M. Juan Szabo and Luis A. Pacheco
ISRAEL POSTPONES RETALIATION AGAINST IRAN, AND PRICES DECLINE
The oil market remains cautious while awaiting the outcome of negotiations between the U.S., Israel, and other countries regarding the type of military response Israel will give to the Iranian attack earlier this month. Initially, it is said that the U.S. wants to avoid targeting nuclear or oil facilities, leaving only military objectives as possible targets. But it's not just the oil supply that's at stake; the supply of natural gas is also a subject of concern due to the situation in the Persian Gulf, and this week, we look at it.
In Venezuela, the political crisis continues to simmer, including the removal of high-ranking officials, among them the former president of PDVSA, Colonel Tellechea. The crisis has yet to visibly affect the reduced oil operations to which the regime seems to be getting accustomed.
INTERNATIONAL
The world has taken a break from geopolitical tensions, seeming to trust that the potentially disruptive effects on energy flow will not materialize, even though warlike activities have not been suspended on the two most serious war fronts. On the contrary, attacks and troop movements have intensified and become more complicated by the presence of troops from multiple countries. However, the event that is most likely to induce an interruption in the flow of oil and gas, Israel's retaliatory attack on Iran, has been avoided for now or rather postponed.
In addition to this atmosphere of uncertainty, Kristalina Georgieva, head of the International Monetary Fund (IMF), in her statements on the eve of the IMF's semi-annual meeting, stated that: “the great wave of global inflation is receding. A combination of decisive monetary policy action, easing of supply chain constraints, and moderation of prices…” However, Georgieva also warned that: “Medium-term growth is expected to be mediocre, not much lower than before the pandemic, but far from being good enough. It is not enough to eradicate global poverty, nor to create the number of jobs we need…” all topics that impact energy issues, including the financing of the transition.
Geopolitics
The main concern of the countries neighboring the Persian Gulf is the potential closure of the Strait of Hormuz by Iran's initiative. About 20 million barrels of oil, products, and liquefied natural gas (LNG) transit daily through this strait. Both Iran and Saudi Arabia are actively preparing their terminals outside the Strait of Hormuz: the Jask terminal in the Gulf of Oman and the Yanbu terminal in the Red Sea, respectively, although the capacities of these terminals only allow handling a fraction of total exports. The United Arab Emirates and Oman can also export crude, about 2.5 million barrels per day (MMbpd), from their terminals in Fujairah and Muscat, respectively, both in the Gulf of Oman. All the liquefied gas coming from Iran and Qatar must necessarily pass through the Strait of Hormuz to reach its destination.
Indirectly related to these preparations, the U.S. bombed Houthi positions in Yemen to reduce navigation risks in the Red Sea, through which part of the crude loaded in Yanbu would exit.
The war front in the Middle East has been very active. In a military action in the city of Rafah in Gaza, Yahya Sinwar, leader of Hamas and “mastermind” of the October 7 attacks against Israel, was taken down. The event, according to some sources, could facilitate negotiations to obtain the release of the remaining hostages and even a light at the end of the tunnel for the end of Israel's war against Hamas. However, Israel has been cautious in its announcements. In ground attacks in southern Lebanon, other Hezbollah leaders have been eliminated by the Israeli Defense Forces (IDF).
In Syria, the security situation is becoming murky with the presence of the Islamic Revolutionary Guard Corps (IRGC). Russian troops around Deir Ezzor airport demanded that the IRGC withdraw from the area, where troops loyal to the Syrian government are also present. Israel has intercepted several drones and missiles launched from Lebanon, Iraq, and Syria, including one that fell near Prime Minister Benjamin Netanyahu's residence.
On the Russian invasion of Ukraine front, the presence of North Korean troops and weaponry actively participating in the confrontation is reported. A contingent of 1,500 soldiers is already in Russia, and the figure could increase to 12,000, according to the South Korean spy agency. This occurs while evidence increases that North Korea is supplying munitions to Russia, as recently demonstrated by the recovery of a missile in the Poltava region in Ukraine. NATO representatives warned that North Korea's presence in the Russian invasion of Ukraine represents a serious expansion of the conflict.
