THE MARKET TAKES GEOPOLITICAL RISKS WITH A PINCH OF SALT

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

THE MARKET TAKES GEOPOLITICAL RISKS WITH A PINCH OF SALT

 

While the oil market anxiously observes the development of the conflict in the Middle East, Venezuela continues to be entangled in a political and economic situation without a clear destination still to be defined.

 

INTERNATIONAL

The much anticipated Israeli military retaliation, in response to Iran's missile attack in early October, has controlled the sentiment of the oil market, which assigns some probability to Iranian production and export facilities being affected. Although the attack did not materialize at the time of writing, it had already had tangible effects on global oil logistics.

 

On the other hand, although the latest storm in the Gulf of Mexico, Milton, a category 5 hurricane, caused considerable damage in Florida, it did not impact the oil industry. The global macroeconomy remains in a state of observation, waiting for inflation behavior: with a downward trend in Europe, but, in the US, a bit more stubborn than the Federal Reserve desires. Meanwhile, the economy of China remains weak. Oil prices have therefore remained between $78/bbl and $80/bbl, not reacting to Libya's return to the markets, nor the increase in commercial crude inventories in the US.

 

Geopolitics

All kinds of speculations were woven after Israel's security council discussed response options to Iran's missile attack, and Defense Minister Yoav Gallant said the nation's response would be lethal and surprising. October 7th, the anniversary of Hamas' incursion into Israel, was mentioned as a possible date for the attack; October 12th, the most important of Jewish holidays, Yom Kippur, was also considered, but the Israeli attack is still unexecuted.

 

The situation keeps countries with interests in the region on edge. The main concern centers on an attack on Iran's oil facilities, particularly the export terminal on Kharg Island, which could trigger a broader conflict and lead Iran to try to interrupt the flow of oil through the Strait of Hormuz: 30% of world oil production flows through this navigation channel.

 

The US sent a fleet of warplanes to the region. Saudi Arabia closed its airspace to avoid being perceived as collaborators with a potential Israeli attack. Russia, in the person of Putin, is making personal contacts with regional heads of state after meeting with his Iranian counterpart, Masoud Pezeshkian. In turn, China, the main or almost sole recipient of crude exported by Iran, is watching with concern a potential attack on the Kharg terminal and surely pressures through its diplomatic channels.

US officials believe that Israel has narrowed down on the possible targets of their response to Iran's attack, which these officials describe as Iranian military and energy infrastructure. There are no indications that Israel is targeting nuclear facilities or carrying out assassinations, but US officials emphasized that the Israelis have not made a final decision. For its part, the Iranian government is intensifying its diplomatic efforts with the aim objective that putting pressure from other countries will move Israel to minimize the scope of its response.

 

After weeks of intense diplomacy aimed at securing a ceasefire between Israel and Hezbollah militants, the US has opted for an entirely different approach: letting the ongoing conflict in Lebanon unfold. Now, US officials have abandoned their calls for a ceasefire, arguing that circumstances have changed. State Department representative, Matthew Miller, indicated that “We support Israel launching these incursions to degrade Hezbollah's infrastructure so that ultimately we can obtain a diplomatic resolution”.

 

For their part, the Houthi rebels remain active, launching missiles toward Israel, which were intercepted on the way, and continue with their somewhat random attacks on maritime transport in the area.

 

On the Russian/Ukrainian front, it is reported that Russia launched a large-scale offensive in the Kursk region on Thursday, breaking through Ukrainian defenses, according to both Ukrainian and Russian sources. The Ukrainian application, Deep State Map, reports that Ukrainian forces may have lost up to 14.7 square miles of territory in just one day and warns of a possible encirclement of Ukrainian troops in certain areas. If this Russian attack continues, it could change the relatively stagnant balance until now.

 

Fundamentals

Defense preparation for Israeli attacks has altered the functioning of the Kharg Island terminal. Iranian exports recently have fallen by about seven hundred thousand barrels per day (700 MBPD) compared to the previous month. A volume that practically compensated, barrel for barrel, for the return of Libyan crude to the market.

 

Russia's invasion of Ukraine has provoked successive waves of Western economic sanctions; however, this has not significantly affected the export of Russian crude and products. Russia has assembled a “ghost” fleet to transport Russian crude to its main customers, India and China. Less known is that Eastern European countries continue to receive and process Russian crude, as does Spain, albeit very discreetly. In these pre-election moments, the US seems to allow this ineffectiveness of its sanctions, as they help maintain the world supply without major upsets.

 

However, Russian production has fallen by 13% since before the invasion (January 2022), to about nine million one hundred thousand barrels per day (9.1 MMbpd). Offsetting the decline of its fields has been uphill due to difficulties in substituting sanctioned imports of oil equipment and services with national products. To disguise this effect, they justify the fall with compliance with OPEC+ quotas.

