The Federal Reserve Hints at Interest Rate Reductions

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

The signals emanating from the economic sphere and the news from geopolitical scenarios, contradictory as they sometimes seem, moved the market towards a bearish sentiment, or at least to be viewed through that lens. Fears of a recession (fall in oil demand) resurfaced after negative signals from labor markets, coupled with the conviction that OPEC+ would proceed with its announcement to gradually increase oil supplies until recovering the 2.2 MMBPD cuts it had made. Clearly, this combination, along with the growth in supply from some other producing countries, would theoretically create an oil surplus.

The bearish sentiment that began the week was the result of several demand-related factors: 1) ongoing disappointment with China's economic results, including the rapid adoption of electric and hybrid vehicles; 2) the surprising downward revision of the number of jobs added between April 2023 and March 2024 (818,000), published by the U.S. Department of Labor; 3) the interpretation that ongoing regional military conflicts do not pose a risk that could affect the availability of crude oil and products; and 4) a supposed gradual reopening, starting in September, of the production that OPEC+ had kept closed “voluntarily”. If these factors persist, they will undoubtedly lead to lower prices, and the market acted on this assumption; by Tuesday, prices had collapsed by more than $2/bbl, merely on the “presumption.”

However, we think that one can find the space to disagree with the market's reading of most of these events.

Indeed, our interpretation of the correction in the new jobs report announced in the U.S. is that it indeed can be read as an indicator of the deceleration of the U.S. economy. But it is also a signal for the Federal Reserve (FED) to start lowering rates, which would lead to more oil demand. On Friday morning, FED Chairman Jerome Powell, speaking at the annual meeting in Jackson Hole, confirmed this trend: “The time has come to cut interest rates.” The market believes it could happen as early as September. Similarly, we believe that the concern over the return to the market, starting in September, of nominally closed OPEC+ barrels, is unjustified. Most of that production capacity was already used to offset natural declines or never existed in the quantities announced.

On the other hand, we are struck by the continued underestimation of the geopolitical risks related to the increasingly complex Russian-Ukrainian confrontation and the unpredictable war in the Middle East; with the elusive promise of a ceasefire that never comes, as the directly involved parties do not encourage it.

Allow us to dive into the elements of our interpretation of recent news.

 

Fundamentals

The active participation of the central banks on both sides of the Atlantic, through a reduction in rates, promises to stimulate economic activity. Consequently, oil demand will tend to grow more than originally predicted, after adjusting it for the lethargy of the Chinese economy (1.4 MMbpd for 2024).

Meanwhile, our estimate for supply growth, at a net 1.1 MMbpd for this year, did not consider production disruptions like those that have affected Canada with wildfires; this week, the railway system strike will also have repercussions on oil and bitumen production.

Other reductions in production capacity are projected due to delays in some projects, as well as declines due to a lack of investment in other countries such as Mexico, Colombia, and Ecuador. U.S. production remains relatively static, around 13 MMbpd, prior calculations had included a 0.4 MMbpd growth for the year. On the positive side, Argentina has increased its production by nearly 0.2 MMbpd, which was not included in the estimates.

Thus, our estimates of demand and supply, based on the 8 months already elapsed and four forecasted, indicate an adjusted demand of 1.5 MMbpd versus a revised supply increase of just 0.8 MMbpd, or 1.0 MMBPD if the threat of reversing OPEC+ closures materializes.

A good indicator of the under-supplied state of the oil market is represented by the measurement of commercial crude inventories in the United States. This refers to the trend shown over the past few months, during which crude inventories have fallen by more than 30 MMbbl. They remain near the 5-year range minimum.

Geopolitics

Russia's invasion of Ukraine is now approaching two and a half years and has turned into a war between two countries. Meanwhile, Hamas's invasion of Israel will reach its first anniversary in October and has also become an undeclared war between Israel and Iran, including all its terrorist arms operating in the area. Israel has received support from its traditional Western partners, but mainly to prevent the war's extension from affecting the global oil supply.

Due to the relatively minor impact these conflicts have had on oil supply hitherto, the oil market has opted to assign them a low risk of escalation. Thus, the geopolitical risk premium currently exhibited by oil prices is negligible.

In any event, Russia's invasion of Ukraine is now a war being fought on three fronts. In eastern Ukraine, in the Donbas region, in the Crimea region, occupied by the Russians since 2014, and finally in Russia itself, with Ukraine attacking military and oil infrastructure and a surprise ground attack in the Kursk region.

The attack on oil and transportation infrastructure has been the most damaging to Russia's production and refining capacity. But it is the surprise invasion of the Kursk region that seems to have most disoriented Putin and his military forces. The operation, designed to force the Russians to divert forces that were having some success in eastern Ukraine, has turned into a sort of mini-Stalingrad. This is the first time since World War II that Russian territory has been attacked by foreign forces. But this time, and for now, the surprised and cornered ones have been the Russians and not the Wehrmacht (Hitler's armed forces).

The surprise effect has allowed the Ukrainian army to advance more than 25 km into Russian territory and control an area of more than 1,200 km², with about 90 settlements and the control center of the gas pipeline system supplying Eastern Europe. In their advance, the Ukrainian forces pushed the Russian army against the Seim River, whose bridges had previously been bombed. It is estimated that some 2,000 to 3,000 Russian soldiers will have to escape, leaving their equipment behind or surrendering to Ukrainian forces. Coincidentally, near where the Battle of Stalingrad (now Volgograd) occurred, a fuel depot has been burning for days; a similar event is happening at the diesel depot in Proletarsk in the Rostov region. The underlying strategy seems to be to use these territories in negotiations to end the conflict.

