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.
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