 

In Libya, the factions disputing control of the country reached an agreement and crude began to flow to markets, at a stable flow of one million two hundred thousand barrels per day (1.2 MMbpd).

 

According to the Energy Information Agency (EIA), commercial crude inventories in the US increased by five million and eight hundred thousand barrels (5.8 MMbbls), partly due to lower refining levels. The agency also reported an increase of one hundred thousand barrels per day (100 Mbpd) in crude production, although this may be just the result of the periodic adjustment and inventory calculation. The little effect this information had on the markets was probably because it was accompanied by a large reduction in gasoline inventories of six million barrels (6.3 MMbbls). Baker Hughes reports an increase of one unit in active rigs in the US, but no change in activity in the Permian Basin, the most important of all; it also reports an increase of 16 units in the rest of the world.

 

Almost a month has passed since the People's Bank of China announced monetary stimulus measures. Chinese and Asian financial markets reacted favorably; however, the initial enthusiasm gave way to concerns about whether the announced stimulus would be executed and whether it would be large enough to reactivate growth.

On Saturday, October 12, Chinese Finance Minister Lan Foan presented China's long-awaited announcement on its financial stimulus plans. The announcement was limited to reaffirming the central government's intentions, but few measurable details that investors need to justify their continued presence in the world's second-largest stock market. This uncertainty does not bode well for future Chinese oil demand. In fact, according to the latest figures published by Reuters, China's oil imports fell in September for the fifth consecutive month compared to the previous year due to low refining margins and refinery maintenance.

 

The World Bank warned, “For three decades, China's growth has beneficially spread to its neighbors, but the size of that impetus is now diminishing.” Recent fiscal support may boost growth in the short term, but long-term growth will depend on deeper structural reforms.

 

Price Behavior

The possible retaliation of Israel against Iran and the potential collateral effect has caused crude prices to return to levels close to $80/BBL; this despite several downward pushes in prices due to events that threaten the integrity of demand and others that signal an increase in supply. The impact of geopolitical risks is for now controlling market perception.

 

Although prices eroded slightly on Friday, they closed the week with gains, as did the previous week, all based on geopolitical tensions. Thus, the Brent and WTI benchmark crudes, at the close of markets on Friday, October 11, were quoted at $79.04 and $75.56/BBL respectively, showing an increase of just over 1% compared to the previous week; a modest increase given the potential impact of tension in the Middle East.

 

VENEZUELA

 

No Visible Progress

The week was characterized by relatively few events related to the resolution of the political crisis,  and much use of the regime-controlled media to distract the country based on scandalous news and the longest Christmas in the Christian world. The passage of time shortens the narrow window for negotiation for the transition. Both, Nicolás Maduro and Edmundo González, have indicated that they will be sworn in as presidents on January 10, 2025.

 

Some observers believe that Edmundo González, in terms of political effectiveness, is following the letter of the infamous document signed at the Spanish embassy in Caracas, which indicated that he would have limited public activity. Supporting this observation, it is mentioned that the president-elect did not address attendees at a recent mass event in the Spanish capital, nor has he traveled or given press conferences in person. Meanwhile, in Venezuela, María Corina Machado continues her vigorous campaign through social media, keeping lit the fire of what for her is the inevitable political change. For their part, the Chancellor of the European Union, Josep Borrell, and the head of the US mission to Venezuela, Francisco Palmieri, seem to agree that international pressure is fundamental in resolving the conflict.

 

In Spain, the scandal of Mrs. Delcy Rodríguez's visit to Barajas airport in 2020, known as “Delcygate”, was revived; more to do with the internal diatribe in the Iberian country than Venezuelan politics. The president of the National Assembly, Jorge Rodríguez, in an obvious distraction strategy, demanded, again, the rupture of all kinds of relations with Spain, a reiteration of a previous resolution of the National Assembly. On that particular occasion, Rodríguez, Jorge, had forgotten that Venezuela heavily relies on the gasoline supplied by Repsol and on the foreign currency generated by Repsol. The cancellation of the numerous flights between the two countries would result in a complete isolation of the country. Luckily for the regime, Rodríguez, Delcy, in her capacity as newly appointed oil minister, quickly defused the bomb planted by her brother and met with Repsol. She reminded the Spanish company that her government had just extended the limits of the block that Repsol operates in the west of the country, and that said extension included access to the best deposits in the Maracaibo Lake basin.

