In a week when U.S. Independence Day festivities shortened active market days, the announcement of a reduction in crude oil, gasoline, and diesel inventories in the U.S. has generated a well-founded expectation that summer won't be as bad as projected a few weeks ago. In parallel, the geopolitical checkmate on hydrocarbon supply, caused by conflicts in Ukraine and the Middle East, is compounded by meteorological threats, from the effects of Hurricane Beryl to floods in Ecuador and forest fires in Canada, bolstering a bullish market. Thus, with the bulls loose, crude oil futures rose and reached new highs, closing a fourth consecutive week of gains.
FUNDAMENTALS
Weather phenomena are affecting, and threaten to impact even more, the supply of crude oil and fuels. Hurricanes, torrential rains with landslides, and extreme droughts generating forest fires are some of these phenomena.
Indeed, refineries around Corpus Christi, Texas, including one from CITGO Petroleum, could be affected depending on the projected path of Hurricane Beryl in the Gulf of Mexico. It could temporarily reduce U.S. refining operations or crude oil exports. It could also affect oil and refined product trade between the U.S. and Mexico.
Most models predict a second impact in the western Gulf of Mexico, as Beryl strengthens in the warm Gulf waters near the Texas-Mexico border; the latest coordinates suggest a more northerly route that could affect Corpus Christi and other oil centers, including Galveston/Houston. Several major operators have conducted preventive evacuations of offshore platforms, including Shell, BP, ExxonMobil, and Chevron, which could disrupt production.
In Ecuador, as we reported last week, landslides on the route of its two major pipelines forced the suspension of pumping: up to 100 MBPD stopped being pumped to Pacific Ocean terminals. One of the pipelines resumed pumping, but 37 MBPD of Ecuadorian production is still shut down.
Canada is preparing for a forest fire season that puts oil production in Alberta at risk, just as companies plan to expand their production to take advantage of the recently expanded pipeline to the West Coast (TMPL), which allows exports to the U.S. and Asia, eliminating the heavy discounts that affected the economics of Canadian heavy crude.
Canadian operator Suncor Energy has closed at least one of its oil sands exploitation platforms in Alberta, where forest fires threaten production in the oil-rich province. According to reports from secondary sources, the company suspended operations at Firebag (215 Mbpd) on Thursday and evacuated all non-essential workers, threatened by fires less than 10 km away.
On the other hand, U.S. inventory data, published by the Energy Information Administration (EIA) in its usual Wednesday report, suggests robust hydrocarbon demand in the U.S. Commercial crude inventories fell by 12 MMbbls, the market expected a reduction of only 2.5 MMbbls - although as we have warned, this may be a correction of past figures. Furthermore, gasoline and diesel inventories showed declines. We qualify it as a “correction” because a sudden drop of this magnitude usually has to do with the calculation method used by the EIA, which consists of a balance of numerous figures related to imports, exports, and refining, adjusted by a factor that determines “presumed” production. In any case, the market saw this as positive.
U.S. production remains around 13 MMbpd, while drilling activity, reported by Baker Hughes, increased by 4 units, but was mainly oriented to offshore activity.
China has maintained a relatively constant import level, slightly above 11 MMbpd, which together with domestic production of 4.2 MMbpd, results in 15.2 MMBPD of crude available for its refineries. However, only 14.3 MMBPD were processed in Chinese refineries, leaving a difference of almost 1.0 MMbpd, which may have been incorporated into strategic reserves or commercial inventories.
OPEC+ continues to maintain exemplary discipline, jealously complying with the latest plan agreed at the recent OPEC+ meeting and aided by problems in Russia (see below).
Regarding macroeconomic prospects, the published minutes of the Federal Reserve (FED) June meeting show that they still don't have enough confidence to start the rate cut cycle. It's mentioned that additional favorable data was needed to have more confidence that inflation was moving sustainably towards 2%. The most recent trends indicate that inflation in the U.S. is moderating, and the labor market has created fewer jobs than the previous month, it certainly seems that the FED's deliberate attempt to slow down the U.S. economy is finally bearing fruit, which tends to confirm that we are approaching the end of the restrictive policy, although this has been reiterated in the past without final resolution. In Portugal, at the annual meeting of the European Central Bank (ECB), Christine Lagarde expressed carefully guarded optimism about efforts to moderate inflation.
