El Taladro Azul Published Originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
In a week full of uncertainty around the long-awaited, although unpredictable, Israeli attack on Iran, oil prices recorded a weekly gain in the wave of geopolitical risk. But just hours after the markets closed, the doubt was clarified. In the early morning of Saturday, October 26, Israel launched an air attack on the outskirts of the Iranian capital, dubbed “Days of Repentance,” referring to the recent Yom Kippur holiday. In principle, the attack avoided damage due to strong international pressure, oil or nuclear facilities. This geopolitical development, if the current situation is maintained, coupled with an increase in US commercial crude oil inventories and a strengthening of the dollar, put downward pressure on oil prices; when the markets opened this Monday, prices showed a severe drop, of almost $4/BBL. However, as the US presidential elections approach, and with the two candidates close in the polls, the market will be exposed to the most varied speculations about the scenarios in the convulsive Middle East region and the war in Europe. The results of these elections will also weigh on the political crisis in Venezuela, which continues without an urgent resolution.
Geopolitics
The expected Israeli retaliation for Iran's recent missile attack began in the early hours of last Saturday. The Israel Defense Forces (IDF) attacked Iran in three waves in the early hours of this Saturday. The operation began with the report of five powerful explosions in Tehran and in a nearby city, Karaj; then, two additional waves followed. After three hours, the Israeli military spokesman, Daniel Hagari, announced the end of the attacks, which he defined as “precise” and aimed “at military targets in response to months of continuous attacks.” This last phrase is important, as it qualifies the attacks as a response, not only to the missile attack of early October but within the context of the attacks on Israel by Iran's proxies.
The scope of the attacks and the damage caused remain unclear at this stage. The IDF said it hit around 20 targets, including missile production facilities, surface-to-air missile launching bases, and other military sites. According to Israeli sources, the attacks materially reduced Iran's ability to manufacture missiles.
The authorities confirmed that the targeted objectives were in the provinces of Tehran, Khuzestan, and Ilam and stated that the country's air defenses had “successfully intercepted” the attacks but that “some areas suffered limited damage.”
The Syrian State News Agency (SANA) has also reported attacks on military facilities in the south and center of that country. The countries of the region closed their airspace during the Israeli attacks. The Tehran authorities acknowledge the death of four soldiers and “limited damage” while announcing a “proportionate reaction.” It is unlikely that there will be a reaction from Iran soon, apart from the terrorist attacks perpetrated by its terrorist organizations in the region; the statements of the Iranian leadership seem to indicate this.
In parallel, on Saturday morning of the Jewish Sabbath, a massive explosion rocked southern Lebanon as the IDF demolished a large underground base of Hezbollah's military unit known as the Al-Hajj Radwan Force, using 400 tons of explosives. The explosion was so powerful that it triggered earthquake detectors across northern Israel. Al-Hajj Radwan's mission is to infiltrate Israeli territory, with special attention to Galilee and northern Israel.
In the confrontation between Russia and Ukraine, there have been few changes. Russian pressure in eastern Ukraine has achieved certain advances, but at a high price in terms of lives and armaments. Meanwhile, Russia continues its drone attacks; this past week, Kyiv was the target of at least 60 drones. Ukraine has limited itself to inflicting damage on military and energy facilities on Russian territory to try to fracture the supply chain to Russian troops. The most publicized news in this conflict is the presence of North Korean military contingents in Russia, allegedly ready to be deployed to the front, according to a denunciation by Ukrainian President Zelensky.
In the Russian city of Kazan, the BRICS summit was held during the week, the first by this group of emerging economies after its expansion from five to nine members last January. The goal of the alliance is to challenge the economic and political monopoly of the West. The group sets priorities and holds debates once a year during the summit, which the members take turns organizing.
At the opening of the meeting, before a small group of representatives, Russian President Vladimir Putin remarked: “Now, in this restricted format, we propose to consider the most relevant aspects of the global agenda, exchange views on the topic of cooperation between BRICS states in the international arena, including the resolution of acute regional conflicts.”