In the U.S., the presidential elections are in the final stretch, in a very tight contest. The latest polls seem to indicate that Vice President Harris's precarious lead is shrinking. Many geopolitical decisions around the world are waiting for the outcome of these elections.
Fundamentals
It is useful to include, in the analysis of the energy market, the issue of natural gas as another aspect to consider. In previous articles, we have analyzed the behavior of the global economy and energy market through the oil prism, and to a lesser extent, we have referred to the contribution of natural gas. On particular occasions, such as the supply of Russian natural gas to Europe and when prices have caused changes between liquid and gaseous hydrocarbons, we have touched on the subject.
The reality is that both energy sources, oil and natural gas, are important, each with its merits, and together represent, today and in the foreseeable future, more than 50% of primary energy consumption. Although crude oil demand will tend to stabilize, natural gas will grow organically. The growth in demand and use of natural gas is because it is a very flexible fuel with lower emissions than coal and oil, and it presents itself as the backup fuel par excellence for the intermittency of other renewable energy sources in the face of the rise of electrification.
Natural gas reserves, as in the case of oil, are found in a handful of geographic regions, commonly coinciding with oil regions, not coincidentally, but because their origin is the result of analogous geological processes in the same sedimentary basins. As in the case of oil, large natural gas developments are not necessarily proportional to the presence of resources, and, therefore, the major suppliers are not the same as those holding the largest reserves.
In any case, the figures indicate that Russia and the Middle East are today’s main protagonists not only in production but also control an important part of the world's gas reserves.
We can also conclude, seen in the context of the next 25 years, that enormous investments will be required, both in oil and natural gas, to maintain supply to the world economy. Likewise, as evidenced in the case of Europe after Russia's invasion of Ukraine, changing from pipeline supply to LNG (liquefied natural gas) tanker supply requires expensive infrastructure at both ends of the purchase/sale transaction, which makes it even more important to secure the navigation routes of that supply line.
Looking back at oil, U.S. oil production remains around 13 million barrels per day (MMbpd), and natural gas production at 103,500 million cubic feet per day, somewhat lower than expected, due to limitations imposed by the Biden administration on liquefied gas exports, which affect the profitability of shale gas developments. After Russia invaded Ukraine, the U.S. became Europe's largest LNG supplier.
The movement of active rigs is also stagnant, according to Baker Hughes. Both rigs developing natural gas because of low prices, and those dedicated to oil, due to financial discipline, have not shown increases in activity despite winter approaching in the Northern Hemisphere with higher seasonal gas consumption.
According to the Energy Information Administration (EIA) report, commercial oil inventories decreased by 2.2 million barrels. Gasoline inventories also decreased by 2.2 million barrels, reflecting lower crude imports and exports and lower refining runs, pointing to stable demand. Natural gas inventories increased by 76 billion cubic feet compared to last week and remain at average levels for this time of year. Meanwhile, the European Union's (EU) natural gas inventories, facing winter, are already at 90% of what's required; like last year, the target was reached ahead of time.
In economic news, China's economic growth was 4.6% in the third quarter of 2024, lower than expected, although refining activity increased with the completion of major maintenance after several consecutive monthly declines.
As soon as the data for the economic slowdown in the third quarter was published, the People's Bank of China released more details of its measures to boost capital markets. The bank's governor, Pan Gongsheng, pointed to the real estate and stock markets as key economic challenges requiring specific policy support. Indeed, while industrial production and retail sales increased and exceeded expectations, the real estate sector remained mired in a slowdown.
In Europe, the European Central Bank (ECB) reduced interest rates by 25 basis points. It's the third time this year that rates have been reduced. The measure reduces the rate the ECB pays on bank deposits to 3.25% from 3.5% and is the first consecutive interest rate cut in 13 years.
For its part, OPEC+ has remained silent, also expectant of events between Israel and Iran, while maintaining production in September close to agreed levels, but with the help of temporary closures in Libya. By the way, although Libya's production has been restored, rumors indicate that Farhat Bengdara, chairman of the board of the Libyan state company, has submitted his resignation to the interim prime minister of Libya's Government of National Unity (GNU) in Tripoli, Abdulhamid Dbeibah. Bengdara was recently appointed after an agreement between the country's two rival clans, Dbeibah's, representing the western government, and General Khalifa Haftar's, representing the eastern rival government. It is speculated that one of Haftar's sons could replace Bengdara, which, if true, could rethink the governance crisis.