GEOPOLITICS
It's been almost 900 days since Russia began the invasion of Ukraine and even though the aggression has stalled for long periods, the Russian army is now advancing slowly but surely in the eastern region, bombing Toretsk, a city under Ukrainian control, but very close to Horlivka, controlled by the de facto Donetsk People's Republic, part of a broad Russian advance that Ukraine has not been able to stop. The city of Toretsk is devastated and time is running out for anyone who wants to leave it. On the other hand, pro-Ukraine partisans inside Russia claim to have blown up a railway line inside Russia used to transport North Korean ammunition to the front. Images showing the explosion of a passing train could not be independently confirmed.
At the time of writing, a Ukrainian drone attack was reported during the early hours of Sunday, July 7. A fire broke out at a Russian ammunition depot in the Voronezh region, near the border. The local governor declared a state of emergency. According to Ukrainian sources, it's a depot of ammunition and ground-to-ground and ground-to-air missiles. This and other actions continue to put pressure on the Russian energy industry. The Russian authorities speak of a production of 10 MMbpd when real production languishes near 9 MMbpd. Russia has had to resort to dark practices for its exports, using a fleet that violates international navigation laws and rules to circumvent Western sanctions; something similar to what Iran and Venezuela do.
On the diplomatic side, Hungarian Prime Minister Viktor Orbán arrived in Moscow on a supposed “peace mission” a few days after visiting Kyiv, which provoked a reaction from European Union leaders who said that Orbán had no mandate to represent the bloc. On Friday, the newly re-elected President of the European Commission, Ursula von der Leyen, warned that “appeasement will not stop Putin”. “Only unity and determination will pave the way for a comprehensive, just and lasting peace in Ukraine.”
In the Middle East region, given the ongoing confrontation of Israel with Hamas in Gaza and with Hezbollah on the border with Lebanon, fears of a possible large-scale war in the area are growing. In any case, it's reported that Israel is considering a new proposal from Hamas on a pause in fighting in Gaza and the release of hostages. A senior Hamas source said on Saturday that a revised proposal for an agreement between Hamas and Israel agreed that talks to release Israeli hostages, including remaining soldiers and men, would begin within 16 days after the first phase of the agreement.
In this context, it's important to note the result of the presidential elections in Iran, the main sponsor of the armed groups surrounding Israel. Masud Pezeshkian, the reformist candidate, prevailed this Saturday in the second round of the presidential elections and will become the next president of the country, according to the Iranian Electoral Commission. Pezeshkian, a 69-year-old cardiac surgeon, achieved 53.6% of the votes against the ultra-conservative Saeed Jalili with 44.3%, in elections that had a participation of 49.9%, with 30,573,931 votes.
The electoral process coincides with a crisis of legitimacy for the Islamic Republic and its supreme ruler, the Supreme Leader, Ayatollah Ali Khamenei. Some observers maintain that the new president could represent a turning point in Iran's relations with the West and as such could affect the course of the war in the Middle East. There's also talk that he could have a less restrictive policy with women and promote a détente in Iranian society. We'll see.
In other countries, interesting results have occurred, especially in Europe, which could change the position versus Ukraine and a change in energy transition policies that originated in the Paris Agreement, 2015 (COP 21).
In the United Kingdom, as polls predicted, Sir Keir Starmer led the Labour Party to a resounding victory, closing a cycle of 14 years of Conservative government, with results almost as impressive as Tony Blair's victory in 1997. This change could reverse some of the more permissive environmental policies of the outgoing prime minister, although the position of the trade unions is not necessarily aligned with the party.
In France, the second round was held on Sunday, July 7. In an unexpected result, early results place the leftist NFP coalition with the majority of seats, but without the absolute majority needed to govern; Macron's centrist coalition, Ensemble, in second place; and the far-right RN, which had won the first round, in third place. Final results are not expected until early Monday, but as no party has reached an absolute majority, the country's future remains uncertain.