Brazilian President Lula da Silva attended via videoconference as he is resting due to a fall. Saudi Arabia, which has not confirmed its accession to the group, was represented by its Minister of Foreign Affairs. Saudi Crown Prince Mohamed bin Salman decided not to attend the summit. Subsequently, it was learned bin Salman had received the US Secretary of State in Riyadh. Argentina confirmed that it was withdrawing its application to join the BRICS.
At this meeting, it was news that China and India smoothed over their differences and reached certain agreements related to the hot border between the two countries. Let us remember that these two countries have the largest populations in the world, and together, they import more than 15% of global oil production. Moreover, Chinese President Xi reiterated the need to seek a negotiated solution to the Russia-Ukraine conflict. In any case, the BRICS group continues to seek strategies to materialize its goal of counteracting the economic and political weight of the West.
In the US, less than 10 days from the presidential election, polls agree that the result is “too close to call,” although the Republican candidate, Donald Trump, seems to continue reducing the lead that Kamala Harris enjoyed just three weeks ago. This trend has been fueled by Harris's lack of exposure in uncontrolled environments; the editing that the CBS network made to the interview with the vice president, apparently to eliminate content that did not favor her, is cited as an example of the media weaknesses of the Democratic candidate. In contrast, Trump's sometimes eccentric statements in the same type of environment do not appear to diminish his support.
The election is being cast as a clash of religion, gender, and generations, and with extreme positions on important issues for the American electorate, such as immigration, abortion, and the economy, but with little analysis of specific policies.
Fundamentals
Oil production in the US had little variation: around thirteen million barrels per day (13.5 MMbpd according to the EIA), but with a tendency to increase with the commissioning of a gas pipeline that allows the evacuation of natural gas from the Permian region; crude oil production in this basin has to be optimized based on natural gas production due to pipeline limitations that connect it to the markets.
According to Baker Hughes, rig activity remained flat. Commercial crude oil inventories, reported by the Energy Information Administration (EIA), showed a larger than expected increase, some five million five hundred thousand barrels (5.5 MMbbls), partly due to higher imports and constant refinery runs. Gasoline inventories also showed an increase of about nine hundred thousand barrels (900 Mbbls), while distillate inventories fell by two million one hundred thousand barrels (2.1 MMbbls).
OPEC+ will have to decide in the next two weeks whether to proceed with the announced production increases, which will add around one hundred and eighty thousand barrels per day (180 Mbpd) at the beginning of December and well over two million barrels per day next year. A volume that, in our opinion, is difficult to materialize, but an announcement that would signal the market.
In summary, with an oil demand of around one hundred and three million barrels per day (103 MMbpd) and no foreseeable increases in supply apart from those of OPEC+, the physical oil market will continue in a precarious balance. It is becoming increasingly evident that the lack of transparent information on inventories and available production capacity is not healthy for the efficient behavior of the market.
By 2025, the production increases scheduled in Brazil, Guyana, Canada, the US, Argentina, and OPEC+, which would be partially offset by declines in the North Sea and Colombia, could reverse the situation towards a well-supplied scenario. On the other hand, concerns about the slowdown in demand growth, mainly centered on China, continue to be a drag on the market.
Price Behavior
The tense wait for the Israeli reaction to the Iranian attacks kept the market with even greater volatility than usual. Prices briefly wavered midweek after data showed a rise in US inventories, but this was quickly overcome by geopolitical events, which eventually were less severe than the market's expectation.
So, Brent and WTI crudes, at the close of the session on Friday, October 25, were trading at $76.5/bbl and $71.78/bbl, respectively, closing the week with a 4% gain over the previous week. However, given the Israeli counterattack over the weekend and the Iranian reaction, this Monday, October 28, market players reduced the geopolitical risk premium, which has also not been very high. Brent and WTI crudes opened the session trading at $72.5/bbl and $68.6/bbl, respectively, a reduction of almost 5% compared to the previous close.
VENEZUELA
The BRICS lifeboat capsized
The trip of Nicolás Maduro and Delcy Rodríguez to the BRICS summit in Kazan, Russia, was the main distraction of the regime during the week. The trip of the couple perhaps sought to obtain resources for the battered Venezuelan economy and to achieve some kind of international recognition in the face of the regime's growing isolation.
