El Taladro Azul Published Originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
A week shortened by Thanksgiving in the U.S., but not less active in news that impacted markets. The fall in U.S. commercial crude inventory and the postponement of the OPEC+ meeting until after the weekend, with indications that there will be no production increases by the cartel this year, among other developments, seemed to support prices. However, the news that overshadowed all others was the ceasefire between Israel and Hezbollah under the auspices of the Biden administration. The agreement consolidates the positions achieved by Israel in southern Lebanon to the point that the Lebanese army is moving south, taking border positions that Hezbollah had previously not allowed. The "Trump Effect" seems to push U.S. stocks to higher levels despite announcements about tariffs and deportation of illegal migrants. Similarly, the president-elect's position on Iran, along with OPEC+ decisions, the new conflict in Syria, and business fundamentals, could cause oil prices to rise in the near future.
Geopolitics
The most significant geopolitical event has been the newly implemented ceasefire between Israel and Hezbollah, which could be a first step towards negotiations to end a war that, since 2006, has killed thousands and caused over a million displaced. Maintaining this truce, in the publicized terms, will not be easy. The ceasefire formally began on November 27, 2024.
The Biden administration led mediation efforts to reach the agreement, which aspires to spread to the Gaza Strip, where negotiations are stalled. Hezbollah was being decimated by the ingenious Israeli technological and military campaign and saw the ceasefire as an alternative to growing human and population support losses. As for Israel, Prime Minister Benjamin Netanyahu spoke of the need to give relief to the Israeli army, which has been fighting on several fronts for more than a year. Netanyahu's critics say that prolonging the conflict helps him avoid early elections.
Israelis believe Hezbollah will attempt to use the cessation of hostilities to regroup and, therefore, are skeptical of the pacifying potential of the event. Israel reserved the right to act militarily if it detects a Hezbollah resupply effort. However, a well-managed ceasefire could be a historic opportunity to neutralize Hezbollah, which, like Hamas, has financial and military support from Iran.
Converting the 60-day ceasefire into permanent peace, and even more so achieving a similar result in Gaza, will not be an easy task for the new U.S. government, which, along with Arabs and Europeans, will try to calm the Middle East.
For now, the Lebanese army is moving south to take its border positions that Hezbollah had usurped while thousands of displaced people think about returning to their homes.
Hamas has not taken a similar escape route. Therefore, the Netanyahu government has no intention of ending its attacks on Gaza, continuing towards its declared objective of destroying Hamas, which still holds about 100 Israeli hostages.
As one fire goes out, another emerges. The civil war returns to Syria with the takeover of a large part of Aleppo by an alliance between Hayat Tahrir al-Sham and other Islamic groups linked to Al Qaeda, who, taking advantage of the withdrawal of part of the Russian and Iranian armies, has launched the most significant attack in years. Reports suggest that Moscow has been moving some of its forces to the invasion of Ukraine, while pro-Iranian forces, particularly Hezbollah, have been weakened by Israeli attacks. This Saturday, the Syrian regular army withdrew from Aleppo, the country's second city, in the face of the rebels' unstoppable operation. On the other hand, Russian and Syrian forces are bombing rebel positions that have the support of Erdoğan, the president of Turkey. A conflict that threatens not only the survival of President Bashar al-Assad's regime but also the regional balance.
Meanwhile, the Russo-Ukrainian conflict, in addition to verbal threats from both sides, has seen massive Russian attacks on Ukraine's energy infrastructure. Ukraine could decide to increase attacks on refineries and oil storage centers in Russian territory, which could further affect availability for the domestic and export markets. There is talk of an economic crisis in Russia, compounded by human losses in its young generation, which is also not a good omen for its future economy. President Zelenski has already begun to hint at the need for negotiations that respect his territory's integrity.
Another geo-economic crisis was presaged by President-elect Trump's announcement of his intention to impose a 25% tariff on imports from Canada and Mexico until their respective governments limit the flow of illegal immigrants and drugs into the U.S. Due to its commercial importance, the news prompted Canadian Prime Minister Justin Trudeau to fly to Florida for a personal meeting with Trump. It is reported that the meeting discussed trade, border issues, and fentanyl trafficking, issues underlying the U.S. leader's tariff threat. Likewise, the president of Mexico, Claudia Sheinbaum, communicated with Trump to discuss tariffs and immigration; the statements from both leaders after the call were contradictory.