 

In the economic aspect, politics has indeed had changes. As we mentioned last week, the combination of exchange rate anchoring and high levels of public spending, without an increase in the availability of foreign currency, was an unsustainable proposition. Therefore, as a first step, public spending was reduced as far as the cash flow would allow, by almost 30%. Last Friday, the Bolivar was devalued against the official dollar by 3.4%. The subterfuge used by the Central Bank (BCV) was the “auction” to the banking sector of $30 million at a rate close to 40 Bs/$, in a process with a floor of 39 $/Bs. The process, as expected, closed the gap between the official and parallel rates to 22%, 4% less than the day before. Liquidity was also restricted by eliminating the reductions applied to bank reserves, reversing the trend from July 2024 that had allowed banks to give more credits. In any case, these are only palliative measures for a seriously ill economy.

 

Oil Operations

 

The only joint ventures that have been increasing their production are those operated by Chevron and Repsol. Not even Maurel & Prom, generally mentioned in the same group, had a marked effect on production.

 

Production in the first days of October averaged eight hundred and forty-six thousand barrels per day (846 Mbpd), slightly higher than the close of last week. The geographical distribution of average production is broken down as follows: 

 

West:                                       193 (Chevron 89) 

East:                                         139

Orinoco Belt:                    514 (Chevron 110) 

TOTAL:                                    846 (Chevron 199)

 

The processing level in national refineries stood at 187 MBPD of crude and intermediate products, with a yield in terms of gasoline and diesel of 58 Mbpd and 71 Mbpd respectively. The domestic demand for gasoline is estimated to be between 120 and 140 Mbpd, therefore, to satisfy it, the country depends on the oil-for-gasoline swaps executed by Repsol.

 

October exports remain in line with the month's export plans of 660 Mbpd, partly to alleviate the bulky inventories at the Jose terminal.

 

Last week, we reported that Repsol had loaded 100 Mbpd of crude bound for Spain. In reality, part of the volume lifted, about 45 Mbpd, was taken to the US, specifically the part used for the gasoline swap, the rest of the volume was sent to Spain.

 

In September, PDVSA's debts with Chevron and Repsol were reduced by about ninety million US dollars ($90 MM), from an initial total of around three billion dollars ($3 BN), between the two companies.

 

The Indian company Jindal, recently chosen as Partner B in the Joint Venture (JV) PetroCedeño, has announced its withdrawal from the project. Although no reasons were publicly given for such a decision, it is presumed that they did not reach agreements in the negotiations of the contracts applicable to the management of operations. The withdrawal of TotalEnergies and Equinor from that same JV was associated with differences with PDVSA regarding the safe operation of the “upgrader”, which must have appeared in the Indian company's due diligence process. Moreover, It is understandable that with the higher country risk, a product of the political and legal uncertainty, investors seek much higher returns to compensate for the inherent risks of investing in Venezuela.

ISRAEL- IRAN CONFLICT THREATENS TO DISRUPT THE MARKET

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

The possibility that the armed conflict between Israel and Iran and its allied terrorist groups could affect the oil market was likely, but until this week's events, it seemed like a distant cloud. The Iranian attack on Israel this week is, in principle, a retaliation for Israeli attacks on Iranian proxies. It will likely provoke a counterattack from Netanyahu's government, with oil targets as a priority. This chain of events has raised the political risk premium, driving oil prices up by almost 10% during the week. The market focused so much on geopolitics that the potential bearish effect of increased crude inventories in the U.S. and the return of Libyan production to the market went under the radar.

 

Geopolitics

This conflict, the most recent chapter in the Arab-Israeli territorial struggle, was initiated 12 months ago by the Palestinian group Hamas's attack on Israeli territory, leaving hundreds of civilian casualties and dozens of hostages. The Israeli state's military response has been forceful but also widely criticized. Israel's recent relative success, simultaneously attacking Iranian proxy enclaves on several fronts and even an attack on Iranian territory, pushed Iran to launch a direct attack on Israel. About 200 missiles were launched, including some of the most sophisticated in the Iranian arsenal, with relatively minimal damage due to the effectiveness of the “Iron Dome,” according to reports from international observers.

It's important to note that the Iranian government informed the authorities of Saudi Arabia and Jordan that the attack was going to take place. These, in turn, warned Israel and the U.S., so there was no surprise effect. Perhaps this warning was made intending to avoid an immediate escalation of the conflict; Iran later reported that it considered its response to the Israeli attack finished. It's also significant to note that both Saudi Arabia and Jordan are allowing Israeli aviation to fly over their territories.

Another active front is the sea around Yemen, where the Houthi militia, also supported by Iran, hit a British oil tanker with a missile. Earlier in the week, two other British Navy ships were attacked by drones. In all cases, the crews were unharmed. British and U.S. forces bombed the areas where the attacks originated.

From the information issued by the U.S. and Israel, it can be inferred that the most likely Israeli retaliation would be against Iranian oil facilities, possibly on the Kharg Island oil terminal. Located 24 kilometers off the northwest coast of Iran, the Kharg terminal is vital to the Iranian economy, as it handles 90% of its oil exports. Anticipating an attack on these facilities, tankers docked or anchored at the terminal have evacuated the area to take shelter in the Persian Gulf. In a strange twist of history, we can note that this terminal was destroyed during the Iran-Iraq war in the 1980s.

