Another volatile week in the oil market, which seems to be the new normal. Concerns about reduced demand, mostly associated with the woes of the Chinese economy and the announced supply increases by OPEC+, reinforced the downward perception in the market. On the other hand, the problem of production closure in Libya and the incentive represented by the gradual relaxation of financial measures imposed for more than two years added to those who see upward momentum.
Commercial crude oil inventories in the U.S. fell again this week. August crude oil imports from China and India were higher than the previous two months. The internal war in Libya halved that country's production. This is a scenario that promotes demand growth and limits supply, as Libya's production drop is greater than the volume that OPEC+ sources indicated they would open in October, which remains to be seen if it materializes.
On the other hand, the timely interventions of the central banks of Europe, England, and, first and foremost, the Fed, are considered an incentive for the growth of Western economies.
Despite the signals, which indicate a precarious supply/demand balance, the oil market shows greater myopia than usual, focusing on the darkness of the tunnel walls instead of the light at the end of it. As such, oil prices showed a behavior resembling a roller coaster.
Fundamentals
On the demand side, the biggest concern remains the less-than-optimistic forecasts for the Chinese economy, constrained by a swarm of centralized industrial policies. On the other hand, excess industrial production beyond demand, to dynamize the system, has fueled protectionist measures from the West. The inefficiency of its industrial production, because of central government subsidies, and the ever-present real estate disaster, make up a situation difficult to remedy. However, Southeast Asia presents important prospects that will contribute to the sustainability and dynamism of annual oil demand, in the range of 1.4 to 1.6 MMbpd.
Inflation in the 20 European Union countries using the euro fell sharply to 2.2% in August, opening the door for the European Central Bank to cut interest rates as the ECB and the U.S. The Federal Reserve (FED) is preparing to reduce borrowing costs to support growth and employment.
On the supply side, production growth can be glimpsed in some countries: Canada, USA, Brazil, Guyana, and Argentina. There is also the latent “threat” of additional production from OPEC+, to reduce the heavy burden that is maintaining closed production, which, according to OPEC+ sources, would begin to be applied gradually from October this year, starting with 0.5 MMbpd.
To analyze the impact of OPEC+'s decision properly, we must take consider a fundamental element of the oil business: the natural decline of fields. The industry, globally, has been maintaining a level of investment in production 30% below what is required to compensate for reservoir decline. This structural underinvestment has reduced the production capacity of many countries, including OPEC+ members, and therefore, the closed potential that is estimated to be incorporated may not be entirely available. So the increase in global supply on the horizon of the next 12 months is shaping up to be around 1.0 MMbpd, less than the advance in demand for the same period.
To this balance, we must incorporate unexpected events such as the events in Libya, where more than half of production, about 0.7 MMbpd, has been stopped since Wednesday night. Exports were halted at several ports due to a confrontation between political factions over control of central bank funds and oil revenues. It is difficult to predict the duration of the closure and confrontation, but it represents a material restriction to the market.
Likewise, the Iraqi government has demanded that the regional government of Kurdistan reduce its crude oil production after market reports indicated that production in the region reached 350,000 bpd, which undermines Iraq's commitments under the OPEC+ compensation plan. According to reports, Baghdad plans to reduce to 3.9 MMbpd, compared to July production of more than 4.3 MMbpd.
Production in the U.S., the world's largest oil producer, continues without much variation around 13 MMbpd, with a stable trend but declining drilling rig activity. This week, according to Baker Hughes, the reduction was 3 less rigs, 2 dedicated to gas development activities.
The weekly report of U.S. inventories, published on Wednesdays by the EIA, coincided with the global trend of the deficit demand/supply balance, showing a weekly reduction of just over 0.8 and 2.2 MMBBLS in crude oil and gasoline inventories respectively. There was some slightly positive news on the economic front, as the U.S. consumer confidence index rose to 103.3 points in August, from 101.9 in the previous month, although concerns about the state of the labor market persist.
Geopolitics
The wars in the Middle East and Ukraine show no signs of abating. Israel launched a large-scale military operation in the West Bank, days after sending 100 planes to Lebanon in a preemptive strike against what it had detected as Hezbollah's preparations to launch an intense rocket attack. Hezbollah responded with a large-scale attack against Israel. Although the risks of a regional war remain high, for now, the parties - Israel, Iran, and their allies Hezbollah, Hamas, and the Houthis - have chosen to mitigate them.
On Saturday, the Israeli army found 6 lifeless bodies of hostages from October 7, they were in a tunnel under the city of Rafah, apparently murdered shortly before the arrival of Israeli troops. One more point on the curve that hinders negotiations and feeds the hawks on both sides.
Meanwhile, Ukraine reported that Russia has mobilized about 30,000 soldiers to its Kursk region, as an element of pressure to push back Ukrainian forces that have invaded Russia. At the same time, Russia launched a massive operation against Ukraine's energy infrastructure, in response to Ukrainian attacks on oil infrastructure in Russia by hundreds of Ukrainian drones and rockets. The damage inflicted on Russian refineries and storage centers appears to be serious enough for the authorities to prohibit revealing the levels of crude processing and fuel production. Perhaps is a coincidence, but it is not ruled out that the attacks have affected Russia's export capacity in August; its hydrocarbon sales to China and India were reduced by 0.8 MMbpd, a volume that is reported to have been supplied by Saudi Arabia.