Fundamentals
The oil industry in the U.S. is not a variable that will modify the supply/demand balance in the short term, maintaining production close to thirteen million barrels per day (13.0 MMbpd). According to Baker Hughes, the number of active drilling rigs in North American basins was reduced by one new unit this week. Perhaps this slow-motion reduction appears more significant if we observe that during 2024, the total reduction exceeds 40 drilling rigs. However, the reduction has yet to translate into a proportional production fall due to increased activity in the Permian Basin at the expense of less productive and gas basins.
Drilling wells and optimizing operations oriented to natural gas production are beginning to increase in response to the expectation of higher LNG exports during 2025. The Energy Information Administration (EIA) reported a reduction in U.S. commercial crude inventories of one million eight hundred thousand barrels (1.8 MMbbls) and an increase in gasoline inventories of almost three million barrels, probably in preparation for the demand increase during the Thanksgiving weekend.
OPEC+, which produces approximately 40% of the world's oil, has been trying to dismantle the production cuts gradually that have been accumulating for various reasons and events; the organization has postponed its decision on several occasions, citing adverse market conditions. On the other hand, there are indications that the closed crude volume, which some analysts estimate at more than five million barrels per day (5), has declined and, in any case, only a small group of countries would be capable of opening new production.
The cartel postponed its next production policy meeting to December 5 to avoid coinciding with another event celebrated on December 1 in Kuwait, where Persian Gulf countries meet. During these additional days, OPEC+ energy ministers will have contacts to achieve unanimity in the upcoming announcements on Thursday. Market expectations are that an extension of quota increases until early 2025 will be announced.
Market actors will have to wait until next Thursday to learn about OPEC+'s 2025 policy, although a new delay in planned production increases is increasingly discounted. The group's supply cuts have helped maintain crude prices in a range that, in the case of Brent, the global oil reference, corresponds to $70/bbl to $80/bbl this year.
The cold season is entering Europe, and increasing concerns are associated with energy supply risks. Anxiety has translated into gas price expectations, which increased 45% in 2024.
How cold will it be? Will the wind be strong enough to alleviate pressure on declining gas inventories? Will there be enough LNG favoring the continent? And will Russian gas continue to flow? In case of scarcity, will they have to resort to oil and coal? These are just some of the questions the market and consumers are asking.
Wind energy is forecast to collapse in Germany next week, while natural gas storage levels are lower than last year, which led the International Energy Agency to sound the alarm. Natural gas flow from Russia to Eastern European countries has continued, although financial problems threaten its continuity. For example, Austria has decided not to pay gas bills as a mechanism to collect amounts Gazprom must pay for an arbitration award, compounded by recent OFAC sanctions on Gazprombank.
China is studying new economic incentives to implement if Trump's trade policy materializes. Meanwhile, China's crude oil imports could increase by the end of this year and early next; Chinese authorities have issued additional quotas to private refineries, the so-called "teapots," to import at least another 43.4 million barrels of crude, according to Reuters.
In Mexico, the state-owned oil company PEMEX is freezing the signing of new contracts with service providers while dealing with approximately twenty billion dollars in supplier debts. According to an internal company document obtained by Bloomberg, this temporary suspension by PEMEX's Exploration and Production division affects new agreements with contractors that were not previously formalized.
The document, dated November 25 and signed by Néstor Rodríguez Romero, PEMEX's Exploration and Production Director, indicates the decision comes after Mexico's 2025 draft budget publication, which assigns fewer funds to the state-owned oil company's exploration and production activities. This budgetary crisis will affect Mexico's declining oil and gas production.
Other News:
• Abu Dhabi National Oil Company (ADNOC) announced Wednesday it's spinning off its low-carbon energy and chemicals division, XRG, which has a market value of at least $80 billion. XRG, which will operate independently from ADNOC, aims to double its asset value over the next decade, leveraging clean energy demand in the global climate transition, artificial intelligence, and emerging economies boom.
• Brazil's Matrix Energia Group and TotalEnergies of Argentina confirmed reaching an agreement with Bolivia's state energy company YPFB to use its infrastructure to transport natural gas from Argentina's massive Vaca Muerta shale formation to Brazilian gas consumers. YPFB issued a statement Tuesday saying the agreement strengthened the "regional energy integration process.” This contract underscores Bolivia's shift from gas producer and exporter to idle infrastructure lessor.