In the Middle East conflict, a stalemate has been reached. Israel continues its campaign to eliminate terrorist bases in the Gaza Strip. Hezbollah persists in firing missiles at targets in the Golan Heights; on Sunday, there was a heavy exchange of fire between Hezbollah and Israel, in which Hezbollah launched more than 300 Katiusha missiles and an undetermined number of drones at Israel, while ceasefire negotiations continue in Cairo.

To the south, Yemeni Houthis continue disrupting maritime traffic in the Red Sea and nearby waters of the Gulf of Aden. This week, the tanker MV Sounion, carrying more than 1.1 MMBBLS of Iraqi crude, was attacked with multiple projectiles off the port city of Hodeidah, Yemen. The Sounion is the third Delta Tankers company vessel, based in Athens, to be attacked in the Red Sea this month.

The threat of Iranian retaliation for the assassination of a Hamas leader on its territory remains latent. Any triggering event could alter the unstable balance of the situation, and its consequences would echo throughout the Persian Gulf, while the U.S. is more concerned with its internal issues related to the presidential elections.

Price Behavior

In summary, the week began with strong pessimism, driving Brent Crude prices below $76 per barrel—the lowest price this year. By Wednesday afternoon, however, the market began to change its mood, reacting to declines in crude and product inventories in the U.S. and news from central banks, including the Federal Reserve signaling that the high-interest rate policy might begin to ease. As a result, the oil market emerged from its slump, and between Thursday and Friday, it rebounded, almost erasing the week's losses.

By the close of markets on Friday, August 23, Brent and WTI benchmark were trading at $79.02 and $74.83 per barrel, respectively, with a weekly loss of just 0.8% for Brent Crude and 2% for WTI. The rally continued as markets opened on Monday, with Brent Crude reaching $80 per barrel.

Venezuela

Cour des Miracles

As expected, the Supreme Court of Justice (TSJ) upheld the appeal filed by Nicolás Maduro. It validated the fraud perpetrated by the National Electoral Council (CNE), confirming that Venezuela is a country without an effective separation of public powers.

On August 23, in a public hearing attended by the diplomatic corps, Magistrate Caryslia Rodríguez, President of the Electoral Chamber, read the ruling in favor of Maduro. In her reading of the so-called sentence, Rodríguez stated that the “Court certifies the electoral material without objection” and “validates the results of the July 28, 2024, presidential election issued by the CNE.” According to the magistrate herself, the decision is not subject to appeal, although according to former CNE rector and presidential candidate Enrique Márquez, the ruling can be reviewed by the TSJ's Constitutional Chamber. Of course, there was no mention that the magistrate had been challenged before the ruling was issued, a complaint that should have been resolved before the sentence was issued, even if just to maintain appearances.

The opinions of both Venezuelan legal experts and the reactions of the vast majority of democratic countries were swift. Venezuelan constitutionalists consider the ruling void, citing several reasons: the usurpation of CNE functions (the court has no authority to take up an appeal that is not even recognized), the complete lack of evidence supporting the conclusion, and the magistrate's recusal. 

The regime's most important goal with the July elections, to become a government recognized for its legitimacy, was not achieved. On the contrary, the court's spurious decision has further exposed the fraud, and the regime will continue without the legitimacy it sought to gain. More troubling for the republic's institutions is that the regime has managed to implicate all public powers in this fraud—difficult-to-repair damage in the short term.

Additionally, the persecution and prosecution of opposition leaders, protesters, and those suspected of voting for the opposition have resulted in more than 2,000 political detainees and about 20 deaths. There are also reports of an undetermined number of dismissals at PDVSA and other state institutions for suspicion of voting for Edmundo González Urrutia or having political material on their social media. The Prosecutor General's Office, controlled by the Chavismo regime, has summoned Edmundo González to appear before the Public Ministry in Caracas on Monday, August 26. González will answer for the publication of the electoral records that the opposition used to support its victory in the July 28 election, a strategy aimed at further inflaming the situation. According to the summons, made public by the Prosecutor's Office, the 74-year-old diplomat must respond as part of a criminal investigation into the alleged crimes of “usurpation of functions, forgery of public documents, incitement to disobedience of the laws, computer crimes, conspiracy, and conspiracy to commit a crime.”

The Public Ministry aims to criminalize the publication of the electoral records that the opposition managed to gather on election night, representing more than 80% of the vote count, and which demonstrate the opposition candidate's victory. The CNE has yet to publish the support for the fraudulent announcement of July 28.

In any case, the regime faces an unenviable situation with demands from governments, allies, and adversaries to show the official records; calls to recognize the sovereign's will expressed at the polls and initiate a peaceful transition before January 10; and threats of personal and economic sanctions against officials and entities involved in the fraud. Unofficially, it is known that the U.S. is preparing a list of 60 individuals connected to the fraud, its validation, and the repression, to be sanctioned.

If the situation persists, the result will be that the country will be more isolated than before. Investors will be unwilling to expose themselves to the political risk of operating under a regime that has proven it does not respect the people's will and has no limits in violating human rights. Financial markets will remain closed, and the country's assets abroad may become the target of judicial embargoes by creditors. The regime members' properties abroad and accounts in tax havens could be frozen, as was done in Russia following the invasion of Ukraine.

The economy, of course, will tend to become unbalanced. Already, just three weeks after the election, a nearly 20% gap has opened between the official and parallel dollar markets due to a severe shortage of foreign currency, which will mark the economic performance if the usurpation continues.

Additionally, and more importantly for the country's economy, the future of OFAC licenses is unclear, and their suspension or substantial modification could represent a decline in revenues over the next 18 months of about $6 billion.

Oil Operations

Perhaps the most notable operational news of the week is the appearance of gas availability in the western part of the country, evidenced by gas deliveries to the petrochemical plant on the eastern shore of Lake Maracaibo. The Spanish oil company Repsol is managing the gas logistics in the region, and contrary to popular belief, the available natural gas does not entirely come from the ENI/Repsol license production in Paraguaná but to a large extent from the production of EM PetroQuiriquire, which is generating about 60 million cubic feet of associated gas per day.

