El Taladro Azul Published Originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
The "chicken game" is a two-participant game in which each player has two alternatives: "continue playing" or "move away." If both players persist, they both lose. If one opts to withdraw and the other persists, the one who withdraws gains benefits, and the other suffers losses. If both choose to withdraw, there is no winner. The English philosopher Lord Bertrand Russell equated the arms race and nuclear escalation of the 20th century with the chicken game.
Putin's exaggerated reaction to the Biden Administration's decision to authorize supersonic missiles against military targets in Russian territory, warning of his willingness to use nuclear weapons if necessary, certainly qualifies as a "chicken game." This rhetorical and material escalation brought geopolitical risk back to markets and has raised oil prices, recovering November's accumulated losses. This escalation in confrontation has been front-page news, but there are other elements the market will consider, such as inventories and other fundamental factors. The impact of the upcoming OPEP+ deliberations should be remembered. Speculations about the "Trump effect" will continue until January 2025, when he becomes the 47th US President.
In Venezuela, the serious petroleum and economic consequences of the catastrophic accident at Muscar facilities, PDVSA's operational center in the eastern part of the country, are beginning to be experienced.
Geopolitics
Geopolitical tensions in the Russia-Ukraine war returned to the center of attention, overshadowing the also delicate situation in the Middle East.
It is difficult to determine whether the Biden administration's decision was last-minute or contemplated. However, it was made to show that it was still in control of foreign policy and to demonstrate strength that had been absent during most of its four years. On November 17, the US gave the Ukrainian government the green light to attack targets in Russian territory using US-origin tactical missile systems (ATACMS).
In simple terms, this means Ukraine now can reach targets in Russian territory at a greater distance than before. These missiles are difficult to intercept and extremely precise. It is still being determined if this decision was consulted with the incoming administration. Still, in any case, it is unlikely that the decision will affect any peace plan proposed by President-elect Donald Trump, who has not officially spoken about the conflict, which has already lasted a thousand days.
In any case, the decision has served for Russia to make a lot of noise and even brandish a new doctrine for the use of its nuclear arsenal. A spokesperson for the Russian Foreign Ministry indicated that Moscow would consider an ATACMS missile attack on its territory as an aggression from the US and not from Ukraine, accusing Biden of "adding fuel to the fire and continuing to stoke tension."
Additionally, the US imposed sanctions on dozens of Russian banks, securities registrars, and financial officials; OFAC issued an alert warning about the risks of joining Russia's Financial Transfer Messaging System, all following the agreements of the Group of Seven (G7). The measure, which uses the department's most potent sanctions tool, means that these banks, including Gazprombank, one of the most important on the sanctioned list, cannot handle any new energy-related transactions touching the US financial system, their trade with Americans is prohibited, and their assets are frozen in the US.
A surprise news story shocked the international community in the Middle East conflict. The International Criminal Court (ICC) issued arrest warrants on Thursday against Israeli Prime Minister Benjamin Netanyahu, his former Defense Minister, Yoav Gallant, and a Hamas leader who has already been eliminated in the war. The court indicts them as being the main responsible parties for crimes against humanity and war crimes committed at least since October 8, 2023.
The Israeli Prime Minister branded the decision as "antisemitic" and considered himself a victim of a new "Dreyfus trial," drawing a parallel with the treason conviction of the French captain of Jewish origin, Alfred Dreyfus. The case became a celebrated cause thanks to an open letter by Émile Zola ("I Accuse"), which mobilized a reopening of the case and revealed, among other things, the antisemitism surrounding the case.
As expected, the US distanced itself from the tribunal's decision, considering that the ICC is not legally competent in this matter. It criticized the "prosecutor's eagerness to request arrest warrants and the worrying errors in the process that led to this decision." Meanwhile, Israel's campaign to weaken Hamas and Hezbollah continued with bombings in northern Gaza and southern Lebanon. Late Sunday, November 24, an imminent ceasefire agreement between Israel and Hezbollah was reported, while military actions intensified.
In the Middle East, the International Atomic Energy Agency (IAEA) is attempting to revive conversations with Iran. To that end, it approved a resolution urging Iran to improve cooperation with the atomic world community and requesting access to assess its arsenal comprehensively. Tehran refused but proposed limiting its uranium reserves. The timing of these actions seems out of sync with the international environment, given the imminent change in the US administration, which will likely be more demanding of Iran.
In Baku, more than a day after the scheduled end of the Climate Change Conference (COP29), negotiators from nearly 200 nations finally agreed on the enormous sums of money the poorest nations need to face the worst effects of global warming.
