M. Juan Szabo and Luis A. Pacheco
Trying to understand the movement of oil prices is, at best, a thankless task. Just as one arrives at a reasonable explanation of the situation, a change in conditions, even if insignificant, causes the market to abandon the sentiment it considered logical only days before and take a new direction, if only temporarily.
The downward price trend of recent weeks, predicated on an oversupply versus a demand presumed to be in recession, was not as robust as thought. It was enough for some circumstantial situations with supply to emerge for the market to migrate to a moment of euphoria.
Hurricane Francine, a tropical storm of moderate intensity, caused the preventive closure of offshore oil and gas production platforms off the coast of Louisiana, USA. In Libya, part of its production remains closed due to unresolved differences between factions vying for control of oil revenue, despite UN mediation. As has happened recently, exaggerated overreaction is how the market reflects new information, which, in the end, is the nature of the oil business – some would say it's how business is done in a speculative market.
Some reactions turn out to be paradoxical. At the recent Asia Pacific Petroleum Conference (APPEC), held in Singapore, in an atmosphere of generalized pessimism, Goldman Sachs stated that prices could fall even further, even to $60/BBL. Let's remember that this was the same investment bank that was forecasting prices reaching $100/BBL before the end of the year. We find it difficult to identify the changes that justify such a change of opinion, which is also evident at the slightest supply stumble. But as we just mentioned, that is the nature of the oil market.
However, now that China's pessimism is reaching its apparent point of maximum concern, it would take more than supply interruptions to raise Brent above its current price of $72/BBL. That “something more,” in our opinion, is, in the first instance, an increase in supply, both from OPEP+ and producers outside the OPEC sphere, lower than the varied forecasts of the different agencies IEA, EIA, and OPEC.
Fundamentals
Concerns about the safety of oil facilities in the Gulf of Mexico, particularly off the coast of Louisiana, led operators to evacuate offshore platforms, reducing oil and gas production, and refineries in the area minimized their runs.
As a result, seven hundred thousand barrels per day of oil and gas equivalent (700,000 boed) were shut down, about half of that volume corresponding to oil, albeit only for a few days. Likewise, refineries located in the projected path of the hurricane reduced their run to operational minimums but are already returning to normal. Phillips66 (NYSE: PSX) and CITGO, in Lake Charles, Louisiana, reported no damage.
U.S. crude production for the week reflects this preventive shutdown; the weekly average barely shows 12.9 million barrels per day (MMbpd). The decreasing trend in rig activity, which had become a constant, changed course this week. According to Baker Hughes, eight rigs were activated, mostly in natural gas areas or in conventional crude development. This week, commercial crude inventories, according to the Energy Information Administration (EIA) report, showed an increase of 800,000 barrels, an insignificant figure when compared to the estimated increase by analysts of 2.0 million barrels; individual weekly numbers are most relevant when viewed as part of the trend. Gasoline inventories increased by 2.3 million barrels, in line with seasonality.
Regarding OPEC+ production, recent figures indicate a reduction of about 500,000 barrels per day (Mbpd) compared to July; it includes cuts of 300 Mbpd in Libya, 100 Mbpd in Iraq, 50 Mbpd in Saudi Arabia, and 30 Mbpd in Russia. In Libya's case, although the production shutdown is larger, the accounting of OPEC's secondary sources uses reported shipments as a calculation basis, which includes inventory use. OPEC+'s decision to postpone openings of shut-in production until the end of the year further reduces the crude supplied to the market. In any case, as we have mentioned on several occasions, the idle capacity maintained in OPEC+ accounting may have been eroded by the decline inherent in using that capacity instead of investing in new capacity.
On the demand side, China dominates the landscape. The country is going through an economic slowdown that seems to be prolonged, affecting Chinese oil demand, and to enhance the effect, it coincides with the ongoing decarbonization of its transport fleet. Paradoxically, the Chinese government uses these periods of relatively low prices to bolster its strategic reserves, adding some dynamism to its demand: China's crude oil imports increased to a one-year high of 11.56 million bpd in August, recovering from a two-year low in July.