Crude production during the week was 826,000 barrels per day, distributed geographically as follows:

 

West:               190,000 (Chevron 86,000)

East:                140,000

Orinoco Belt:   496,000 (Chevron 103,000)

TOTAL:            826,000 (Chevron 189,000)

The national refineries processed 215,000 barrels per day of crude and intermediate products, as several processing plants in Puerto la Cruz are under maintenance. Gasoline production was reduced to 70,000 barrels per day, while diesel production was 74,000 barrels per day, putting pressure on the domestic fuel market.

A hydrocarbon leak was detected at the El Palito refinery, contaminating 28 kilometers of beaches in the state of Falcon.

As we mentioned last week, exports are lagging behind the schedule. By August 23, it is estimated that the month will conclude with an export of around 540,000 barrels per day of crude.

THE COMPLEX RIDDLE OF OIL PRICES

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

 

Week after week, we try to shed some light, obviously in a concise manner, on the events we believe affect the oil market in the short and medium term: Fundamentals, macroeconomics, geopolitics, forecasts, and even meteorological phenomena. All these variables intertwine with the interests of market players, moving prices in different directions, in what we generically call volatility.

This price fluctuation or volatility is a fundamental characteristic of markets, which encourages the buying and selling of respective values, whether in terms of the physical market or the form of contracts and their derivatives in the futures market. A good part of these transactions are promoted and executed by short-term traders, using technical analysis of asset behavior and digital algorithms that can make transactions in fractions of a second. In this way, they limit their risk of loss and use market volatility to obtain short-term gains. Although these operations can benefit the market by adding liquidity, they can amplify and even manipulate fluctuations beyond the fundamentals, resulting in undesired effects for economies and consumers that depend on oil.

Depending on the interest pursued, whether participating in the market to obtain short-term gains or for a planned position as an energy consumer or producer, it is valuable to try to understand market trends in the medium/long term.

In this context, this week we will analyze the behavior of the oil market since the end of 2019, pre-pandemic values, to try to estimate future trends, excluding the background noise measured in terms of volatility.

Undoubtedly, COVID-19 was the phenomenon that affected the oil market most forcefully in recent decades. A decline in demand during March 2020 of more than 20 MMbpd generated profound havoc in the market, some crude oils instantly became uneconomical due to the brutal price drop (see graph). To rescue some vestige of balance, OPEC+, responding to the gravity of the situation, closed 7 MMBPD of production, thanks to the collaborative spirit of its members and their economic needs.

Source: EIA

Almost immediately, and as a mechanism to preserve the remaining cash flow of the industry, investments in Exploration and Production were reduced by 30% compared to levels that were already depressed by OPEC's strategy change in 2016: reconquering markets lost to “Shale Oil” and abandoning price defense.

This collapse in the industry and its collateral effects defined the price trend for the next almost 2 years: an upward trend determined by strict control of supply by OPEC+, while post-pandemic demand recovered.

This period led to the so-called “Energy Crisis” of late 2021, when markets realized that the abrupt reductions in investments in oil upstream had severely reduced the ability to respond to incremental demand, not only from OPEC+ but from the whole world. The rebound in demand, faster than expected, could not be satisfied with the available supply, which marked the beginning of a new stage of instability, with abrupt price increases, pushed to extremes by an unexpected event: the Russian invasion of Ukraine in February 2022. Added to this was the bet that some countries had made to migrate to wind and solar energies, which proved less reliable than expected, boosting demand for gas and coal.

The invasion, as is well known, generated strong global polarization and a reordering of the oil and gas market, driven by sanctions on destinations and transport of Russian hydrocarbons, which took most of 2022.

At the beginning of 2023, a new stage in the oil market began. It was perceived that the Russian/Ukrainian geopolitical problem, which affected the whole world in one way or another, did not represent an imminent risk to the supply of hydrocarbons. From that date until today, we have gone through a period of relative stability, in which the price of Brent Crude has remained at an average slightly above $80/BBL (see graph). The volatility during this period may be attributed to the issues inherent to high inflation coming from the energy crisis and post-pandemic financial stimuli. In turn, this has led Central Banks to measures to cool the economy via interest rate increases, which transforms into fear of a recession. We will not mention the issues of the Chinese economy, important as they are for demand, so as not to complicate the analysis further.

As if all the above were not enough, 2024 brought with it the risk of escalation of the war taking place in the Middle East, triggered by attacks on Israel by groups financed by the Islamic Republic of Iran in October 2023.

The fact that the average oil price has remained relatively constant indicates that neither the much-talked-about recession nor the domino effect of the Middle East war has a high probability of materializing in the short term, or at least that's what market players think.

Thus, trying to project prices for the following months is an exercise that may seem adventurous, but we will still try to identify the signposts on the road. To do so, we will take our data and weigh the projection of the fundamentals published by specialized institutions, which, naturally, have their political agenda.

Fundamentals

On the supply side, we can estimate growth from the announced return of barrels closed by OPEC+, to which new production from Saudi Arabia, Iraq, United Arab Emirates, and Oman would be added. Production growth from Canada, Brazil, Guyana/Suriname,  African offshore, and other countries will contribute additional volumes to world supply.

For 2024, we estimate a growth of 1.1 MMbpd, net of decline. Similarly, we estimate that for 2025 the generation of new production potential will be 1.4 MMBPD net of natural decline. It remains to be understood what the role of Argentina and Venezuela will be; their contribution to supply depends exclusively on political developments in those countries. Supply should grow in the years following 2025 in net volumes between 1.2 and 1.4 MMbpd if demand or price conditions do not change.