An unwanted consequence of the trip is that it made the country think about who was in charge in Venezuela, perhaps underlining the rumor that power now resides in Minister Diosdado Cabello. Despite the photos Maduro took with Putin, Xi, Erdoğan, and Mahmud Abas, the result was discouraging for the regime. A camera shot showed Putin pointing out to the Venezuelan that he was going to the formal session and that Maduro should follow a different path. However, Maduro did manage to participate in the group’s expanded meeting, which Putin used to garner support for his position versus the West.
The worst outcome for Nicolás Maduro was President Lula’s unyielding position to veto Venezuela's entry into the BRICS group. The regime reacted by comparing Lula to former president Bolsonaro, who had also opposed Venezuela's entry.
María Corina Machado and Edmundo González Urrutia won the prestigious 2024 Sakharov Prize for Freedom of Conscience, awarded by the European Union. This award is given in recognition of their struggle for democracy. Undoubtedly, it is an award that seeks to rally support for the very besieged Venezuelan opposition and adds to the recognition the European Parliament has already given to González Urrutia as the elected president.
The regime has been forced to review its economic policies. It seems to have abandoned the concept of exchange rate anchoring, allowing the value of the official dollar to slide beyond 40 bolivars per dollar. This seeks to reduce the gap with the parallel dollar, which reached up to 27% and threatens a rebound in inflation; the parallel dollar is the reference used to restock commercial inventories. The regime bets on curbing inflation and devaluation by injecting large sums of dollars into the exchange market. It has also taken repressive measures recently through inspections of businesses to ensure that sales at the official rate are respected; there are known cases of arrests of people for selling foreign currency at a parallel price.
The regime has also been forced to reduce its expectations regarding the level of public spending. A reduction of more than 25% is observed in the final months of the year, which traditionally correspond to the highest months in public spending: perhaps this is what Maduro was referring to with the advance of Christmas. All these revisions to the economic policy of the past year are becoming a greater brake on the economy. The only solution to this mess is the increase in the availability of foreign currency, which is not under the control of the regime and its central bank but of a drowsy oil industry.
Without the support of BRICS and Western developed countries, the isolation is becoming a straitjacket that is, among other things, widening the Chavismo’s internal fractures.
Oil Operations
The only event to highlight for the week is the shutdown of the naphtha reformer at the Cardón refinery in Paraguaná, which severely affects gasoline production.
The average crude oil production during this last week was eight hundred and fifty thousand barrels per day (850 Mbpd), distributed regionally as follows:
• West 195 (Chevron 89)
• East 138
• Orinoco Belt 517 (Chevron 112)
• TOTAL 850 (Chevron 201)
The heavy crude upgrader of the Joint venture PetroPiar, the only one in operation of the four existing in Jose, produced 82 Mbpd of upgraded Hamaca crude.
The level of processing of the national refineries stood at 183 Mbpd of crude and intermediate products, with a yield in terms of gasoline and diesel of 50 and 72 MBPD, respectively. The drastic reduction in gasoline production will cause greater scarcity in the domestic market.
Crude oil exports in October appear to be on track to exceed 600 Mbpd. The crude export program to the US and Europe by Chevron and Repsol is being fulfilled as scheduled.
CITGO
In what appears to be a renewed disinformation and distraction campaign from the Venezuelan crisis, the National Assembly published a “report” about CITGO. In the report, they seek to hold members of the 2015-2020 National Assembly (AN2015) and a large group of Venezuelans responsible for what they describe as the “biggest theft in Venezuela’s history,” referring to CITGO. The infamous report has been taken to the prosecutor's office with the declared purpose of establishing persecution against more than three hundred Venezuelans.
The reality is entirely different. Five years of legal and political efforts by the AN2015 and a team of professionals have prevented the loss of that asset: CITGO is still the republic’s property. This effort has been the only thing that has protected that asset from the claims of PDVSA's multiple creditors and the republic. The regime has lacked the will or the capacity to seek solutions to the debts they incurred, which is the reason for the current CITGO crisis and the destruction of PDVSA.
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