Some sources close to Ukrainian President Volodymyr Zelenskyy maintain that the incursion of Ukrainian forces into the Kursk region has the strategic objective of pressuring Russia to accept a “just peace”, although there are no signs that this is close.
The crisis over control of the Central Bank of Libya threatens a new outbreak of instability in the country. Libya is a major oil producer that has been divided, since the death of Muammar Gaddafi, between eastern and western factions, each with international backing from different countries, reinforcing global polarization based on geopolitical interests.
Price Behavior
Prices moved at the mercy of the news, in our opinion, without much clarity in their interpretation of events, perhaps biased by China's economic fate. This recurring concern over the past few months has pushed prices down, ignoring the extreme geopolitical risk and supply concerns.
On Friday, markets entered a liquidation scheme after Reuters published an article citing OPEC+ sources that the group was willing to proceed with planned increases. This resulted in lower crude oil prices, and sealing losses for the week and the month.
Thus, the benchmark crudes, Brent and WTI, at the close of markets on Friday, August 30, were quoted at $76.93/bbl and $73/bbl, respectively; $2/BBL lower than the previous week.
VENEZUELA
A Victory That Looks Like Defeat
After the announcement of an alleged electoral victory, fraudulent, the regime adopted the strategy of the defeated: retreating behind the walls of repression and gathering around it the loyal and the benefited economic class. They seem to trust that the opposition will fade away, and international pressure will dilute over time.
Legal deadlines have passed without the National Electoral Council publishing the voting records, as required by law and regulations, and the opposition, and the international community. They seem to have decided that the "ultra petita" sentence of the Supreme Court of Justice legitimizes them and nothing else is needed.
Persecution, raids to homes, and imprisonments, without any legal process, continue. The objective is to instill fear in a citizenry that demands recognition of their rights to choose their ruler. The regime is clear that multitudinous and frequent protests could weaken their attempt to cling to power. The president-elect, González Urrutia, has defied the General Prosecutor's summons three times, the last accompanied by a threat of an arrest warrant.
Last week, a nationwide blackout was preceded by an electrical outage of some magnitude. As expected, the regime denounced that both were part of sabotage orchestrated by the opposition. Experts in the field postulate that the failure began with a probable electrical discharge on the 400 kV Guri A - Canoa line, during a strong storm over Guri. This relatively common event should not have caused a system collapse, as these incidents are common in all transmission systems of any country. It is believed that in this case, the protection systems that should have eliminated the short circuit failed, probably due to lack of maintenance.
Experts conclude: “The cause of the blackout of the Venezuelan electrical system is not a consequence of a terrorist act by the opposition, nor self-sabotage by the government, but of an electrical infrastructure with very little maintenance, coupled with poorly prepared and trained technical and managerial personnel, which makes it impossible to operate the sector to the minimum required standards.” If this latest blackout has served any purpose, it is to show, to both insiders and outsiders as well as to the regime, the reason they lost the elections.
Politically, a new ministerial cabinet was announced, formed by Maduro's most loyal members. Delcy Rodríguez was ratified as vice president and also replaces Colonel Tellechea as Minister of Oil. Tellechea is also replaced as president of PDVSA by the current VP, Héctor Obregón; another president of the state oil company who leaves a trail of unfulfilled promises.
The Western international community has been adamant in not recognizing Maduro as president-elect. Some have taken the additional step and have recognized Edmundo González as the president-elect of Venezuela based on the voting records made public by the opposition.
The announcements to impose sanctions on the people who facilitated the fraud and those who trample on citizens' human rights, in order to hinder the financing of an illegitimate regime, have not become a reality. So Chevron and Repsol continue to deliver 57% of the income from the production they operate to the regime.
The financing of high public spending is achieved thanks to higher SENIAT collections and the use of part of the foreign currency from the private oil sector. The remaining foreign currency is insufficient for the rest of the regime's needs, particularly intervention in the exchange market to try to stabilize it, as evidenced by the gap between the official and parallel markets that reaches 20%.
Oil Operations
Undoubtedly, the power failures have had their consequences on oil activities. The refineries were affected, as well as the upgrading/blending equipment for production in the Orinoco Belt. However, production was only marginally affected.
Crude oil production during the week was about 821 Mbpd, geographically distributed as follows:
• West 188 (Chevron 85)
• East 140
• Orinoco Belt 493 (Chevron 101)
• TOTAL 821 (Chevron 186)
The El Palito and Puerto la Cruz refineries were impacted by blackouts and reduced national processing to a weekly average of 206 Mbpd of crude oil and intermediate products. Gasoline production was reduced to 64 Mbpd, while diesel production was 70 MBPD, putting pressure on the domestic fuel market; long lines were observed at service stations even in eastern Caracas.
During the last 7 days of the month, 8 shipments were dispatched, taking crude oil exports to 601 Mbpd. To the U.S. 215 Mbpd were dispatched, to China (including Malaysia) 170 Mbpd, to India 120 Mbpd, to Spain 64 Mbpd, and to Cuba 30 Mbpd.
Crude oil exports in August were made in three commercial segregations, Merey (446 Mbpd), Hamaca (69 Mbpd) and Boscán (86 Mbpd). As for products, 4.5 Mbpd of asphalt and 37 Mbpd of residual fuel were exported.
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