We estimate crude oil demand growth at 1.8 MMBPD for 2024 and 1.6 MMBPD for 2025, stabilizing at 1.4 MMBPD during subsequent years. It is important to note that it is in the projections of demand where there are more unknowns. The political objectives of the various agencies (OPEC, IEA, EIA, and various consultants) are reflected in their conflicting demand forecasts.

So, for 2025 to 2027, we estimate a precarious Demand/Supply balance, which may result in a relatively stable average price of around $82-83/BBL in terms of Brent Crude. However, unexpected events, such as the restriction of passage to oil tankers through the Strait of Hormuz or a significant recession, could change these forecasts.

Price Behavior

If we focus on shorter-term events, it was a busy week for oil prices. Markets opened the week higher due to reduced probabilities of recession and the conviction that better indices related to inflation control would bring a reduction in interest rates by the Federal Reserve; the discussion has been focused on the size of the adjustment (50 or 25 basis points).

 

The announcement by the Energy Information Administration (EIA) of a slight increase in commercial crude inventories (opposite to the announcements of the American Petroleum Institute: a fall of 5.0 MMbbls), added to the apparent slowdown in U.S. manufacturing activity and the measured attitude shown by Iran, to avoid damaging the delicate ceasefire conversations in Doha, reversed the upward trend. By the end of the week, the weekly gains were erased, leaving prices at the levels where they had started.

Thus, at the close of markets on Friday, August 16, the benchmark Brent and WTI crude oils were trading at $79.68/bbl and $76.65, respectively, almost no change from the previous week.

 

VENEZUELA

The Regime in its Labyrinth.

The electoral results in Venezuela continue to occupy headlines in the world and regional press. At the OAS, in a second attempt to agree on a common position on Venezuela, the representatives of Uruguay and Peru took center stage. The two diplomats expressed their certainty about González Urrutia's victory. The weight of the Carter Center report, the report from UN experts, which Secretary-General António Guterres surprisingly published, continues to undermine the political foundations of the regime. Furthermore, the digitized records of more than 80% of the voting tables, is glaring evidence of the regime's attempted fraud.

The OAS dealt an important blow to the Chavista regime by approving a consensus this Friday demanding Caracas to stop the repression and for Venezuelan authorities to publish “expeditiously” the records of the past July 28 elections in that country. In addition, the European Union and twenty-two other countries, including Spain, all present at the inauguration of the President of the Dominican Republic, are demanding democratic transparency.

Meanwhile, the triad of regional presidents, Lula, Petro, and AMLO, cannot find an acceptable way out of the political labyrinth in which the actions of Maduro's regime have caged them.

The opposition leadership rejects any suggestion of repeating elections. Rather, it stresses that national effort and international pressure should focus on recognizing the people's mandate and negotiating a peaceful transition before January 10. The leadership indicates that negotiations should seek to guarantee political and personal security for those involved and allow for the country's governability and recovery starting from the beginning of the new presidential term.

On the economic aspect, it comes as no surprise that public spending in July was very high; and, due to post-election political instability, it continues to be high. The last thing the regime wants is to cause discontent in its dwindling support base. This increase was possible thanks to high levels of revenue collection by SENIAT (+ 1600 MM$ at the official rate). However, a shortage of foreign currency limited intervention in the exchange market, so in August the parallel rate began to show a growing gap with the official dollar (+14.3%). Until now, the availability of foreign currency had been underpinned by funds obtained from negotiations of Petrocaribe debts (like Haiti), but current conditions are not suitable for obtaining an OFAC license authorizing this type of transaction with other debtors.

 

Political instability and different pressure and mediation mechanisms will likely require months to reach results. Meanwhile, investors and traders prefer to wait for a better definition of Venezuela's near future, which will reduce activity or slow it down over time. The combination of a regime accused of fraud and also defaulting is an unattractive combination for honest private investment.

Oil operations

Production remained at the levels of last week's close, 828 Mbpd, geographically distributed as follows:

• West 190 (Chevron 86)

• East 140

• Orinoco Belt 498 (Chevron 104)

• TOTAL 828 (Chevron 190)

Production handled by Chevron has already reached 190 Mbpd, including production resulting from the drilling campaign in PetroIndependencia, where well number 11 is already being drilled. If the incorporation of the 2nd rig, scheduled for September, continues, production at the end of the year could exceed the plan of 194 Mbpd. In the coming weeks, a shortage of diluent could develop that could affect production in the belt not managed by Chevron.

National refineries processed 244 Mbpd of crude oil and intermediate products, still well below their nominal capacity. Gasoline production reached 78 Mbpd, while diesel production was 79 Mbpd. Despite lower economic activity since the elections, gasoline continues to be limited at service stations.

For August, the crude export program indicates that about 670 Mbpd will be dispatched from national terminals, but mid-month figures confirm that exports are delayed, possibly due to a lack of on-spec crude at the terminals. In the first half of the month, 242 Mbpd of crude has been dispatched to the U.S., 200 Mbpd to China, and 65 Mbpd to Europe.

OIL PRICES REBOUND AS RECESSION FEARS DIMINISH

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

   

 

Although the week began with strong liquidation of position  and a general fall in financial markets, the emergence of signals reinforced tight crude supply and favorable economic indicators. This weakened the perception of an imminent recession projected during the first days of August and revived the oil market. Brent Crude prices approached $80/bbl again, showing a weekly gain after four consecutive weeks of losses. And as markets closely follow the threat of military retaliation from Iran against Israel, geopolitics has also added some bullish momentum. Ongoing tensions in the Middle East and reduced unemployment numbers in the U.S. countered concerns about slowing economic growth and weak demand.

