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.
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