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.
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