The coming months will determine whether Israel's impressive offensive against Hezbollah over the past month, which has now triggered an Iranian ballistic missile attack against Israel, perpetuates and escalates the relentless cycle of violence in the Middle East or stands as a positive turning point against Iranian-backed aggression.

The “Abraham Accords” (2020), which seek to establish relations between Arab countries and Israel to ensure peace and whose progress was the main victim of Hamas's invasion of Israel on October 7, 2023, are still standing. Significantly, the countries that signed the Abraham Accords with Israel have not abandoned hope of returning to the course of normalization. This will be crucial if Israel wants to change the course of what has become the most existential threat to the Jewish state since the 1973 Yom Kippur War. None of these countries has cut ties with Israel or disassociated itself from the agreements. And although many, including the United Arab Emirates, have tried to calm tensions with Iran, they do so with their eyes wide open to the ongoing threat that Iran represents.

Meanwhile, on the Russian/Ukrainian front, each army concentrated on attacking the other's territories. Russian troops have taken complete control of the eastern city of Vuhledar, but at a very high price in terms of casualties and equipment loss. The Ukrainian strategy in the Donbas is to withdraw slowly, causing maximum Russian losses and exhaustion.

As the Ukraine/Russia war approaches 1000 days, with its terrible consequences in terms of human lives and infrastructure destruction, its effects on the global hydrocarbon industry have not materialized.

In any case, all the great powers are, in one way or another, associated with or interested in these two conflicts. The possibility that the conflicts will escalate and eventually intermingle with the disputes between China and Taiwan and China's objective of controlling the South China Sea is not ruled out. In that sea, a good part of world trade transits, and there are disputes between several countries over the delimitation of territorial waters. The Philippines, Malaysia, Taiwan, Vietnam, and China have disagreed about the area's limits and mineral rights. For example, Malaysia is expanding oil and gas exploration in the disputed South China Sea despite pressure exerted by the constant presence of Chinese navy ships.

So we find ourselves in a complex geopolitical situation, with multiple foci of potential problems that are to some extent interdependent, so events in one of these conflicts could trigger a domino effect of alarming proportions. The fact that oil is the fuel that moves the world, especially in times of war, makes it appear as a potential trigger or mitigator.

 

Fundamentals

The preventive closures of production facilities in the Gulf of Mexico due to the presence of Hurricane Helene have been fully recovered, so crude production increased by one hundred thousand barrels per day (100 Mbpd). However, Tropical Storm Milton is already beginning to be a cause for concern. The other major supply disruption, the closure of production in Libya, is also coming to an end. The opening of about 600 MBPD has already begun.

The greatest efforts to generate production in the U.S. have been oriented to the natural gas sector in preparation for the winter in the Northern Hemisphere and the increase in demand for liquefied natural gas (LNG) exports. The International Energy Agency (IEA) predicts that gas demand is rebounding globally, 2.5% in 2024, and is heading towards consumption records in 2025, increasing another 2.5%. Natural gas prices in the U.S. indicate this, as well as drilling activity. According to the report, gas-dedicated rigs have increased by five units while reporting a drop of three units in the shale oil basins (-2 in the Permian).

On the other hand, commercial crude inventories showed an increase of 3.9 million barrels (MMbbls), a product of higher imports, lower refining levels, and lower exports related to Hurricane Helene and the adjustments that the EIA applies weekly in its Wednesday reports.

Additionally, the U.S. Bureau of Labor Statistics reports an increase of 254,000 jobs in September, above the consensus of 165,000. The unemployment rate remained practically unchanged at 4.1%.

OPEC and OPEC+ are trying to counteract the adverse effects caused by the news of the supposed change in OPEC+'s commercial strategy. OPEC refuted a Wall Street Journal article, which reported that the Saudi Oil Minister had said that oil prices could fall to $50/BBL if group members do not respect production cuts, to clarify that it was “totally inaccurate and misleading” information. Thus, OPEC stated that what was planned, as announced, was the progressive and gradual dismantling of production closures by the organization's members.

In China, the financial stimulus measures applied by the central government seem to have had an initial positive effect. For example, the Shanghai Composite Index rose more than 7% during the week. We'll have to see if the measures will have the same effect on oil demand.

So, as far as fundamentals are concerned, the balance we can make is a net increase in supply for the last quarter of the year of about eight hundred thousand barrels per day: 650 MBPD from the return of Libya, 100 MBPD for the increase in U.S. production and 50 MBPD for the opening announced for December by OPEC+, against a demand (around one hundred and three million barrels per day) that for now has not given indications of yielding.