• ENI (the Italian oil company) and Côte d'Ivoire's Ministry of Mines, Petroleum, and Energy signed contracts in Abidjan for acquiring four new exploration blocks in the country's territorial sea. The blocks CI-504, CI-526, CI-706, and CI-708 cover a total area of about 5,720 square kilometers at depths ranging from 1,000 to 3,500 meters; their proximity to the Calao oil discovery in Block CI-205 represents a strategic opportunity in the area. According to the agreements, ENI can explore the zone for up to 9 years. ENI produces around 22,000 barrels of oil equivalent (Mbped); the company already operates six deep-water blocks in Côte d'Ivoire. Chevron Corp. has also expanded its exploration area in other African countries, including Nigeria and Angola, where it sees potential for production reactivation despite years of decline. West Africa is emerging as one of the world's regions with the most attractive and active offshore exploration and development.
Price Behavior
Geopolitics kept markets on edge as the ceasefire between Israel and Hezbollah faced an early test when both parties denounced violations but survived the rest of the week. While partial or temporary peace does not directly affect oil flows, a resumption of hostilities could significantly impact sanctions on Iran and reactivate Houthi actions and other possible reactive acts by Iran.
Meanwhile, Russia continues attacking Ukraine's energy infrastructure, increasing the likelihood that Ukraine will respond similarly, which could affect refining and oil flows.
In any case, the perception of lower geopolitical risk impacted prices more than all other elements combined, including the Trump effect.
Thus, Brent and WTI crudes closed on Friday, November 29, at $72.94/bbl and $68/bbl, respectively, a loss of almost 3% compared to the previous week.
VENEZUELA
Custer’s Last Stand?
Despite petroleum lobbying efforts and other emissaries trying to convince the new U.S. administration that the Maduro regime is a reliable and necessary partner, the probability of this happening moves further away with each Trump nomination for his international relations team. Added to this is the bipartisan vision in the U.S. Congress in favor of democracy in Venezuela and against electoral fraud perpetrated in the country. Likewise, international recognition of Edmundo González Urrutia as president-elect has been growing.
Therefore, the regime has no alternative but to negotiate its exit or prepare more international isolation and stronger sanctions from January 10, 2025. This, if recent history is an indication, augurs new waves of repression against the political opposition and the population in general to maintain social control.
For example, the National Assembly approved, in an express manner and giving it organic law status, an instrument they have called the Simón Bolívar Law. This law "formalizes" the violation of the most elementary individual rights and political repression and other acts that, although at odds with the Venezuelan Constitution, the regime already executes. To underscore its indifference to international pressures, the regime has intensified harassment of the Argentine embassy, which, under Brazilian custody, has sheltered six opposition members since before the July 28 elections. Currently, the embassy site is surrounded by the political police, SEBIN, and they have cut off electricity and water. They have also been harassing María Corina Machado's family, blocking the only entrance to her mother's house. All this while, citizens suffer adversities due to a lack of public services, gasoline and diesel shortages, and prices unaffordable to most of the population.
In the economic aspect, public spending remains limited by currency availability, which tends not to improve if the effects of the Muscar accident on crude exports are factored in. The official exchange rate has slid to 47 BS./$, and the parallel market rate is estimated at 56 BS./$, a figure nobody publicly mentions but is widely used in commercial transactions. This has led to price increases already observed by citizens in the most traded products.
Petroleum Operations
Hydrocarbon industry activities and electricity supply continue to be affected by the Muscar accident on November 11. The accident's repercussions extend to gas availability in much of the country, impacting electricity supply; oil production is also affected. Jose's petrochemical plants have not yet been able to restart despite PDVSA's damage control operation; the opening of natural gas-rich fields in the Anaco area is reported, and apparently, a redirection of gas volumes from other fields. However, the regime must still explain what happened beyond the worn-out excuse of sabotage and the steps taken to restore the system. Surprisingly, during the week, PDVSA's president, Héctor Obregón, announced "the complete recovery of the Muscar industrial complex in Monagas." However, he did not provide details of the extent of that recovery.
Last week's average national production was 750 million barrels per day (750 Mbpd) due to closures and diluent scarcity. The only crude upgrader in operation is PetroPiar (Chevron); Merey 16 mixing plants are operating partially.
Regional crude production distribution is as follows:
• West 200 (Chevron 93)
• East 108
• Orinoco Belt 442 (Chevron 107)
• TOTAL 750 (Chevron 200)
Refining levels reached 202 Mbpd of crude and intermediate products, with a gasoline yield of 70 Mbpd and 65 Mbpd of diesel.
Export scheduling in Eastern Venezuela continues to be undefined until segregation volumes stabilize. Chevron's exports will not change in volume. The lack of light crude is forcing more DCO production and less Merey. The November export estimate is 576 Mbpd of crude, pending information from the last five days.