The final agreement voted in the early hours of Sunday in Azerbaijan, stipulates that developed countries mobilize at least three hundred billion dollars annually until 2035 to help the poorest nations most vulnerable to climate disasters. This last-minute agreement prevented the conference from ending in chaos and repeating the fiasco of COP16 that recently ended in Cali, Colombia, without any agreement. The likelihood of the agreement holding is up in the air, given that Donald Trump has said he will withdraw from climate agreements.
In Mexico, the ruling Morena party's coalition and its allies in Congress voted in favor of a bill proposed earlier this year by former President López Obrador that eliminates seven of Mexico's 11 independent regulatory bodies, including two in charge of the energy sector, the CRE and the CNH, which will be "absorbed" by the Ministry of Energy. The project will be sent to the Senate, with a Morena majority and its allies, for discussion and approval. It is expected to happen quickly and be sent to the executive power to be endorsed and published. Its supporters have defended the bill, arguing that it will generate savings for the State and simplify procedures. However, its critics warn that it could damage competition and reduce already limited transparency.
Fundamentals
Despite this week's fundamentals pointing to higher US crude inventories, the EIA reported an increase of only five hundred thousand barrels in commercial inventories. The reported increase is insignificant considering that refinery utilization remained constant during the week, while crude imports increased by one million one hundred thousand barrels daily (MMbpd). More relevant is the increase of over 2 MMBBLS in gasoline inventory, although, as we have maintained, the trend has more interpretative value than weekly values.
US production remains constant at around thirteen million barrels per day (MMBPD), with the EIA publishing a reduction to 13.2 MMBPD this week in reconciling adjustment factors to the figures it had been reporting. US drilling activity is reducing drop by drop. This week, Baker Hughes reports one less rig on the list of active units.
Close collaborators of President-elect Trump indicated that contrary to media reports, the coined phrase "drill baby drill" to describe Trump's domestic oil policy does not align with the domestic oil industry's reality, where financial discipline will continue to prevail as long as an environment of uncertainty persists, especially regarding global demand.
The relatively constant US crude production raises doubts about some agencies' perspectives of overproduction for 2025, mainly since those analyses include a 300 MBPD increase in the Permian Basin for non-OPEP+ growth. In any case, the North American hydrocarbon industry would be prepared to react when market conditions dictate.
Under the new administration, the US liquefied natural gas export business is expected to be boosted, which could affect oil production, especially in Texas.
Contradictory signals continue to emerge from China. The narrative around Chinese demand remains biased downward, with some analysts pointing to structural changes in the country's economy that likely mean a slowdown in oil demand growth despite stimulus measures. However, according to customs authority reports, crude purchases increased in the last two months; these could be opportunistic purchases of Russian and Venezuelan crude due to competitive advantages. However, reaching a definitive conclusion requires additional information and analysis.
Another factor to consider is OPEP+'s position regarding gradually opening its "closed" production capacity or postponing the decision. The recent price rebound due to geopolitical reasons might motivate some relaxation and elevate the group's production above the 40 MMbpd of recent past production. However, reaching a consensus will be challenging because the closed capacity isn't homogeneously distributed among members and associates.
Saudi Arabia, UAE, Iraq, and Kazakhstan may have the potential to increase production; other countries might not even maintain current production levels. Therefore, making a discretionary volume opening decision will be complex. Leaving everything unchanged would provoke protest, but managing unanimity with future increment promises might be achievable; this will be the decision at next weekend's meeting.
Finally, Iran is hurrying to deliver the most crude to China, primarily via Malaysia, which offers sufficient economic discounts to attract Chinese oil companies. Simultaneously, smuggling from Iraq appears to resolve the domestic gasoline deficit.
Other News
• ConocoPhillips (NYSE: COP) announced the completion of the Marathon Oil Corporation (NYSE: MRO) acquisition. Per the merger agreement, each Marathon Oil ordinary share converted to the right to receive 0.255 ConocoPhillips ordinary shares at the merger's effective moment, with cash in lieu of fractional shares.
• Shell (SHEL.L) won an appeal against a historic ruling requiring accelerated carbon reduction efforts, dealing a blow to activists using legal channels to pursue climate action. The Hague Appeals Court said Shell was responsible for reducing greenhouse gas emissions to protect people from global warming. However, it dismissed the 2021 ruling, which ordered Shell to reduce absolute carbon emissions by 45% by 2030 compared to 2019, including those caused by product usage.
Price Behavior
Crude oil prices rose on Friday, consolidating gains after a week of geopolitical tensions in the Russia-Ukraine war and the Middle East. The market is attentive to signals about what will happen next in Ukraine, as the war seems to be reaching a crucial phase after passing its 1,000th day earlier this week.
