El Taladro Azul Published Originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
This last delivery of the year is an opportune moment to take a retrospective look at the events that have marked its course. For most of these twelve months, geopolitical instability, generated by wars and economic sanctions, positively (rise) and negatively (fall) affected the perception of oil market actors, developing volatility that we have analyzed to try to understand the complex world of crude oil price formation. Despite hopes of an energy transition, hydrocarbons will remain essential to the global economic dynamic.
The prolonged war between Russia and Ukraine has become a war of attrition, exceeding 1000 days, this time not in trenches, but motorized and aerial. Ukrainian forces managed to occupy a small part of Russian territory in Kursk to stop the Russian advance in eastern Ukraine. They also achieved some success by attacking Russian oil installations far from the border, causing damage to 15% of Russian refineries, some fuel depots, and shipping ports. For its part, Russia opted to use a contingent of North Korean soldiers, further internationalizing the conflict. It began to use more sophisticated and powerful weaponry, sometimes even suggesting that greater involvement of NATO could force them to use nuclear warheads. Both sides have made drones a novel element of this bloody war.
The confrontation between Israel and Hamas, initially confined to the Gaza Strip, expanded as Iran and its proxies, Hezbollah and Houthi rebels, joined the conflict. The military success of the Israeli Defense Forces in that conflict has transformed the regional geopolitical dynamics, although it did not solve the underlying reasons. On the other hand, the fall of the Syrian dictatorship of Bashar al-Assad represents a serious setback for Russia, its presence in the Middle East, and its access to the Mediterranean Sea. Iran also lost the supply route to its proxies in Syria, Lebanon, and Gaza, which had already been diminished by more than a year of losses in their wars against Israel.
In sum, this year's war conflicts translated into higher transportation costs due to transit limitations through the Red Sea and the Suez Canal, a consequence of the continued attacks by Yemen's Houthis and changes in Russia's export patterns due to damage to its infrastructure. However, the oil and gas production capacity of the regions in conflict has not been significantly affected.
On the other half of the world, China has taken the opportunity to push what it sees as its legitimate territorial ambitions. Military deployments around Taiwan and in the Northern China Sea, probably to study the reactions of neighboring countries and international actors in general, are the spearhead of a situation that must be followed with attention.
The inauguration of the newly elected American president, Donald Trump, in January 2025 is a significant milestone for his country's internal politics and worldwide. The expectation of a trade war, with increases in tariffs and incentives for domestic investment, will impact economies and relationships with his neighbors and current commercial partners, Mexico and Canada, as well as with China, the BRICS countries, Europe and South America, without counting the potential effect of the much-touted mass deportation of immigrants.
From the perspective of industry fundamentals and oil markets, the threat of a global oil demand erosion, or at least its growth, has been the variable that most affected market agents' perceptions.
This continued fear is due to a combination of factors: a China with economic problems, until recently, the engine of energy demand growth, and the projections of a recession. The Asian giant's economy has not managed to react to stimuli introduced by the central government. Equally relevant has been the global inflation that erupted since mid-2021 as a product of the energy crisis and the post-pandemic rebound, which motivated restrictive monetary policies in different economies seeking to cool the economy without producing a recession, the so-called "soft landing." One of the collateral effects of this economic cooling is a less robust oil demand growth.
By the end of the year, inflation showed signs of responding to these policies, even generating recession in particular cases. Thus, central banks have begun to relax their policies, and we are heading toward a year with inflation under control and interest rates that will once again stimulate investment and, consequently, a more vigorous demand.
Week after week, we have tried to make sense of the crude oil price fluctuations as reactions to the most recent events and statistics. Nevertheless, analyzing the year retrospectively, we can conclude that it was a year where the market reacted cautiously, even to seemingly extreme news. The year began and seems to be ending with very similar oil prices. Throughout the year, prices moved within a narrow band of 15 dollars, lower than in previous years. The average cost of Brent crude was $80.7/barrel, a value close to what consumers and producers consider acceptable.
This price level is probably very close to what OPEC+ will try to maintain if there is understanding among other producers. At the same time, we are convinced that a price close to $80/barrel in Brent crude terms allows "Shale Oil" producers, the other "swing producers," to maintain their strategy of financial discipline with controlled growth.
Another element that characterized the year was the consistent divergence in oil demand and supply forecasts from institutions and analysts, the most relevant being the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC). The estimates of these two institutions do not coincide even in demand predictions for 2024, less than a month from closing, when reality should make them converge.
Before Closing the Year
In the second week of December, oil prices finally moved past the interpretative dichotomy resulting from the OPEC+ announcement of postponing dismantling its production closure strategy. The issue now occupying market anxieties focuses on the geopolitical repercussions of Trump's decisions regarding sanctions on Iranian and Venezuelan crude. Also, speculation continues about the ability to effectively implement the new sanctions by G7 countries on the Russian "dark fleet"; the market seems to interpret that both strategies have a high probability of increasing crude prices.
Geopolitics of the Moment
In Syria, confusion still reigns between celebrations and tears related to the release of prisoners from jails. Israel, fearing that the arsenal supplied by Iran to the Al-Assad regime to keep Hezbollah equipped might end up in the hands of insurgents, bombed military targets and missile warehouses on the outskirts of Damascus and is hurrying to take positions on the demilitarized border.