The November presidential elections in the U.S. continue to be full of uncertainty and possible changes in the alignment of candidates. A growing chorus of voices from the Democratic Party and independents insists, with increasing force, that President Biden step aside after his disastrous performance in the debate with Republican candidate Donald Trump, and the ineffective television interview with George Stephanopoulos, which was supposed to straighten out the mess.
It's increasingly clear that the U.S. president, his party, and the country are inexorably sliding towards a political crisis that raises the extraordinary possibility that a presumptive candidate could be pushed aside in the final stretch before his party's national convention and months before an election in which two opposed visions of the future of the U.S. compete.
The dilemma seems to have caught the Democratic Party off guard; without a widely accepted replacement, as Vice President Kamala Harris does not have the necessary popularity to run for the presidency of the world's largest economy.
Other News
• The state of Alaska is suing the U.S. Administration for the Bureau of Land Management (BLM) of the Department of the Interior's decision to restrict access to drilling and mining in a large part of the National Petroleum Reserve-Alaska (NPR-A). “The new rules were approved without adequate participation from affected parties, exceeded Congressional authorization, and were hastily implemented to circumvent Congressional oversight,” the state of Alaska said in a statement announcing the lawsuit it had initiated.
• Nigeria's Upstream Petroleum Regulatory Commission (NUPRC) gave the green light to agreements between ENI's local unit, Nigerian Agip Oil Company, with Oando LG, and Equinor with Project Odinmim, clearing the way for the change of hands of two key onshore assets. Major oil companies operating in Nigeria have been abandoning their onshore fields affected by theft, vandalism, and pollution to focus on deep-water explorations.
PRICE BEHAVIOR
The unusual alignment of the stars: supply interruptions due to weather events, reduction of crude and product inventories in the U.S., and a constant perception that geopolitical elements could extend and affect fuel supply, added to the position of central banks, probably reversing the restrictive monetary policy adopted since the 2021 energy crisis before the end of the year, added to the market's optimistic perception and prices thus proved it.
Participants in the oil market have begun to unwind short positions (low future prices) at a rapid pace, while increasing long positions (high future prices). Crude futures could be supported by speculative purchases, as OPEP+'s commitment to production cuts remains firm, which would result in higher prices for longer.
Thus, at the close of markets on Friday, July 5, and despite a last-minute adjustment, benchmark Brent Crude and WTI crude were trading at $86.86/bbl and $83.44/bbl, respectively, 2% higher than the previous week, the highest levels since April this year.
However, some analysts said that gains were limited during the week by concerns about China and Europe's performance during the second half of the year.
VENEZUELA
The false security of a military parade
During the traditional military parade on July 5, the official candidate, Nicolás Maduro, addressed representatives of the armed forces in a warning voice: “I swear to you, that this commander-in-chief's baton will remain in good hands in the years to come. It will never fall into the hands of any oligarch or puppet” (as he defines opposition candidate Edmundo González Urrutia, who doubles him in polls). A clear demonstration of how the regime consistently disrespects the constitution in complicity with the military high command.
What we don't know is whether this was a message from Maduro to the military or, on the contrary, it was a script chosen by the military high command, concerned about the loyalty of the armed forces.
The National Electoral Council carried out an electoral simulation that the PSUV used to “oil the machinery”. They made a great effort, but the result was, like the consultation on Guyana, little interest and much abstention, so the event was little publicized.
The official electoral campaign, which officially began on July 4, has continued with its abuses of power, arresting political adversaries, intimidating the opposition voters, and making excessive and illegal use of public money and assets for the campaign in their favor. These tactics are expected to intensify as the elections approach and their message fails to resonate with the population. They were also handing out gasoline tickets so that supporters could transport themselves to official gatherings.
The regime held a virtual meeting with representatives of the Biden administration, which was unknown to the opposition. Neither the PU, Edmundo González, nor María Corina Machado were aware of the meeting, much less its agenda. Republican Senator Marco Rubio described the meeting as inconvenient and a political error by the White House. In his opinion, these conversations only give the regime legitimacy it does not have and undermine the opposition's crusade.