 

Price Dynamics

Prices rose to new six-week highs due to growing speculation that Israel would attack Iran's oil infrastructure in retaliation for Tuesday's missile attack. When asked about the news, President Biden said in an impromptu comment: “We are discussing that.” So, as long as the expectation of a strong retaliation on oil facilities is maintained, the geopolitical risk premium will have significant effects on the oil market. Consequently, we estimate that prices will remain close to $80/BBL, in terms of Brent Crude, and then after the attack (if it occurs), reflect the magnitude of the supply disruption and the resulting probability of conflict escalation.

That post-retaliation price largely depends on the idle production capacity that OPEC+ can open and bring to market to replace the affected volume. The IEA and EIA (U.S. Energy Information Administration) maintain that idle capacity is around 5.5 million barrels per day (5.5 MMbpd), far superior to the loading capacity of the Kharg terminal, which is about 2.0 MMbpd. Our analysis estimates that the real idle production capacity is much lower than that mentioned by these international organizations. Of a total of 2.4 MMBPD remaining in this category after uncompensated declines, only 500 Mbpd are immediately available, and the other 1.9 MMbpd require months to be available. So, under our scenario, the disabling of Kharg can hardly be compensated by idle production capacity in OPEC+.

As things stand, the benchmark crudes, Brent and WTI, closed on Friday, October 4, at $78.08/bbl and $74.38/bbl, respectively, an average increase of 9% compared to the previous week's closings.

 

Other Oil News

• Ecopetrol and its partner Petrobras announced that the Uchuva-2 delimiting well confirms the extension of the natural gas discovery made in 2022 with the drilling of the Uchuva-1 well. This well provides significant information for developing this new production frontier in the Colombian Caribbean and reinforces the gas potential that has been foreseen in the region. The Uchuva-2 well is located in the Tairona Block, approximately 31 kilometers from the coast, and its drilling, at 804 meters of water depth, began on June 19. Meanwhile, the drilling platform contracted for drilling the Komodo-1 exploratory well is withdrawing from Colombia due to the high costs incurred in mobilization and waiting, as it still needs to receive the Environmental license. The block operator is Ecopetrol, and its partner is a subsidiary of Oxy. As a curious note, the Uchuva wells will now be called Sirius, and the Tairona block will be known as Gua-Off as a result of a legal action filed by the indigenous community of Taganga. Further evidence of the complex relationship with communities.
• Petrobras announced that its board of directors gave the green light to acquire a 10% stake in the offshore block in the “Deep Western Orange” basin in South Africa. The purchase in the deepwater field came after a competitive process organized by the French oil company TotalEnergy, which operates the project and will maintain a 40% stake in the block. This consortium includes TotalEnergy (40%), QatarEnergy (30%) and Sezigyn Pty (10%). This approach seems aimed at diversifying exploratory risk and responding to the fact that pre-salt basin discoveries have been decreasing, and exploratory “plays” at the mouth of the Amazon have not received due environmental permits.
• U.S. dockworkers and port operators reached a tentative agreement that will immediately end a crippling three-day strike that has paralyzed maritime transport on the East Coast and Gulf Coast, both parties said on Thursday.
•  

VENEZUELA

The Ubiquitous Electoral Acts

While the regime acts pretending that July 28 never existed, formal evidence increasingly supports Edmundo González's electoral victory. On this occasion, the Carter Center, which was an electoral observer in the Venezuelan presidential elections on July 28, with extensive experience in these matters and which in the past was perceived by the regime as a friendly actor, joined those who question Maduro's position and his National Electoral Council (CNE). Its principal advisor for Latin America, Jennie Lincoln, showed before the Organization of American States (OAS) the “original” voting records that point to the triumph of the opposition candidate Edmundo González Urrutia. The records would confirm that the standard-bearer of the main Venezuelan opposition platform, Edmundo González Urrutia, won the elections with 67% of the votes, while the current president, Nicolás Maduro, would have obtained 31%.

However, the regime is refusing to initiate negotiations aimed at starting the peaceful political transition that derives from its electoral defeat. Furthermore, it is inviting political parties to begin conversations about the future of parties and future electoral processes under the premise that all attendees commit to accepting the rulings and decisions of the Supreme Court of Justice and the CNE; that is, to start a new game and annul recent history. The democratic opposition, invited to the meetings, indicated its disagreement with the procedure.

The persecution of the democratic opposition continues. This time, it was the turn of several members of María Corina Machado's (MCM) security ring, detained by the political police, SEBIN, without a court order. On the other hand, the regime is repeatedly announcing that MCM is about to leave the country as a divisive strategy of the opposition.

The projection of the economy does not promise dividends for the regime either. Even SENIAT's collection has been markedly reduced, which has forced public spending to be restricted below planned values. The shortage of foreign currency fails to maintain the exchange anchoring policy, which will have to be adjusted to avoid the growth of the gap between official and parallel exchanges, which is already over 21%. Imports cannot be financed by the system, the foreign currency available for this purpose has suffered a continuous deterioration in the past six months.