Latin America is issuing an interesting combination of contradictory news. On one hand, the new Mexican government has decided to reduce Pemex's investment budget in its upstream activities by $1.4 billion for the last quarter of 2024. Although they mention that the effect of this reduction would only result in a production reduction of less than 6,000 barrels per day (6.0 Mbpd) for the last quarter, our estimate indicates that, although almost half of the cuts correspond to activities not generating production potential, the reduction will be closer to 63 MBPD. The newly inaugurated Mexican president, Claudia Sheinbaum, indicated that the company's production would be limited to 1.8 MMBPD in 2025, compared to 1.75 MMBPD in 2024, but a considerable reduction from the medium-term plans.
On the other hand, the Argentine state oil company, YPF, is achieving important milestones in Vaca Muerta, reaching a production of 388,000 barrels per day in the first half of 2024, 20% more than in the same period last year, more than compensating for the drop in production in Mexico. Likewise, in terms of natural gas, it averaged a production of 558 million cubic feet per day (558 MMcfd), 11% higher than in 2023.
Further north, Colombia is experiencing a severe drought, which is affecting water availability and electricity generation. As a consequence, natural gas prices are soaring, but not its availability, despite some news of discoveries, but which do not have the entity to change the balances, for now.
Finally, two potential hurricanes threaten the Gulf of Mexico. Nadine, currently near the coast of Belize, and Oscar, moving towards the Bahamas and Cuba. Both could cause interruptions in oil and gas activities in the Gulf of Mexico.
Price Behavior
Oil markets have stagnated since the contract liquidation earlier in the week, which occurred after reports that Israel had given assurances to the U.S. that it would not attack Iran's oil facilities. However, the market has not forgotten that there will likely be a retaliatory attack by Israel, but according to the Washington Post, it will be a series of surgical responses to military facilities.
This week, attention has also refocused on supply and demand fundamentals, with a weaker demand outlook due to China's economic situation, although the central government of that country is striving to solve the priority problems of its economy.
Market outlooks published by OPEC and the IEA this week suggested slower demand and a considerable supply surplus for next year, which keeps pressure on oil prices.
Thus, crude oil prices fell to levels not seen since early October, when geopolitical risk had not yet reflected Iran's attack on Israel.
From Tuesday to Thursday, crude oil prices moved little while investors sought a new direction, which they finally found on Friday when China's growth in the 3rd quarter was known: a new reduction in prices, closing the week with a strong loss.
The Brent and WTI benchmark crudes, at the close of trading on Friday, October 18, were quoted at $73.06/bbl and $69.22/bbl, respectively, a decrease of 7.5% compared to the previous week.
Meanwhile, gas prices at Henry Hub, the reference point in Louisiana for natural gas prices, fell from $2.49/MMBTU to $2.26/MMBTU, a decrease of 13% compared to the previous week, and significantly lower than prices in the European Union, which move around $15/MMBTU.
VENEZUELA
The regime retreats to its citadel.
The regime has decided that its best option in the face of electoral defeat and fear of internal fractures is to retreat and reorganize the leadership, a complicated process due to multiple interests and dubious loyalties within and between internal factions. Some say that the appointment of Diosdado Cabello as Minister of the Interior is part of this closing of ranks, mainly to prevent Cabello from taking power, keeping the enemy close seems to be the strategy. The “total transformation” in the Bolivarian National Armed Forces, ordered by Maduro, is also a delicate rearrangement of personnel. The two generals who managed the security agencies and who have supported the electoral fraud are removed, but the Minister of Defense is maintained; the new appointments are close to Minister Cabello.
The National Assembly appointed a new member to the CNE board to fill the vacancy left by rector Delpino, who was removed from his position after denouncing a serious “lack of transparency and truthfulness” in the questioned elections of July 28. Alex Saab is appointed Minister of Industries, replacing Colonel Pedro Tellechea.