A few weeks before the election, a decision in which the regime disqualifies the MUD card or candidate Edmundo González Urrutia himself, or even suspends the elections for some extravagant reason, is not ruled out. The same U.S. representatives, Brian Nichols and Francisco Palmieri advocate maintaining the path without obstacles until reaching elections in which “the people have the opportunity to express themselves”, in a clear allusion to potential desperate acts by the official party.
In the economic aspect, the increase in oil prices and the normalization of the oil export process, under the extremes of General License 44-A, has generated incremental income for the regime. However, the exchange rate anchoring policy is proving very costly, the gap between the official exchange rate and the parallel one has increased considerably, to 10% compared to 5% at the beginning of the year. After a surprising fall in public spending in June, July is beginning with a strong rebound, but it could be late for electoral effects.
Hydrocarbons Sector
PDVSA signed a Joint Venture agreement, pending approval by the Assembly, with Globalable Holding SL, a company owned by Venezuelan businessman Ricardo Cisneros. Through this agreement, Globalable becomes PDVSA's “B” partner with a 40% shareholding in the joint venture, PetroCabimas, on the eastern shore of Lake Maracaibo. After the signing, it was announced that the plans were to bring production to 50 MBPD (without mentioning the required levels of investments and expenses), a level never reached since the block was granted as an operating agreement in the third Round, in 1997. Most of the wells are marginal producers that will have to be replaced by new wells with modern architectures and prepared for alternate steam injection—with a significant investment.
During the week, PDVSA also reported having put into operation part of one of the natural gas compression plants in northern Monagas, which reduced the volume of gas flaring and venting and, according to the statement, allowed additional production to be opened in the Furrial Field. We believe it's a small operation, but the only information available is that from PDVSA. This news and others of little materiality seem to be part of a campaign to project activity in the oil industry in the face of the electoral process.
From an operational perspective, 4 drilling rigs are active in the country, and a fifth unit is about to enter operation for Chevron, in PetroIndependencia.
Three new wells from the belt entered production this week, raising national production to 798 Mbpd, geographically distributed as follows:
• West 170 (Chevron 68)
• East 142
• Orinoco Belt 486 (Chevron 100)
• TOTAL 798 (Chevron 168)
Refineries maintained their processing level at 230 Mbpd of crude and intermediate products. Gasoline production reached 75 Mbpd, while diesel production remained at 72 Mbpd, insufficient to supply the national market.
The different sources that report on export levels differed in their reports on the volumes exported and their distribution among customers. Elements are as striking as one of the companies reporting no crude exports to Cuba, while the other indicates that up to 30 Mbpd of Venezuelan crude ended up in Cuba in June. The difference in information seems to be related to the fact that the shipments were made in tankers different from those traditionally used by Cuba and that the cargoes did not leave Venezuelan terminals but were transferred from tanker to tanker on the high seas.
CITGO
An appeals court in the state of New York ruled that PDVSA was right in maintaining that the Venezuelan Constitution does govern the validity of the 2020 Bonds.
The best way to present this judicial success is to reproduce the explanation of lawyer Jose Ignacio Hernández, who was intimately involved, along with the PDVSA ad hoc Administrative Board, in the decision to take the case to court. Lawyer Hernández says:
“On July 3, 2024, the Court of Appeals for the Second Circuit granted the appeal filed by PDVSA against the judgment of the Southern District Court of New York, which almost four years ago had dismissed the lawsuit for nullity of the PDVSA 2020 Bonds.
In practice, this means that the lawsuit will have to start over, but this time considering that, as PDVSA argued, the Venezuelan Constitution does govern the validity of the 2020 Bonds.
From many points of view, this is a historic ruling, not only for the case of the 2020 Bonds but, in general, to advance in strengthening transparency in public debt operations.”
Meanwhile, in Delaware, Judge Leonard Stark moved the hearing to consider bids in the PDV Holding auction to September 19. This was in response to the motion of the special trustee in charge of the process, Robert Pincus, requesting additional time to analyze the offers and ensure that the winning bid maximizes the value of the company; the hearing had originally been set for July 15. The decision of the Appeals Court in New York adds a new complexity to the auction process in Delaware.
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