In a week influenced by a combination of geopolitical events, economic indicators, and supply and demand factors, oil prices reacted with uncertainty. It all began with a drop in prices in response to the relatively low impact of Hurricane Beryl on oil operations. This erosion in prices was reversed by announcements of additional drains on commercial crude and product inventories in the U.S. and a weaker dollar. In this back-and-forth, perspectives changed again due to high expectations of achieving a ceasefire agreement in the Gaza conflict, and the revelation that U.S. consumer confidence had waned. On Friday, well into the day, it emerged that the agreement between Israel and Hamas was not going well, prices began to rebound, but too little and too late to avoid a week of losses.
As if that weren't enough, the already known counterpoint between the demand projections of the IEA and OPEC has been revived, each organization showing its bias, although OPEC's verses have been more accurate, for now.
FUNDAMENTALS
Hurricane Beryl and other meteorological factors
At the beginning of the week, Tropical Storm Beryl approached the U.S. Gulf Coast, causing concern in crude markets. Major Texas ports, including Corpus Christi, Freeport, Houston, and Galveston, closed in preparation for the storm's arrival. However, the storm's impact on oil infrastructure was less severe than anticipated and only manifested in the shutdowns of some gas liquefaction plants and petrochemical production facilities; tanker transport was also suspended. The relatively low impact on supply operations diminished the importance of this variable, contributing to downward pressure on prices.
Forest fires in Canada continue to be a threat. Near oil activities in northern Alberta, firefighters managed to contain the advance of flames in the oil sands region. Still, dense smoke on Friday continued to prevent the resumption of most oil production. More than 100,000 residents of Fort McMurray, in northeastern Alberta province, were evacuated; the Athabasca Oil Sands facilities were affected, interrupting the extraction and refining of approximately 1.2 million barrels of oil per day.
In Ecuador, the Oleoducto de Crudos Pesados (OCP) resumed operations on Wednesday after 16 days of shutdown due to the threat of landslides in the mountainous terrain of the Amazon where it passes. According to the pipeline operator, OCP Ecuador S.A., pumping was restored thanks to the construction of two 2.8-kilometer “bypasses” in the erosion zone of the Quijos River. It now proposes to reopen the closed production of about 37 MBPD.
U.S. Inventory Data
In its customary Wednesday report, the Energy Information Administration (EIA) announced another weekly drop in commercial crude inventories of 3.4 MMbpd, far exceeding expectations. Gasoline inventories also decreased by 2.0 MMbbls, indicating strong summer fuel demand, which helped stabilize prices after Monday's fall; although as we've warned in previous editions, these weekly figures should be analyzed carefully.
Economic Indicators and Perception
The market is more attentive than ever to U.S. economic data and its interpretation and use by the Federal Reserve (FED). The release of the Consumer Price Index (CPI) on Thursday showed that inflation is moderating, with a rate of 3% over the last 12 months, near the lowest level in more than three years. As expected, hopes returned for possible interest rate cuts later in the year, which in turn could stimulate crude demand.
A monthly survey conducted by the University of Michigan showed that U.S. consumer confidence fell to an eight-month low in May, although inflation expectations improved for the next year and beyond.
Russia, the Unknown Variable
Russia has seen its ability to export crude and products diminished. Before it invaded Ukraine, it produced around 10.5 MMbpd, including the participation of multinational companies. The invasion dramatically changed Russian oil activity: the absence of foreign partners, access to equipment and parts, sanctions and price caps, and more recently constant attacks on its oil infrastructure. All this has taken a toll on the hydrocarbon industry in Russia, visible in the fall in production to 9.0 MMbpd, cleverly disguised as cuts to comply with OPEC+ agreements. Russian shipments of petroleum products fell by 4.2% in June compared to May, largely due to emergency repairs being carried out on refineries and terminals attacked by Ukraine. According to reports, 7.9% of refining capacity is in these conditions.
OPEC+ Remains Firm at the Helm.
According to OPEC secondary sources, the OPEC+ cuts are being honored, thanks to the effort of a group of countries that could produce somewhat more, such as Saudi Arabia, Iraq, the UAE, and others that can barely cover their quota. The effect on the market is the same regardless of the motivation for the cut.
China's Economic Challenges
Data from China, the world's largest oil importer, revealed that economic obstacles persist, originating from the mortgage crisis affecting banking, and the lack of effectiveness of government incentives. Despite official stimuli, persistent growth has not been achieved, influencing the demand for crude required by refineries.
On the other hand, due to the stagnation of domestic consumption, China's trade surplus soared to a historic high in June: an increase in exports offset an unexpected fall in imports, which, on the other hand, increases the risk of greater tensions with international partners. The growing imbalance has already led some nations to impose additional tariffs on Chinese imports, including electric vehicles, which could bring economies closer to a trade war.
Where Demand is Heading
As we mentioned in the introduction, the contrasting demand perspectives from the main energy agencies added uncertainty to the market. The International Energy Agency (IEA) reduced its demand growth forecast, predicting global demand growth of 710 MMbpd in the second quarter, mainly due to a contraction in Chinese consumption. The IEA cited factors such as mediocre economic growth, improved energy efficiency, and the growing adoption of electric vehicles.
In contrast, OPEC maintained a more optimistic outlook, maintaining its demand growth forecasts. The organization expects global oil demand to increase by 2.25 MMBPD in 2024, citing persistent economic growth and the increase in summer travel as key drivers of fuel consumption.