 

FUNDAMENTALS

 

The oil market received an initial boost midweek with the publication of crude and product inventories by the Energy Information Administration (EIA), showing the sixth consecutive weekly decline. However, this time, gasoline inventories did not follow the crude trend. According to EIA data, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.7 million barrels from the previous week. At 429.3 million barrels, crude oil inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.3 million barrels from last week and are about 2% below the five-year average for this time of year. The accumulation of product inventories suggests that travel demand was cooling as summer was ending.

 

On the other hand, U.S. production temporarily emerged from its lethargy and increased by about 100 MBPD, likely a result of the optimization of joint operations between ExxonMobil / Pioneer and Occidental / CrownRock, following their respective merger closures. Baker Hughes also reported a slight increase (+2) in U.S. drilling activity, offset by a decrease (-23) in active units in the rest of the world.

 

For its part, the U.S. Department of Energy (DOE) announced that it will request bids to purchase an additional 3.5 million barrels of crude for the Strategic Petroleum Reserve (SPR). This will execute the administration's strategy to continue with purchase requests when oil prices fall to $79 per barrel or less.

 

The number of Americans filing new unemployment benefit claims fell more than expected last week, calming fears that the labor market is cooling and reinforcing the idea, for now, that it is still on the path of a “soft landing”, at worst. Initial claims for state unemployment benefits fell by 17,000 to a seasonally adjusted 233,000 in the week ending August 3, the Department of Labor (DOL) said on Thursday, the largest drop in about 11 months – although it remains the highest figure since 2021.

 

In the market environment we have tried to summarize, sentiment on oil prices remains vulnerable to fears that a recession in the U.S. in the coming months will affect oil demand. A series of weak labor data and U.S. purchasing managers' index readings reinforced this notion during the week, causing a fall in most commodity markets. To some extent, the massive sell-off was triggered by operations of Hedge Funds and other money managers, who turned pessimistic regarding commodity futures for the first time since 2016. However, in a week of extreme volatility, markets rebounded strongly towards the end, despite the questions that flooded the markets.

 

In other latitudes, specifically Libya, the state oil company declared force majeure on exports, 300 Mbpd of crude from the Sharara field, in the west of that country. This followed what appears to be an orchestrated takeover by the army commanded by the son of Khalifa Haftar, head of the Benghazi Government. This reduction in Libya's production, along with cuts in Russia, Iraq, Nigeria, and Mexico, all OPEC+ countries, resulted in an average production decrease of 400 MBPD compared to early July.

 

GEOPOLITICS

 

Tensions in the Middle East increase and decrease as negotiations for a ceasefire are announced only to be suspended by warlike activities. Another hope of reaching an agreement in Qatar, between Israel and Hamas, seems to have been defused with the return of Houthi attacks in the Red Sea.

 

A tanker, the Delta Blue, flying the Liberian flag, reported four attacks off the port of Mokha, Yemen, in 24 hours. The captain was able to confirm that the crew and ship were safe and continuing their journey.

 

The market has been attentive to possible retaliation by Hamas, Hezbollah, and Iran for the deaths of terrorist group leaders; Iran's direct involvement, beyond its support for those armed groups, is due to the Hamas leader being killed on Iranian territory. The U.S. government has sent a larger contingent of warships to the area and has been in constant contact with allies and partners in the region. There is a “clear consensus” that no one should escalate the situation, Secretary of State Antony Blinken said on Tuesday.

 

Fears of a wider conflict in the region have offered some support to crude in recent sessions, as traders fear that a broader war in the Middle East could disrupt supplies. But, at the same time, during the week, the risk premium rose only marginally, as the market trusts that the parties are not willing to escalate the situation. However, an Israeli attack on Gaza, to what Hamas describes as a hospital converted into a shelter for more than 100 refugees, with its mosque, but which Israel considers an operational center for terrorists concentrated in the mosque, put the area on alert again.

 

In Russia's war against Ukraine, in a combination of military skill and total surprise, Ukraine invaded Russian territory in the Kursk Oblast region. Hundreds of Ukrainian troops, backed by tanks and protected by air defenses, were advancing. Russian soldiers were surrendering, and hundreds of Russian civilians in and around the city of Sudzha were fleeing with everything they could carry. It was not only a propaganda blow against Putin but also a bold and counterintuitive military action, which an analyst describes as “doing the least obvious.”

 

Ukrainian forces encountered little resistance, and with Russian communications in the region blocked by effective electronic warfare, Ukrainian brigades advanced more than 20 kilometers (ca. 12 mi miles) into Kursk Oblast in the first two days of the operation. By the end of Friday, the Russians had lost control of at least 250 square kilometers of territory. This is an area of some strategic importance, as a natural gas transfer center through which Russia supplies substantial volumes of natural gas to Europe came under Ukrainian control.

 

If Ukraine manages to consolidate its control over this strip in Kursk Oblast, it could use it as a bargaining chip in negotiating a possible ceasefire.

 

PRICE BEHAVIOR

 

Naturally, commodities continue to be at the mercy of macroeconomics, and oil prices began to show gains midweek after the announcement of U.S. inventories and the S&P 500 having its best day in years on Thursday, advancing 2.3%. Stocks in U.S. markets took off on Thursday after a series of surprisingly good news about weekly initial unemployment claims hinted at a better-than-expected U.S. labor market.

 

Energy markets are on a tightrope due to the threat of imminent military activity in the Middle East and the escalation of confrontations between Russia and Ukraine. This has raised European natural gas prices which could have a domino effect on oil in case of pipeline disruptions.

 

Thus, at the close of markets on Friday, August 9, Brent and WTI benchmark crudes were trading at $79.66/bbl and $76.84/bbl, a gain of approximately 3.7% compared to the close of the previous week.

 

 

VENEZUELA

A Regime with Few Friends

 

Just over two weeks after the Venezuelan presidential elections were held and one of the most monumental frauds in the region's electoral history was perpetrated, the Maduro regime continues to increase repression to maintain power at all costs. Despite calls from allies and adversaries to make official CNE election records public, these have not been formally released yet, reinforcing evidence of the opposition's victory and cornering the regime.