The country's petrochemical sector, an important area for oil demand as it is not subject to short and medium-term replacements, could be threatened if growing trade tensions with the West impact exports.
In sum, it is a market where the fundamental forces of the industry compete in a market with light feet and short-term vision.
Geopolitics
The development of the Israel vs. Hamas war resembles a chess game without a clock. Predicting events and their chronology is practically impossible. Perhaps that's why the contest sometimes looks stagnant and without collateral effects on the rest of the region, with the critical exception of continuous human casualties. This week, there wasn't even new activity from the Houthis of Yemen in the Red Sea, although surprisingly, the rebels launched a new technology missile into Israeli territory, which seems to have circumvented the country's sophisticated air defense.
Meanwhile, the Ukraine-Russia war involves increasingly more territory and more countries and tends to affect the energy market marginally due to the destruction of oil and electrical infrastructure in both countries.
Thus, the geopolitical risk premium that the market would normally assign to oil prices when there are conflicts with the probability of an escalation that interrupts oil activities is almost non-existent for now. One must presume that the market factors in OPEC+'s idle production capacity and weak demand are protection against the eventuality of supply problems, a risky bet.
Price Behavior
The price of Brent Crude has lost around 13% of its value in the last 20 days due to a mix of realities and feedback between the market's pessimistic sentiment and the application of the popular Murphy's Law as an interpretative mechanism for each new piece of news that afflicts crude demand, particularly China's economic situation: “If something can go wrong, it will go wrong.”
Last Tuesday, oil prices continued their downward dynamic, falling to reach the lowest levels of the year. However, the interpretation that supply interruptions could wreak havoc on the short-term physical market made prices begin to react gradually. On Friday, crude oil futures took one step forward and one step back, although production losses in Libya and the Gulf of Mexico helped consolidate a modest weekly gain, breaking the trend of previous weeks.
At the close of markets on Friday, September 13, the benchmark Brent and WTI crudes were trading at $71.61/bbl and $68.65/bbl respectively. A meager gain of around 1% in the week.
Venezuela
Between Surprise and Suspicion
Ambassador Edmundo González Urrutia (EGU), the president-elect in the elections of July 28, after days of guarded whereabouts, surprised the country's public opinion with his departure from Venezuela aboard a Spanish air force plane; he was bound for Madrid, where the government had granted him the benefits of political asylum.
As magical realism continues to be part of our idiosyncrasy, all kinds of stories and myths surround the unexpected development of events. While the regime announced that the departure had been the product of a negotiation, the Spanish foreign ministry denied that anything had been negotiated beyond the contacts to request and grant asylum, according to the law. It was also known that EGU had been a guest at the embassy of the Netherlands for several weeks, a euphemism that allowed the outgoing ambassador of that European country not to communicate his presence to the Venezuelan foreign ministry.
There was also doubt whether EGU's decision was known to María Corina Machado (MCM) or, on the contrary, like the majority, she was also surprised by the departure. But the main concern in the opposition ranks was the doubt about what the president-elect's intentions would be once he was residing in Spain. These doubts arose from a confusing initial statement from EGU. The democratic opposition in Venezuela spread the narrative that the situation was convenient, as González Urrutia's life was in danger in Venezuela, and from exile, he could defend his victory more precisely in the centers of power.
In Spain, his cause has had much resonance, even though the Sánchez Government recognizes neither Maduro nor González Urrutia as president-elect, insisting that the CNE has to present the official voting records. An argument that, weeks after the fraud, is Pyrrhic since the period for presenting the official results has expired and, on the other hand, the regime resorted to a legal farce to circumvent the legal obligations in this regard.
The Popular Party (PP) and VOX, knowing that some of the Spanish Government's allies would not accompany Pedro Sánchez in his stance of not recognizing EGU as president-elect, submitted and achieved majority approval in the Spanish Congress of Deputies. This exhortation to the Spanish government calls for the recognition of EGU as president-elect of Venezuela. A similar action is being programmed in the Senate, more a chapter in Spain's internal political tug-of-war than effective support for EGU.
