwhile, crude oil production and the total number of active drills remain unchanged. The current production of 13 MMBPD of crude oil is the result of a slight increase in onshore operations, offset by a reduction in offshore operations.
The chain of consolidation of oil companies continued this week. ConocoPhillips (NYSE: COP) announced it has reached an agreement to acquire Marathon Oil Corporation (NYSE: MRO) for approximately $22 billion (including debt), an all-stock transaction, if approved by MRO shareholders and regulators.
On the other hand, the leader of the Republican Party candidacy race, former President Donald Trump, was found guilty of 34 charges in a trial in New York; This decision will probably be appealed. In any case, the decision provides an opportunity for the Democratic Party to use the result in its campaign, while Trump will use it in his to victimize himself.
China continued to generate negative macroeconomic information. This time the shadow fell on the manufacturing sector, which unexpectedly fell in May, keeping the need for new stimulus alive. Meanwhile, a prolonged real estate crisis in the world's second-largest economy continues to weigh on the confidence of businesses, consumers, and investors. The official manufacturing Purchasing Managers' Index (PMI) fell to 49.5 in May from 50.4 in April, according to the National Bureau of Statistics (NBS). Below the 50 mark that separates growth from contraction, analysts expected 50.4.
Global Inflation: The PCE (Personal Consumption Expenditure Prices) index for April, which the Federal Reserve closely follows, showed growth of 2.8%, year-over-year, and is largely in line with forecasts, confirming market fears that the FED would not act to reduce rates until at least September.
In the eurozone, figures released on Friday showed eurozone headline inflation rose from 2.4% to 2.6% in May, while core inflation rose from 2.7% to 2.9%. Analysts still expect the ECB to cut rates next week, but higher inflation will limit prospects for further cuts.
GEOPOLITICS
The war conflicts continued their dynamics, with Russian threats against NATO, demanding the use of weapons from the member countries of the alliance against Russian targets. After much deliberation, both the US and European powers decided to authorize Ukraine to use weapons received from those countries on specific targets related to attacks from Russia and related logistics.
The Russians continue, with some success, to approach the important city of Kharkiv and attack the energy infrastructure in Ukraine. Meanwhile, Ukrainian missiles and drones have hit Russian targets in the Crimean Peninsula, warranting the closure of the Kerch Bridge, used for supplying Russian troops.
On the Gaza front, Israeli forces ended combat operations in the Jabaliya area of northern Gaza after destroying more than 10 kilometers of tunnels during days of intense fighting that included more than 200 airstrikes, according to Israeli sources. In the southern tip of Gaza, Israeli forces launching an offensive against Rafah found rocket launchers and other weapons, as well as tunnels built by Hamas in the center of the city.
The Houthis have been actively attacking ships entering and leaving the Red Sea, prompting an attack by US and British aircraft to neutralize launch centers in Yemen. The Houthis claim to have launched a missile attack against a US aircraft carrier in response to attacks on their facilities, but officials on the Dwight Eisenhower aircraft carrier denied this claim.
On the diplomatic side, Israel has been harshly criticized, including by its ally the US, which is pressing for a definitive ceasefire. On Friday the 31st, during the Jewish Shabbat, President Biden detailed the elements of the Israeli ceasefire plan. However, Prime Minister Netanyahu denied that these were the conditions proposed by Israel since a necessary condition was the immediate return of all Israeli hostages.
In the Far East, US Defense Secretary Lloyd Austin and Chinese Defense Minister Dong Jun met in Singapore on the sidelines of Asia's premier defense summit, the Shangri-La Dialogue. The US-China relationship is expected to focus on maintaining open communications at the military level, as well as on the wars in Ukraine and Gaza, and tensions in the South China Sea.
General elections were held in India, Mexico, and South Africa, three countries that move the balance of energy supply/demand in their regions. In South Africa, parties prepared for coalition talks on Friday, as the ruling African National Congress (ANC) looked set to fall well short of a majority for the first time in 30 years of democracy. With results of 61.2% of the electoral colleges, the ANC obtained 41.9% of the votes, a sharp drop from the 57.5% it obtained in the last national elections in 2019.