 

80% of the voting tallies issued by CNE machines on voting day are in the hands of the opposition and show a difference of more than 4 million votes in favor of González Urrutia. As if that weren't enough, the information is published and protected from potential cyber-attacks. The regime only follows the strategy of shouting louder, that is, repressing the opposition and social leaders.

 

The Carter Center, an NGO that in the past has endorsed the regime's electoral processes in Venezuela, has declared in successive statements that: 1) the elections were not democratic, 2) there was no hacking of data transmission, and that the tallies were properly printed, and finally, 3) that Edmundo González had won the elections. The U.S. and the European Union seem to have reached the same conclusion, now it remains to be seen if it results in a firmer position from them.

 

The regime's natural allies in the region, Mexico, Colombia, and Brazil, continue to avoid taking a firm position on the electoral events in Venezuela and have sought to buy time. President Lula, probably accompanied by President Petro and President López Obrador, has warned Maduro, given the overwhelming evidence in favor of González Urrutia, that a ruling of Venezuela's Supreme Tribunal on the elections would not be sufficient. He has urged Maduro, once again, to present the election records. If, at this point, the regime was to belatedly present voting tallies showing Maduro's triumph, they would hardly be credible. There is also speculation about a meeting between the four presidents in question, but it is difficult to estimate the usefulness of such a meeting.

 

There are only two imaginable scenarios. The first scenario is one in which, against all odds and with the support of the military leadership, Maduro remains in power. A scenario of extreme isolation, as even his old allies in the Puebla Group, will find it difficult to stay close to a proven usurper, although the case of Nicaragua is not precisely a hopeful precedent.

 

The other scenario consists of a round of negotiations for a transition that provides certain personal and political guarantees to regime members, given international and national pressures, although the latter is diminished by the regime’s repression. The Biden Administration, after an initially clear position on the fraud, seems to have retreated amid confusing and ambiguous statements.

 

The economic situation doesn't help the regime either, as the fall in oil exports in July and early August and lower crude prices reduced hydrocarbon sales revenues by 20% compared to the estimated amount. This reduction, coupled with inflationary pressures repressed after the elections, is an unattractive combination for what will come in terms of exchange rate, inflation, and consumption.

 

Oil Operations

 

Production has not been affected by the country's political turmoil. On the contrary, in the newly extended PetroQuiriquire block on the eastern coast of Lake Maracaibo, operated by Repsol, deferred production was significantly reduced, so that the national average production for this last week was 826 MBPD, geographically distributed as follows:

 

• West                189 (Chevron 85)

• East                 140

• Orinoco Belt     497 (Chevron 103)

• TOTAL             823 (Chevron 188)

 

Chevron's production reached 188 MBPD, the highest since OFAC granted it License 41.

 

National refineries processed 242 MBPD of crude and intermediate products, well below their nominal capacity. Gasoline production reached 77 MBPD, while diesel production was 80 MBPD. Despite the abnormality in the country, or perhaps because of it, gasoline continues to be limited at service stations.

 

For August, the crude export program indicates that about 670 MBPD will be dispatched from national terminals, however, the first days of the month suggest significantly lower exports.

 

CITGO

 

CITGO Petroleum Corporation, PDVSA's subsidiary in the U.S., has reported mixed financial results for the second quarter of 2024, reflecting the operational and market challenges facing the refining industry.

 

According to the company, its focus during this period was on plant and facility improvement and maintenance. The company carried out major turnaround work at the Lake Charles (Louisiana) and Corpus Christi (Texas) refineries, as well as routine spring maintenance at the Lemont (Illinois) refinery: a total of nine major maintenances at the three refineries. These activities, costly and with short-term impact on production, are crucial to ensure long-term operational efficiency and safety: $228 million was disbursed on plant maintenance and catalyst changes.

 

Naturally, these renovations affected production figures. The refineries operated at 84% of their capacity (95% in the first quarter), processing 720,000 barrels per day (830,000 barrels per day in the first quarter), of which 678,000 were crude.

 

In addition to the volume impact of the turnarounds, market conditions were also adverse. Demand for refined products contracted and refining margins were not favorable. For the second quarter, the Gulf Coast refining margin decreased by 17.07%, from $19.51 per barrel in the first quarter to $16.18 per barrel. On the other hand, the Chicago refining margin increased by 11.31%, rising from $13.88 per barrel in the first quarter to $15.45 per barrel in the second quarter.

 

Financial figures reflected these operational and market challenges. CITGO reports a net loss of $25 million, with an EBITDA of $162 million and an Adjusted EBITDA of $149 million.

 

Despite these challenges, CITGO reported a solid financial position. The second quarter closed with a total liquidity of $3,830 million, which includes available cash and a $500 million credit line. This represents a decrease of $740 million from the previous quarter, mainly due to maintenance expenses. On the other hand, the company reports that it did not make dividend payments and had a debt of $2,980 million at the end of the quarter.

 

In its commercial activity, the company also reported an increase of 76 new service stations under the CITGO brand; the largest increase in two decades.

 

In the ongoing saga of the auction of shares of CITGO Petroleum's parent company (PDV Holding), Judge Leonard Stark agreed to extend the bid evaluation period. The special master in charge of the auction, Robert Pincus, requested three additional weeks to finalize an analysis of the bids submitted in June and establish the terms for the sale of PDV Holding shares, whose sole asset is the Houston-based company. The court set August 22 to reveal its recommendation on the bids, and October 15 as the deadline to announce a winner. This is the second time Judge Leonard Stark has delayed the auction process at Pincus's request, showing how complex and unprecedented the operation is.