Brent and WTI crudes closed Friday, November 22, at $75.17/bbl and $71.24/bbl, respectively, gaining almost 6% compared to the previous week.
VENEZUELA
The Regime Seeks Survival Loopholes
In what some analysts described as a late decision, US Secretary of State Antony Blinken confirmed that, based on incontrovertible evidence, they recognize Edmundo González Urrutia as Venezuela's president-elect. Italy and Ecuador joined the countries, making this recognition. Though not yet the expected avalanche of support, these are signals of the growing isolation of the Venezuelan regime after the July 28 electoral fraud.
Another focus of international pressure on the regime is the Public Office of Victim Defense (OPCV) of the International Criminal Court (ICC), which strongly questioned prosecutor Karim Khan's lack of progress in investigating crimes against humanity committed in Venezuela. The OPCV warned that "victims have been waiting too long for justice and have the right to swift and fair proceedings.”
The regime can reach an understanding with the Trump administration. The Washington Post reports that the government has already contacted Trump's team, hoping to convince them that solving illegal immigration—which Trump has made a crucial agenda point—involves establishing a comprehensive Venezuelan repatriation system. The regime argues that maintaining licenses, lifting sanctions, and reducing the migrant flow would stabilize Venezuela economically.
The regime seeks to remain in power for a "prudential" time and receive recognition from the Maduro administration. While it sounds like science fiction, regime officials are trying to push this based on past success in obtaining real concessions from the US administration in exchange for promises. This is easier proposed than achieved, especially with the people Trump has nominated to top security and foreign policy positions.
To make matters worse, the US House of Representatives approved a bipartisan law called BOLIVAR (Banning Operations and Leases with the Illegitimate Venezuelan Authoritarian Regime Act), which prohibits transactions between the US government, American citizens, and the Maduro regime. The law will now be sent to the Senate for discussion and approval.
This "BOLIVAR Law" has stirred significant controversy in the National Assembly, generating a "Simón Bolívar" bill proposal to permanently politically disqualify Venezuelans the regime considers have attempted against the constitution, including requesting sanctions.
The economic situation continues in therapy due to currency scarcity. The official exchange rate rose above 42 BS/$, pushing the parallel market rate toward 56 Bs/$. With hydrocarbon sales income relatively constant before the Muscar accident, public spending had to be cut again, and liquidity was limited through banking, resulting in consumption reduction, economic growth reduction, and inflation increase.
Thus, Christmas 2024 doesn't promise traditional increases in public spending, consumption, and bonuses, at least for most of the country without access to currency. One way to summarize it in a sentence is that the Venezuelan economy is moving from formal economic activity to informal and generally from a partially market economy to an economy of controls and straitjackets.
Petroleum Operations
The Muscar plant accident last week continues to affect the hydrocarbon industry significantly. Its effects were felt practically nationwide, from Margarita Island, Jose, and Anaco in the east to the center and even the western part of the country.
If manageable with existing infrastructure, recovering crude production in northern Monagas state would mean flaring all the rich associated gas. A drop in light oil production affects the ability to dilute Belt crude, requiring selective closure of extra-heavy oil production. Jose’s petrochemical plants have been stopped due to a gas shortage since the accident. Liquid extraction and fractionation plants are not receiving feed. Consequently, once inventory is exhausted, gas cylinders will become scarce in the domestic market.
Since Thursday, news has spread that gas has arrived in Margarita and Jose. However, we can only think this means increased gas production in the Anaco area, which must be limited or affect the gas supply to the country's center. Moreover, Margarita generation plants were initially designed as dual (gas and diesel), but we are still determining if this is true.
Reports on Jose crude upgraders indicate only the PetroPiar plant is operational and capable of processing around 100 Mbpd of Belt crude; today, this is the only existing mechanism to reduce diluent needs. Merey 16 mixing plants are functioning partially.
Technicians analyzing the Muscar situation and associated installations agree that repair will require months of arduous work.
Average national production reduced this last week to 746 Mbpd due to closures and diluent scarcity. Regional production distribution:
• West: 199 (Chevron 91)
• East: 105
• Orinoco Belt: 442 (Chevron 106)
• TOTAL: 746 (Chevron 197)
Refining levels reached 198 Mbpd of crude and intermediate products, with 68 Mbpd gasoline and 70 Mbpd diesel yield. CRP yield information has been difficult to verify; some sources claim gasoline yield is higher than 68 MBPD mentioned and a lower diesel yield. In any case, it is a domestic market with a structural deficit.
Export programming in the country's east remains undefined until produced segregation volumes stabilize. Chevron exports will see no volume changes, though some Merey crude might end up as DCO.
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