In India, a six-week-long election has come to an end; over 970 million people were called to vote. The results of this gigantic call will mark the future of the subcontinent and its economy, the most dynamic on the planet.
On the other side of the Atlantic, in Mexico, the presidential elections were held on Sunday, June 2. Claudia Sheinbaum sweeps the elections and will be the first president of Mexico, candidate of Morena, López Obrador's party. According to the latest counts, Sheinbaum obtains almost 60% of the votes, while her main rival, the opposition Xochitl Gálvez, barely 27.6%. Sheinbaum inherits a country uniquely positioned to benefit from increasing changes in international trade, but it is also a country with no shortage of problems. From persistent crime to infrastructure issues, they will be a challenge for the new government given persistent inflation, high interest rates, the largest budget deficit since the 1980s, and an over-indebted and operationally deteriorating Pemex.
Prices
Thus, crude oil prices, after having reached $85/BBL (Brent Crude) mid-week, were pressured downwards by a liquidation at the expiration of the month's contracts, accompanying what already constitutes a repetitive background noise: the threat of deterioration in demand due to the restrictive policies of central banks and macroeconomic signals. The decline, due to this accumulation of adverse effects, was only offset by news predicting that something positive could emerge from the OPEC+ meeting. The Brent and WTI crude markers, at the end of the day, on Friday, May 31, were trading at $81.11/bbl and $76.99/bbl respectively, closing another week with a loss of around 1%, compared to the previous week.
We harbor the idea that this deterioration of several weeks is the product of the overvaluation of the negative perceptions that surround the markets. The theoretical values, estimated by us, based mainly on fundamentals, indicate prices around $3/bbl higher than the prices set by the market today.
VENEZUELA
As the expected date approaches, the hope of Venezuelans increases, seeing the will of the citizens to want to vote. This is evident in the participation in the popular rallies that Maria Corina Machado manages to orchestrate in the most remote places: in all the events the fervor is notable.
Meanwhile, the regime continues harassing the opposition side, accusing them of being traitors to the country, doctoring photos and voices that appear everywhere on the internet. It also persecutes the people who provide shelter, food, or transport MCM and his entourage. In any case, the worn-out promises of Maduro's campaign, repeatedly unfulfilled, no longer resonate with the people, who are tired of the hardships that have been inflicted on them recently.
Reliable polls indicate such a large gap between Edmundo González and Nicolás Maduro that numerologists conclude that it is unlikely that the regime will be able to overcome the slope in fairly transparent elections. What is heard from those who know how the National Electoral Council (CNE) operates is that a key element on election day may be the application of “operation morrocoy” in centers with a traditional opposition majority. Since the electoral registry, despite the threats of registration of new voters and changes of address, not to mention the mockery of the registration of voters outside the country, has not changed substantially. It is easy to know the candidate centers for this operation and for the opposition to design an appropriate counter-strategy.
Public employees are receiving enormous pressure to attend PSUV rallies, to follow Maduro on social networks and “like” him, and to, as they call it, “vote well.” In any event, the regime may need very drastic measures to avoid defeat on election day.
On the economic side, oil revenues have not overcome the downturn created by the replacement of OFAC licenses, although they are in the process of being restored with the granting of new licenses to market crude oil. SENIAT collection has increased due to greater collection efforts and additional taxes such as pensions. In any case, the total collected has allowed public spending to increase but offered less foreign currency at the exchange tables. The official exchange rate and that of the parallel market are distancing significantly, with the implication that this has on inflation.
Hydrocarbons Sector
Licenses
It was learned that around 50 special license applications have been submitted to OFAC (Office of Foreign Assets Control of the Treasury Department). The companies Maurel & Prom and Repsol, as we previously reported, received their respective licenses. General License 44 A, which gave a deadline for the orderly completion of activities initiated under LG 44, expired on May 31.
During this week, it was learned that the British BP and the state company of Trinidad and Tobago, NGC, received from OFAC a two-year license to jointly develop with PDVSA the Cocuina-Manakin gas fields. The fields are in the territorial waters of Venezuela and Trinidad, respectively. This is the second license granted towards increasing the supply of gas to Trinidad facilities, the first allows the supply of gas from the Dragon field, in the north of Paria, to existing facilities located in Trinidad.