In what seems to clarify González Urrutia's plans a bit, he met with President Sánchez at the Moncloa (official presidential residence), and the next day with former presidents Felipe González and Mariano Rajoy, although it was later announced that his political actions in Spain would be limited until his situation is formalized.
On the other hand, U.S. Secretary of State Antony Blinken has recognized opposition candidate Edmundo González Urrutia as the winner of the July 28 elections in Venezuela and has called for the start of a transition process. In a statement, he declared that “overwhelming evidence” shows that González Urrutia “achieved the majority of votes.” This Friday, the Governments of Argentina and Uruguay have joined in recognizing EGU's victory.
Back in Venezuela, as expected, the regime reacted to these diplomatic advances with its usual belligerence, a mixture of street stridency and circus, and threatened to break diplomatic and commercial relations with Spain. However, everything seems to be no more than a public stance. In parallel, the Minister of Oil, Delcy Rodríguez, was meeting with the Spanish oil company, Repsol, to hasten the pace of that operator's activity in the Mixed Company, PetroQuiriquire. We will see what Repsol's real appetite for Venezuela risk will be.
In general, the country remains in a kind of tense lethargy, which is observed in a noticeable reduction in vehicle movement even in the capital city. The same is happening with the decisions of potential investors and entrepreneurs, who are waiting for the panorama to clear, especially regarding OFAC sanctions, for now, limited to personal sanctions on 16 individuals of the regime related to electoral fraud and subsequent human rights violations.
The regime continues to cling to its economic approach of maintaining a high level of public spending, almost at the pre-election level, and anchoring the official dollar exchange rate. However, there are not enough dollars to comply with these two policies and finance imports, so the economy is beginning to suffer. The increase in the gap between the official and parallel dollar rates testifies to this. The fall in oil prices recently aggravates this foreign exchange tightness.
Oil Operations
This past week, several events shook oil activities, largely related to recurring electrical problems. The most significant was the total blackout at the Paraguaná Refining Center (CRP), which forced the total shutdown of the Amuay and Cardón refineries. The event occurred on Wednesday night. No official statement has been issued about the incident. However, some workers indicated that it was a catastrophic event in one of the electric generators that resulted in the fall of the entire system; others blamed an electrical storm in the Amuay area. The event seems to have been interpreted by the security forces as sabotage, and a large number of official vehicles from the police, army, and SEBIN were seen and filmed around the refineries.
In any case, the only refinery in operation in Venezuela is Puerto la Cruz, which requires light crude for its operation, which in turn is used as a diluent for the Merey 16 segregation; there are not enough volumes for both operations.
As a result of these events: 1) the supply of gasoline for the domestic market now depends on inventories and volumes received in the form of barter from Repsol. 2) Processing levels in Puerto la Cruz are limited by the availability of light crude. 3) For the blending of Merey 16, a series of condensate streams, light crude, and intermediate products are being used, which is causing quality specification problems that result in discounts in the price of that commercial segregation. It has been mentioned, without being able to independently confirm, that these difficulties in blending result in higher sulfur content. Due to shorter residence times in tanks, crude has been dispatched with up to 4% BS&W (sediment and water content) and sulfur, affecting downward the prices for those shipments.
Crude production during the week was eight hundred and thirty-six thousand barrels per day (Mbpd), an increase of almost 10 Mbpd compared to last week, but most of it is the recovery of deferred production due to electrical issues in previous weeks. The geographical distribution of average production is broken down as follows:
• West 192 (Chevron 89)
• East 140
• Orinoco Belt 504 (Chevron 104)
• TOTAL 836 (Chevron 193)
Given the time it is taking to drill and complete the wells in PetroIndependencia, it appears that the program of 17 budgeted wells will be completed without difficulty.
As we mentioned at the beginning of this section, refining is very compromised, the average processing of crude and intermediate products for the week barely reached about 140 Mbpd.
Exports to the U.S. are in line with the program, an average of 226 Mbpd of crude has been dispatched to Gulf of Mexico refineries. Similarly, in exports to Spain, the program, about 64 BPD, is being met. Exports to other places have faced delays and obstacles due to the specification problems of the Merey crude and low inventories of upgraded Hamaca crude.
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