The economy is deteriorating, and the parallel exchange rate, currently at 43.9 Bs/$, is estimated to approach 60 Bs/$ by the end of the year. The reduction in consumption and rebound in inflation will be difficult bones to chew under inflexible economic policies.

Oil revenues, led by Chevron, have not increased despite the increase in volume taken by Chevron to the U.S. due to the deterioration of oil prices lately. The current price situation, increased by the Middle East situation, could give some breath to the regime's accounts while it lasts. However, it is important to note that oil prices have a double edge, as the country also needs to buy gasoline and diluent to keep the country running. This pernicious effect means that a 10% increase in the price of crude represents only a 4% increase in net income.

Oil Operations

At the end of September, crude exports were lower than projected due to delays in loading crude destined for India and greater competition in the Chinese/Malaysian market, which allowed replenishing inventory that had been drained to achieve exports in previous months. Electrical blackouts, a problem with no solution in sight, have affected the operation of export terminals and refining, upgrading, and petrochemical plants.

Crude production activities remain stable. Crude production averaged eight hundred and forty-four thousand barrels per day (Mbpd), practically unchanged from the previous week. The geographical distribution of production is as follows:

 

Mbpd

• West:                           191 (Chevron 89)
• East:                            140
• Orinoco Belt:              513 (Chevron 109)
• TOTAL:                      844 (Chevron 198)

Chevron almost reached, in the joint ventures it operates, the maximum planned production level for the year: 198 MBPD.

The processing level of national refineries stood at 183 Mbpd of crude and intermediate products, with a yield in terms of gasoline and diesel of 50 Mbpd and 70 Mbpd, respectively.

September exports fell compared to August. The average for the month was 564 Mbpd of crude. Exports by destination were distributed as follows:

USA: 245 Mbpd, 85 Mbpd of Boscán, 90 Mbpd of Hamaca, and 70 Mbpd of Merey. China and Malaysia: 184 Mbpd. Spain: 100 Mbpd, and India: 35 Mbpd There were no deliveries to Cuba, and 54 Mbpd of residual fuel were exported to the Far East.

 

CITGO: Too many lawyers spoil the case

This week, in the Delaware court, where the forced sale of CITGO's parent company is being heard, presided over by Judge Leonard Stark, a new chapter unfolded in this complex story. The hearing was supposed to set a final date (November 19) for the auction award, given the result announced last week, declaring Amber Energy, a subsidiary of investment firm Elliot Investment Management, as the auction winner.

The number of objections presented by the lawyers of the numerous creditors to the offer presented by Elliot was such that Judge Stark had no choice but to declare: “I cannot have a final sales hearing on November 19.” This new turn in this long story postpones what until this week was taken as a fact, and it is not clear what options the judge has to get out of this complicated judicial labyrinth.

THE GHOST OF OVERSUPPLY

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

One would have expected the combination of a new drop in U.S. crude inventories, Hurricane Helene, China's economic stimulus measures that boosted Chinese stock markets, and the production interruption in Libya would drive oil prices up. However, news speculations about a change in OPEC+ strategy, particularly from the Kingdom of Saudi Arabia, weakened the bullish dynamic. The British financial newspaper, the Financial Times, reported that the Saudis are considering changing their price defense strategy, using production cuts, to regain their share in oil markets. The news, although without many details or reliable sources, was received with alarm by the oil market, possibly an overreaction; a “déjà vu” of 2014, when then Saudi minister Ali al-Naimi, pushed OPEC to abandon the price defense policy and flooded the market with Saudi crude, which ended a period of high crude prices; an attempt to undercut the economies of North American shale oil, which, by the way, proved unsuccessful.

 

The reality of the current news and its effects will be seen in the development of the international environment, including the apparent escalation of hostilities in the Middle East.

 

Fundamentals

 

The news that spooked the oil market this week was the supposed change in Saudi (OPEC?) strategy to reconquer the market share it has lost while acting as a “good Samaritan,” safeguarding crude oil prices and benefiting all other producers. An increase in production by Saudi Arabia would break the precarious discipline maintained by the OPEC+ organization, but the real meaning of this apparent “every man for himself” is complex to estimate. Whatever its effect, it could be magnified by Libya's return to its usual production because of a possible agreement between the factions currently in conflict.

 

In our opinion, the countries that could also increase their production, if the Saudis decide to do so, are Iraq, UAE, and Oman. The big question is how much shut-in crude each of these countries has.

 

To try to answer this last question, we take as a baseline the information published by Javier Blas, a Bloomberg columnist. Blas maintains that OPEC+ is currently producing about eight hundred and fifty thousand barrels per day (850 Kbpd) more than the agreed quotas.  By the way, this could be one of the reasons that could be driving the change in Saudi stance.