But not everything is going smoothly. A court in Trinidad has granted ConocoPhillips the right to assert a $1.33 billion claim against Venezuela for past expropriations, a decision that could complicate the execution of the projects. The court decision gave ConocoPhillips the right to seize, in Trinidad, any compensation to Venezuela for joint gas projects with that country. Since winning the arbitration award against Venezuela and PDVSA, ConocoPhillips has attempted to enforce the judgment in different courts, including those in the US and the Caribbean.
The Texas-based company Global Oil Terminals, owned by Harry Sargeant III, obtained a license from OFAC to purchase and export asphalt from Venezuela for at least two years. Previously, Sargeant had signed a contract with PDVSA to import six shipments of asphalt, of ninety-five thousand barrels each, which would be used for various infrastructure projects in the US. The state refinery on the Island of Curaçao signed a five-year agreement with Global Oil Management Group LLC, also owned by Sargeant, to manufacture and export asphalt; Possibly the license obtained from OFAC authorizes the use of Venezuelan crude oil for processing in Curaçao.
It emerged in the media that India's Jindal Steel and Power Ltd. will partner with PDVSA in a joint venture to produce crude oil in the Orinoco Belt, according to people familiar with the deal. This is PetroCedeño, whose original partners, TotalEnergies and Equinor, abandoned the project due to disagreements with PDVSA. PetroCedeño includes the production field in the Zuata area and the largest Jose upgrader, designed to produce 180 MBPD of 32º API (light crude) synthetic crude oil. Currently, the production of this field is affected by water intrusion into the reservoir. The upgrader is being used as a kind of refinery to produce a VGO of sorts (Vacuum Gas Oil) that is used in refineries and as a diluent. This comes just months after the Indian company won a contract to manage the country's largest iron ore complex.
It was also known that a PDVSA Gas team traveled to Iran to review the progress in the manufacturing of 5 cryogenic exchangers for the eastern gas processing plants, under a contract signed with the Hilavis Arina company. According to PDVSA Gas, this equipment will be installed in the extraction plants of San Joaquín, Jusepín, and Santa Bárbara, to improve operational reliability and increase the production of the plants.
In line with the numbers presented by Minister Colonel Tellechea at the press conference with Fedeindustria, which we discussed last week, it appeared on the front page of the second section of the newspaper El Universal, as electoral propaganda, that “production is already close to the million barrels per day.” The truth is that, despite the minister's numerous statements on this matter, real production continues to be below 800 MBPD. It is interesting to note that there is a marked difference between the numbers shown in the official propaganda and the information sent to OPEC by the ministry.
Operations
During the week, crude oil production increased by 3.0 Mbpd compared to the previous week, despite frequent power outages, which did not affect the operation. The weekly average production reached 785 Mbpd, distributed geographically as detailed below:
• West 163 (Chevron 66)
• East 143
• Orinoco Belt 479 (Chevron 95)
• TOTAL 785 (Chevron 161)
The increase in production corresponds to well work over and development drilling activities at PetroBoscán and PetroIndependencia, respectively (operated by Chevron). The production, operated by Chevron, 161 Mbpd, is the highest since the company received License 41 from OFAC, at the end of 2022.
According to local service companies, Repsol began its search for a drilling rig to use at PetroQuiriquire in the western basin.
The refining operation was slightly impacted by electrical problems, so the processing level was reduced compared to the previous week: an average of 204 Mbpd, with a production of 60 Mbpd of Gasoline and 73 Mbpd of diesel. Fuel rationing continues despite (or because of) the start of the election campaign. Users report preferential treatment to vehicles used in the regime's campaign.
Exports for the month averaged 624 Mbpd of crude oil and 54 Mbpd of products. Crude oil exports had the following destinations: 345 Mbpd to China, 197 Mbpd to the US, 48 Mbpd to India, and 34 Mbpd in barter with ENI/Repsol.
Two executives of the so-called “CITGO six” (accused of corruption by the regime) sued CITGO Petroleum for $400 million in a court in the state of Texas. The plaintiffs allege that the company conspired to lure them to Venezuela and abandon them to their fate while they were prisoners of Chavismo, a condition in which they remained for almost five years. Another gloomy episode of the long Chavista night.
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