GEOPOLITICS
The neuralgic points from a geopolitical perspective continue to be the same:
• The Russian invasion of Ukraine and its conversion into a war between the two countries
• The Middle East War between Israel and the different terrorist factions financed by Iran (Hamas, Hezbollah, and Houthis).
• Electoral results in Europe
• The elections in the U.S. and the Biden enigma
Except for the real effects already analyzed in the fundamentals section dedicated to Russia, the effects so far have been limited to the incremental costs of not being able to navigate freely through the Red Sea and the Suez Canal. However, oil prices have not been immune to diplomatic efforts to dissipate tension, as seemed possible during the first days of the week. This turned into the opposite: a possible escalation that increases the perception of risk and, therefore, prices.
Regarding the election results in Great Britain, the Labor victory was expected and has already shown its first effects related to hydrocarbons, with the revocation of drilling permits in Lincolnshire, in northeast England. In France, the results were surprising, with the left coalition taking the best part, but leaving the country in a state of political disarray.
In the case of the U.S. electoral campaign, we find ourselves in an unprecedented situation. After President Biden secured the electoral college votes, which guaranteed his acclamation as a candidate at the Democratic Party Convention, the perception of Biden's cognitive deterioration and his inability to govern for the next 4 years, increased.
The real importance of the situation is that the two parties represent opposed agendas and the winner will define the international agendas in which the U.S. must exercise leadership, without underestimating the domestic agenda. At closing, an assassination attempt against Donald Trump was reported, from which he miraculously escaped. The aftermath of this event will surely affect the remainder of the campaign and the elections.
PRICE BEHAVIOR
A weaker-than-expected hurricane, falling inventories, supply interruptions in various geographical regions, elections with strong political changes, wars debating between diplomacy, bombing and trenches, and uncertainty in US politics, is a menu to disorient any market. This is what's happening to the oil market. The behavior of crude oil prices over the last 12 months resembles an electrocardiogram more than a price curve.
In a period of such uncertainty, our simplistic reading continues to be that we are in the presence of an oil market with growing demand and lagging supply. This is due to the lack of sufficient investment to balance the market and OPEC+ monitoring to prevent abrupt changes. We think oil prices will remain at the same current levels, plus a variable band depending on geopolitical risks that could aggravate the energy crisis that has been lurking in the panorama in one way or another since 2021.
As things stand, the Brent and WTI benchmark crudes were trading at the close of markets on Friday, July 12, at $85.03/bbl and $82.21/bbl, respectively. The market closed the week with a loss of around 2% compared to the previous week.
VENEZUELA
In 14 days, the Elections
A well-known saying goes: “Desperation is fury with nowhere to go”, this seems to describe Madurismo's election campaign. Disorientation has led it to use obviously contradictory elements, such as the relationship with the U.S. Sometimes it qualifies it as the imperialist devil, and sometimes as the one that gives legitimacy to the Maduro administration. Likewise, sanctions are either the cause of all the ills afflicting the country or a force that they have overcome.
Regarding international observation of the elections, definitely, the most reliable observer, the EU mission, will not be present. UN groups and the Carter Center are already in Venezuela.
Just as the regime's campaign has been lackluster, unfocused, and full of errors, its economic management has been relatively successful and true to its objectives. Anchoring the exchange rate to control inflation has proven to be increasingly costly. Implementing this has been possible thanks to the increase in prices and the increase in exported crude volumes, particularly due to Chevron's action.
In parallel, the other objective has been to increase public spending, to try to reconquer lost supporters. Despite having increased public spending, mainly due to improvements in tax collection by SENIAT, this does not seem to have been as effective as inflation control. According to analysts on the subject, public spending has not been reflected in domestic consumption.
Hydrocarbons Sector
Announcements of the incorporation of a new "B" partner in The JV, PetroCabimas, were marred by a publication from Suelopetrol. The Venezuelan company (or is, according to their statement) the original national partner in the operating contract, and then a 40% shareholder in the Joint Venture migrated and approved by the National Assembly in 2006. It is unknown how the legal situation of the two conflicting partners is being managed unless Suelopetrol decides to sell its shares to Ricardo Cisneros' group. Due to the legal and operational complexity of this business, we think that this Joint Venture is another that will drag along, while the political panorama is elucidated.
Operations
From an operational perspective, 4 drilling rigs are active. A 5th unit is scheduled to start activities for Chevron in PetroIndependencia, but it will be in September. With this unit, operating the last 3 months of the year, the drilling of the 17 wells budgeted for this year by the North American company will be completed, to reach almost 200 Mbpd of gross production in its four Mixed Companies.
In western Venezuela, deferred production was reduced partly in Boscán and partly in the extended block of PetroQuiriquire, operated by Repsol. Meanwhile, in the east, two other wells in the belt began commercial production. So national production increased to 807 Mbpd, geographically distributed as follows:
• West 174 (Chevron 71)
• East 141
• Orinoco Belt 492 (Chevron 199)
• TOTAL 807 (Chevron 170)
The refineries, despite the problems at El Palito, processed 245 Mbpd of crude and intermediate products. Gasoline production reached 78 Mbpd, while diesel production remained at 77 Mbpd.
Exports scheduled for July indicate a marginally lower volume than in June, with approximately 650 Mbpd of crude and about 70 Mbpd of products.
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