 

Based on the 2024 production of OPEC+ countries, the natural decline of the fields, and the potential generation activity, we can calculate that the potentially available production volumes to be opened are as follows: Saudi Arabia 1100 Kbpd, United Arab Emirates 400 Kbpd, Iraq 200 Kbpd, and Oman 100 Kbpd. A total of 1.8 million barrels per day, from which we should subtract the 850 Kbpd estimated by Javier Blas, for a net figure of 950 Kbpd of potential addition to global supply. A figure that by December would temporarily balance demand and supply, assuming they were to incorporate all at once, which is unlikely, and would imply a reduction in prices that are currently forecast for crude.

 

During the week, elements were also observed that, on the one hand, support the hypothesis that the oil market is undersupplied. On the other hand, the Chinese economy, the biggest black cloud over the market, is being attacked by the central government with measures that could stop its weakening.

 

The measures consist of monetary stimuli: reducing interest rates, injecting funds into large Chinese banks, and establishing preferential conditions for housing acquisition. The measures boosted Chinese and Asian stocks to their best week recently, although there could be a delay before the real economy feels the full effects of the stimulus measures.

 

The Energy Information Administration (EIA), in its Wednesday report, confirmed that commercial crude inventories in the U.S. continued to fall during the last week. This time, the reduction was 4.5 million barrels, and gasoline and distillate inventories also fell.

 

Additionally, although Hurricane Helene formed in the eastern Gulf of Mexico and made landfall in northern Florida, it caused the preventive closure of offshore production platforms in Louisiana. The closure was about five hundred thousand barrels per day (500 Kbpd), although companies are already normalizing activities.

 

On the other hand, the downward behavior of inflation, expected in the U.S. and evidenced in Europe, is allowing central banks to continue dismantling their restrictive monetary policy, which should support economic growth.

 

In summary, the fundamentals mostly moved in a direction that indicates a market restricted on the supply side, but the announcement related to Saudi Arabia seems to have mitigated this perspective. The mere idea of a price war instantly reversed the market perception.

 

We must consider that the news of the OPEC strategy change may be a trial balloon and that what is really proposed is the implementation of what has already been announced, that is, a gradual opening by OPEP+: about 200 Kbpd starting from December.

 

Geopolitics

 

It is commonplace to say that geopolitics continues to be convulsed, although, for now, without major direct consequences on the oil market. In any case, the situation in Eastern Europe and the Middle East tends to become more complicated with recent events.

 

Israel seems to have decided that it can no longer endure Hezbollah's attacks from Lebanon, which requires constant monitoring and a costly controlled give-and-take of missiles, without solving the issue of the exile of its border inhabitants.

 

The detonation of pagers and “Walkie-Talkies” had already been the beginning of this new policy towards Hezbollah. They continued with tactical bombings, including the organization's headquarters, taking down the main commanders of this militia. On Saturday, the 28th, it was confirmed that the bombing of Hezbollah's headquarters reached the top leader, Hassan Nasrallah, despite being in an underground bunker. With this attack, it is presumed that most of the high commands of the Shiite group, sponsored by the theocratic regime of Iran, have been eliminated in just two weeks. Of its hierarchical structure, only Abu Ali Rida, third in the chain of command, seems to have survived.

 

It is not the first time that Israel has eliminated a Hezbollah chief. In 1992, they reached Abbas al-Musawi, the founder of the organization. The conditions, this time, are different, as the chain of command was decimated and their communications, including with Iran, were all but destroyed. Reuters reports that, as a preventive mechanism, the Iranian supreme leader, Ali Khamenei, had been moved to a safe place within the country with reinforced security measures. Khamenei vowed to avenge Israel and assured that he was in no hurry to do so. However, the Houthis of Yemen took the initiative for retaliation, launching missiles against the plane transporting Netanyahu. The missiles were intercepted by Israeli defense systems, and on Sunday morning, the 29th, the Israeli air force attacked the port of Ras Isa in western Yemen, where oil tanks are seen in flames. Geopolitical alarms were triggered, and it is uncertain what could be the next steps on both sides. The use of oil as a weapon of revenge by Iran cannot be ruled out.

 

 

On the Russian/Ukrainian front, there is also talk of an impending threat. Russian President Vladimir Putin warned that if Western countries authorize Ukraine to use NATO weaponry on targets in Russian territory, he will not hesitate to use nuclear weapons. In general, the warning was interpreted as a “bluff”, but it cannot be totally ruled out when the threat it comes from a head of state who may be feeling cornered. In any case, Ukrainian options are also limited since it appears improbable that they can regain the territory lost since 2014

 

In summary, the two main sources of military conflicts could turn into global conflicts if any of the participants cross some red line, whose definition is currently less than clear.