 

 

This Monday, August 12, OFAC published the renewal of General License 5 (LG 5P) until November 12, 2024. The license prevents holders of the bond known as PDVSA 2020 from executing the guarantee associated with this contentious PDVSA debt. It should be noted that an annulment case is pending against these bonds and their guarantee in a New York court (50.1% of CITGO Holding Inc. shares, a subsidiary of PDV Holding and parent company of CITGO Petroleum).

THE OIL MARKET CLINGS TO PESSIMISM

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

   

Crude oil and product inventories continued to fall in the U.S., but its economy added fewer jobs than expected. OPEC+ failed to surprise markets this week, maintaining its previously announced policy. Worrying news originates from Asia about the Chinese economy and the 5.8% collapse of the Nikkei index in Japan in response to the interest rate hike by the Central Bank.

Given this unfavorable news, global financial markets had a complex and volatile round last Friday. The main Wall Street indices plummeted with the Nasdaq, with its high-tech component, leading the way and in the process, dragging down other markets such as oil.

The particularity of each market was evidenced by the actions taken by the major central banks of the developed world, which moved interest rates in different directions this week, although those decisions may be short-lived. The Bank of Japan initiated the action on Wednesday by raising rates. Then came the Federal Reserve's decision to maintain its rates, but with signals that a cut could occur in September, followed on Thursday by the Bank of England's first reduction since 2020. Most major central bankers are shifting their focus towards preserving economic growth and employment, while Japan once again becomes an atypical case.

On the other hand, Iran and its terrorist arms have not, so far, carried out reprisals for the recent deaths of Hamas and Hezbollah leaders. This has instilled in the market a feeling that the sudden escalation of geopolitical tensions, after Israel's attack in Lebanon and the assassination of Hamas leader Ismail Haniyeh in Iran, might not materialize, which could have triggered oil prices.

This temporary sense of relief, coupled with the ongoing concerns about oil demand, caused prices to collapse during the week. The downward trend continued on Friday with a drop of nearly $2/BBL, another consecutive weekly fall, the fourth.

FUNDAMENTALS Wall Street indices collapsed by up to 2.8% during the week, dragged down by tech stocks, which lost up to 26%, led by giants Intel and Amazon. The U.S. Department of Labor published its statistics for July, reporting that fewer jobs were created than expected. Indeed, U.S. hiring slowed dramatically last month in the face of high-interest rates, adding a mere 114,000 jobs vs. 179,000 in June. The unemployment rate rose to 4.3%. These results led some analysts to opine that the Federal Reserve's (FED) delay in initiating rate cuts could push the U.S. economy into a recession.

On the physical oil market side, crude, and product inventories have been declining recently. Data published by the Energy Information Administration (EIA) showed that U.S. commercial crude oil inventories retreated for the fifth consecutive week; the fall was 3.436 million barrels, exceeding expectations that the drop would be narrower: 1 to 2 million.

Meanwhile, U.S. gasoline inventories also fell to their lowest level of the year. Refinery problems further reduced domestic supply, while demand remained above the important 9 million bpd mark, a healthy summer consumption. According to the EIA, the contraction in gasoline inventories was 3.67 million barrels, 1.6%.

U.S. crude production continues at around 13 million bpd, with no signs that operators have decided to increase their efforts to boost production. This week, according to Baker Hughes, the change in drilling activity in the U.S. was again negative, 3 units went out of service, although two correspond to natural gas activities. At the international level, Baker Hughes reports a fall of 23 units in the week (-27 versus the previous year).

Additionally, the delay in the delivery of two Floating Production, Storage, and Offloading (FPSO) units, one in the Gulf of Mexico and another in Brazil, as well as the forest fires in Canada and the high probability of hurricanes in the Gulf of Mexico, might reduce the available supply during the year.

Otherwise, Thursday's meeting of the OPEC+ monitoring committee made no important policy recommendations, although it left the door open regarding the schedule for undoing rate cuts.

During this storm in financial markets, supply and demand fundamentals, once the most valued indicators in the oil market, have been overshadowed by the market's valuation of economic forecasts and their potential impact on oil demand.

On the other hand, although it involves relatively minor volumes, political instability in Venezuela could cause a reduction in its exports.

GEOPOLITICS 

As with the fundamentals of the oil industry, the market shows indifference to events in the Middle East, which could lead to extended conflict in the region. The market’s reaction seems to arise from Iran’s lack of response, for the moment, to the Israeli incursions; despite threats from Ayatollah Ali Khamenei to act in retaliation for the death that occurred in Tehran.

The most forceful event this week has been the assassination of Ismail Haniyeh in Iran, a day after a high-ranking military figure from Hezbollah also died in an Israeli attack in Beirut. Early indications suggest that Haniyeh and his bodyguards died after a rocket hit the house where he was staying in Tehran. Israel typically does not comment on its operations abroad but this attack seems to have its signature, and, therefore, all eyes inevitably focus on them: it is believed that Israeli planes fired rockets from outside Iranian airspace. The U.S. has ordered the deployment of additional warships and fighter planes to the Middle East, supporting Israel, amid rising tensions in the region.

While the attack is being investigated, the political consequences are in sight. The most obvious is the damage to the fragile efforts to negotiate a ceasefire in Gaza. Ismail Haniyeh was not involved in day-to-day events in Gaza, but as the leader of Hamas, he was a critical interlocutor in negotiations mediated by Qatar, the United States, and Egypt. U.S. officials had recently suggested that ceasefire negotiations could soon succeed, although that same suggestion has been announced several times without any success.

On the front of the war between Russia and Ukraine, drone and missile attacks continue from both armies. The most relevant attack, from an oil perspective, is the night attack on the Russian airfield of Morózovsk and various oil depots and fuel storage facilities in the Russian regions of Belgorod, Kursk, and Rostov. This offensive continues to undermine Russia's ability to export oil and fuels.

