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.
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