 

Price Behavior

 

Another week of extreme oil price volatility came and went. During the first few days, Chinese stimuli, crude, and product inventories in the U.S., the continued interruption of production in Libya, and preventive closures due to the presence of Hurricane Helene strengthened prices, with Brent momentarily surpassing $75/BBL.

 

Prices fell around 3% after the Financial Times reported a possible change in strategy by Saudi Arabia, which the oil market took as probable. On Friday, as different interpretations emerged and without direct statements from the Arabs, prices began a modest rebound, interrupted by the market close, ending the week with a net loss in prices.

 

As such, at the close of markets on Friday, September 27, the Brent and WTI benchmarks were trading at $71.98/bbl and $68.18/bbl, respectively, an average drop of 3.6% compared to the previous week's closings.

 

Crude oil futures moved timidly on Friday as traders awaited further confirmation that OPEC leader Saudi Arabia and its allies planned to increase production in December.

 

VENEZUELA

 

UN General Assembly, a bad scenario for the regime

 

At the UN General Assembly, held in New York this week, additional pressure on the regime was brought to bear. Both to initiate the transition to the new government that won the July 28 elections and also to end widespread repression and, in particular, the persecution of democratic opposition leaders. There are also demands for the release of “hostages” captured under false charges and of the long list of political prisoners without due process guarantees and presumption of innocence.

 

The regime and its allies continue their strategy of denying the electoral results of July 28 and persist in their efforts to dismantle the unity of the opposition and tarnish the reputation of the president-elect, Edmundo González Urrutia. Maduro went so far as to say this week that María Corina Machado was packing her bags to leave the country. In fact, Machado continues her internal campaign with great courage, while González has become the standard-bearer of the cause abroad and maintains an active agenda to promote the peaceful transition that most Venezuelans voted for.

 

On the economic side, the regime also continues to take steps toward the precipice of an inflationary economy and probably stagnant in terms of growth. For now, they remain attached to high public spending as a mechanism to maintain consumption levels while maintaining the official exchange rate anchor. For now, the executive clings to high public spending as a mechanism to maintain consumption levels while maintaining the official exchange rate fixed, something that appears impossible to sustain over time. The fall in oil prices and the inability to obtain new OFAC licenses to receive payments for Petrocaribe debts resulted in a shortage of foreign currency to feed the needs of the economy. There are already signs that seem to confirm these trends, public spending has had to be cut, and the parallel dollar continues to separate from the official dollar.

 

Oil Operations

 

This week was characterized by the start of some refining processes in the Paraguaná refineries and recurrent power outages, although with little effect on production and exports.

 

Crude production averaged eight hundred and forty-three thousand barrels per day (843 Kbpd), in line with the trend of the previous week. The geographical distribution of production is shown below; Chevron almost reached the production level they estimated at the end of the year, 197 Kbpd.

                Kbpd

West:                                       191 (Chevron 88)

East:                                        139

Orinoco Belt:                            513 (Chevron 108)

 

TOTAL:                                     843 (Chevron 196)

 

The processing level of national refineries stood at 186 Kbpd of crude and intermediate products, with a yield in terms of gasoline and diesel of 51 Kbpd and 68 Kbpd, respectively.

 

Exports to the U.S. have been slightly delayed lately due to the effect of Hurricane Helene but could be recovered during the last days of the month. Everything points to an average export of 630 Kbpd for September.

 

On Thursday, September 26, 5 workers died, and one remains missing after the sinking of an oil barge operated by a PDVSA contractor in Lake Maracaibo. The accident was apparently due to adverse weather conditions, as well as maintenance problems with the barge. The accident happened in the area known as Tía Juana, south of the LL-652 platform of PetroIndependiente (Chevron).

 

CITGO

 

In the case of the auction in Delaware of PDVH shares (parent company of CITGO Petroleum), the court-appointed trustee selected the conditional offer from an Elliott Investment Management subsidiary as the winner, with an amount of 7,280 million dollars. The hearing for the approval of the recommendation is set for November 19, 2024.

 

However, the fact that the offer was conditional, contrary to what the auction conditions stipulated, foreshadows difficulties in the process. On the one hand, certain creditors of the nation and PDVSA have introduced new lawsuits in other Delaware courts to try to benefit from the auction, bypassing the priority list established by Judge Stark. Similarly, the issue of PDVSA 2020 bonds, whose validity is still being aired in a New York court, introduces complexities to the auction that have not been resolved. Hence, the “conditioning” of the offer will surely be the subject of new legal actions.

 

For its part, the ad hoc Administrative Board of PDVSA issued a statement in which it maintains that there are still legal avenues to defend the ownership of the asset. It recalled that, in any event, the transfer of ownership of the shares cannot be carried out without a license granted by the U.S. Treasury Department.