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).
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