Tuesday, August 06, 2024

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.

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