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.
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