Pedro Tellechea is the most recent addition to the long list of oil ministers or PDVSA presidents who have fallen from grace and have been “indicted.” This Monday, October 21, the attorney general's office confirmed the arrest of the former president of PDVSA and oil minister. He is accused of “serious crimes against the highest interests of the nation…”, which means everything and nothing. Most likely, like his predecessors, his case will fall into a judicial limbo where indulgences are not accepted, although being active military, Tellechea is probably a pawn in a more complicated game.
The newly appointed Minister for Oil, Delcy Rodríguez, announced the launch of the “National Petrochemical Revolutionary Patriotic Historical Block” as part of what she called the construction of the new economic model together with the workers. She continued mentioning: “We are in defense of the hope of our people, the other is the abyss, and we already know what it's about: delivering our resources to the hegemonic centers…”
In her continuous double discourse, Rodríguez forgets that it is the North American market and other “hegemonic” centers that are providing more than half of the foreign currency used to finance public spending and the attempt to try to reduce or maintain the gap between the official and parallel dollar.
The Economy
What the economic numbers reveal is that public spending is being cut, and SENIAT's collection is falling, probably an indicator of the contraction of the formal economy and a higher level of unemployment.
As we mentioned last week, the official dollar is being revalued. However, the gap between the official and parallel has not closed, a pernicious effect that, if not addressed, will fuel inflation. Foreign currency income is not growing, and current oil prices do not indicate a potential rebound. Therefore, interventions in the exchange market are insufficient to anchor the official dollar, given the inflationary environment being experienced.
Oil Operations
The French oil company, Maurel & Prom, in a press release, indicated that it was producing 7,100 barrels per day (7.1 Mbpd) in its block in the western part of the country, an increase of almost 1,000 barrels per day compared to the previous month. The operator forecast that by the end of the year, it would reach about 10 Mbpd, an unlikely level, as there are no active drilling rigs, nor is their arrival imminent. Repsol has continued with the maintenance program in the Tomoporo field on the eastern shore of Lake Maracaibo, and Chevron continues drilling one of the last wells of the 17 scheduled for this year.
The average crude production during this last week was 849 Mbpd, geographically distributed as follows:
- West 195 (Chevron 89)
- East 139
- Orinoco Belt 515 (Chevron 111)
- TOTAL 849 (Chevron 200)
The processing level of national refineries stood at 194 Mbpd of crude oil and intermediate products, with a yield in terms of gasoline and diesel of 61 Mbpd and 72 MBPD, respectively, insufficient to satisfy domestic gasoline demand, which continues to depend on imports.
October exports remain in line with the month's export plans of 660 BPD, partly to relieve the bulky inventories at the Jose terminal. PDVSA is probably thinking of sending fuel to Cuba to help solve the general blackout due to failures in the island's generation, but it is not scheduled yet.
In the La Salina tank farm in Cabimas, a fire occurred in a tank containing seventy-five thousand barrels of oil. Apparently, due to the lack of fire-fighting foam and not keeping the outside of the tank cooled, what is called a “boilover” occurred—a sudden boiling of water that expels the burning oil from the tank—which resulted in at least twenty workers with burns.
Natural Gas
The current production of natural gas is about 3,200 million cubic feet per day (MMcfd), of which about 700 MMcfd correspond to free gas, mainly from the Cardón IV Gas License offshore the Paraguaná peninsula and smaller volumes from deposits in Guárico state.
In northern Monagas, due to a lack of compression, injection, and treatment infrastructure, 1400 MMcfd are burned or vented. The petrochemical industry uses about 300 MMcfd to produce methanol and ammonia. The remainder of the production is dedicated to the national market, which includes the volumes consumed in oil operations, fuel for thermoelectric plants, and domestic gas.
Regarding methane gas prices in the country, they are officially set at highly subsidized levels – at a loss. The price of the gas produced in gas licenses is around $3.5/MMBTU, with the particularity that PDVSA has only paid a fraction of the gas delivered by ENI and Repsol, which increases PDVSA's bulky debt with ENI/Repsol companies.
Looking towards the future of natural gas in Venezuela, a necessary condition to develop the gas business to supply the domestic market and export gas to the international market is the setting of a market price that generates incentives for the producer and is affordable to the domestic consumer and competitive in the export market.
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