Meanwhile, in the U.S., Kamala Harris secured enough votes to become the Democratic presidential candidate and announced that, in the coming days, she will make public her selection for vice president. The current vice president will be closely watched regarding her performance in handling situations that the U.S. must confront with an outgoing president and a vice president with a relatively short political career.

PRICE BEHAVIOR 

The beginning of August has been forceful for oil prices: they saw 6% of their value evaporate in the few days of the new month.

As detailed in our analysis of the fundamentals, the oil market has reacted to variables that threaten a fall in demand, mainly due to the deterioration of economic indicators and its interpretation of relative geopolitical calm. The oil market's perception ignored inventory reductions, lower global production forecasts, as well as threats of an escalation of conflicts in the Middle East.

As such, the benchmark crude oils Brent and WTI, at market close on Friday, August 2, were trading at $76.81/bbl and $73.52/bbl, respectively, another week of deterioration in oil prices.

 

VENEZUELA

Venezuela Fights On

As we anticipated in our last issue, the National Electoral Council (CNE) offered the first bulletin with the results of the presidential elections in Venezuela in the early morning of Monday, July 29. Elvis Amoroso, president of the CNE, reported that, with 80% of the votes counted, Nicolás Maduro had been elected as president of the Republic, defeating the opposition candidate, Ambassador González Urrutia. Within a few hours, in a rush and without delay, and without fulfilling the required legal extremes, the CNE proclaimed Maduro as president-elect.

 

The opposition's reaction was immediate, describing the CNE's actions as a gigantic fraud. Serious international observers were quick to reflect their doubts and astonishment regarding the veracity of the announced result. In record time, the opposition, to the regime's surprise, began a process of publishing the electoral records generated at the voting centers, which attest to the opposition's overwhelming victory and evidenced an electoral fraud of historical proportions. The electoral records shared so far (80%) leave no room for changes in the results, due to the abysmal difference between the candidates. The opposition's victory is so overwhelming that several countries, including the U.S., have already recognized Edmundo González Urrutia as the winner of the July 28 election.

The Carter Center, the only international observer authorized by the regime, promptly withdrew from Venezuela due to security concerns, later confirming that the process could not be qualified as democratic. International authorities agree with the opposition in demanding that the CNE must show the original records from each polling station, which to date has not occurred.

Under the pretext of constitutional protection, the regime turned to the Supreme Court of Justice (TSJ) to try to give a legal veneer to the fraud and bypass the CNE's obligation to comply with its duty to publish electoral data. The regime's control over all institutions and powers, including the CNE and TSJ, is widely known, so little can be expected from this instance, which equally has no constitutional powers to address the issue.

Protests in the streets became widespread, and the regime opted to use repression and persecution of opposition leaders. In particular, it dedicated itself to detaining polling station witnesses without any judicial order, probably to extract information from them or to use forced statements to dismantle the case of the opposition's victory. The National Guard and police attacked the gatherings with tear gas and by firing pellets at protesters, with a tragic result of at least 11 murders and 1,101 detainees (according to Foro Penal), including two minors.

The prosecutor's office lashed out at Edmundo González and María Corina Machado, accusing them of participating in the hacking of the CNE's transmission system, a hack that never existed, according to international experts. In any event, María Corina Machado is very active, but in “safekeeping”. This Sunday, the opposition called for marches throughout the country and abroad, which turned out to be massive. It's likely that Machado, who has proven to be a skillful political strategist, will surprise the regime again in the days to come.

The regime looks cornered, having proven the fraud they are trying to establish. However, for now, they have the support of the high military command and non-democratic friendly countries such as Cuba, Nicaragua, Iran, and Russia, and the suspicious ambiguity of Brazil, Mexico, and Colombia.

If they get away with it, the regime will face greater isolation than before the relaxation of U.S. sanctions. The U.S. and Europe could impose new sanctions against those involved in the fraud, and possibly against their sources of funding, from which the oil industry does not escape. Judging by the rumors circulating the oil lobby in the U.S., not even Chevron feels immune to the events.

In principle, the continuation of projects under OFAC licenses, if the electoral fraud is consolidated, will be negatively impacted by the U.S. government decisions. Furthermore, the foreign oil companies may decide not to further expose themselves to the growing country risk. All of the above will shake down oil revenues but would benefit the regime's acolytes who feed off the shadow transactions of crude oil and product sales.

Oil Operations

Regarding production activity, in the Boscán field, in the west of the country, about 12 wells were incorporated into production after improvements in their artificial lift system. In the extended Block of PetroQuiriquire, operated by Repsol, several inactive wells were put online. Drilling activity in the country remains at 4 drilling units.

The week's production averaged 823 Mbpd, geographically distributed as follows:

• West                          186 (Chevron 85)

• East                            141

• Orinoco Belt              496 (Chevron 102)

• TOTAL                      823 (Chevron 187)

 

With this level of production during the last week, the month of July averaged 812 Mbpd, of which 180 Mbpd correspond to Chevron.

The refineries processed 235 Mbpd of crude oil and intermediate products. Gasoline production reached 72 Mbpd, while diesel production remained at 78 Mbpd. Long queues were observed at service stations during the days leading up to the elections. However, after the elections, the streets were desolate with low attendance at service stations.

July closed with crude oil exports of 540 Mbpd, almost 100 Mbpd below what was programmed, possibly the complex situation of the pre-and post-election days have reduced loading operations at the terminals. Only exports to the U.S. maintained a high level of 242 Mbpd: with 90 Mbpd of Boscán, 84 Mbpd of Hamaca crude, and 68 Mbpd of Merey 16 crude.

China received 133 Mbpd, India 114 Mbpd, Spain 34 Mbpd, and Cuba 17 Mbpd. The export of residual fuel was 63 Mbpd.