The future of Russian bases in Syria remains to be discovered. Russia has two military bases in Syria: The Tartus naval base on the Mediterranean coast and the Khmeimim air base near the port city of Latakia. These bases are considered among the Kremlin's most important military assets. Tartus is especially critical, as it provides Russia with only direct access to the Mediterranean Sea. According to the Russian official news agency TASS, Syrian rebel fighters have already taken total control of Latakia province, where both bases are located. Ukrainian military sources indicated that Russia is withdrawing from its Syrian bases, although Russia rules out that possibility.
The second censure motion against the president for declaring martial law in South Korea has triumphed. President Yoon Suk-yeol will be suspended from office, and Prime Minister Han Duck-soo will temporarily take his place. Koreans took to the streets to celebrate their president's removal, although the Constitutional Court still needs to decide his fate.
In Georgia, Mikheil Kavelashvili, a pro-Russian politician, was elected president by the Central Electoral College composed of deputies and local government representatives—the first time the president has not been elected by popular vote. The opposition has yet to recognize the results of the parliamentary vote held on October 26, and the acting president, Salome Zurabishvili, questioned the legitimacy of Parliament in choosing a new president to replace her. Street protests continue.
The US and Trinidad and Tobago signed military cooperation agreements. The agreements, which include the renewed Status of Forces Agreement (SOFA) and the Cross-Servicing Acquisition Agreement (ACSA), were signed on December 10 by National Security Minister Fitzgerald Hinds and US Department of Defense representatives. According to the US Embassy in Port of Spain, the new SOFA will allow greater interoperability between the armed forces of both countries, facilitating the exchange of resources, personnel, and logistical services.
Current Fundamentals
OPEC+ maintains relatively constant production that will average 40.5 MMbpd for the last quarter of the year and, according to announced agreements, will remain at that volume until April 2025. According to OPEC, global demand by the end of 2024 is 103.8 MMbpd, while the IEA reports 102.8 MMbpd, a difference in figures that is difficult to understand.
The US also maintains a constant production level (around thirteen million barrels per day), and weekly EIA reports indicate considerable growth during the year (around six hundred thousand barrels per day). Nevertheless, we insist that these amounts may result from arithmetic calculations adjusted by an empirical factor commonly revised retrospectively. Baker Hughes reports that the number of active drilling rigs remained constant last week. Commercial crude inventories fell by one million four hundred thousand barrels (1.4 MMbbls), while gasoline inventories increased by 5.1 MMbbls in the lower average range of the last 5 years.
India's Reliance signed a contract to purchase 500 Mbpd of Russian crude, almost one-eighth of India's daily imports. Unofficial sources indicated that the negotiated price is $4/bbl below the Brent price. The increase in Russian crude purchases is made at the expense of crude from Saudi Arabia and Venezuela. We'll see how this is managed in an environment of new sanctions on Russian oil.
After clashes between armed groups near the facility, Libya's state oil company declared force majeure at its 120,000 bpd Zawiya refinery today. The company said several storage tanks were damaged, causing fires, although these were later contained. Zawiya is Libya's largest operating refinery, with most of its output absorbed domestically. It runs on crude from Libya's El Sharara oil field, which Repsol runs.
Mexico's production continues to fall amid budgetary problems and the overwhelming debt of the state-owned oil company Pemex. November production is estimated at 1.3 MMbpd, almost 30% below the budgeted production.
Meanwhile, Argentina's production continues to grow from the activities of state-owned YPF and private companies. In November, the average production was estimated at 746 MBPD, primarily due to growth in the Vaca Muerta Basin.
Our supply and demand balance estimates indicate that current demand remains at 102.8 MMBPD and supply at 102.5 MMbpd.
Price Behavior
The market finally seems to have digested that OPEC+ would maintain its current production until the end of the first quarter. It perceives that instability in the Middle East and Eastern Europe represents a real threat to normal oil activities and, therefore, factors in a greater geopolitical risk. In parallel, the touted supply increase from other producers has begun to raise doubts, which has helped to strengthen prices during the last week.
So, at market close on Friday, December 13, Brent and WTI benchmark crudes were quoted at $74.49/bbl and $71.29/bbl, respectively. The week closed with a gain of around 4.7% compared to the previous week.
VENEZUELA
A Year of Political, Economic, and Emotional Ups and Downs
If international geopolitical uncertainty was the order of the day on the world stage, the public scene in Venezuela was no less dramatic. The surprising success of the opposition primaries in 2023, with María Corina Machado's victory, led to her disqualification and, after a bumpy route, to the nomination of Edmundo González Urrutia (EGU) as the presidential candidate.
On July 28, despite all the obstacles imposed by the regime during the electoral campaign and the process of voting and counting votes, the objective of winning the elections was impressively achieved, though not surprisingly. EGU won 70% of the votes. The regime's institutions then hijacked the process, and the National Electoral Council, or at least part of it, communicated partial results favoring Maduro and qualified them as irreversible, declaring Maduro as the contest's winner. The street protests in response to the perpetrated fraud led to violence and repression by the regime's security forces, causing more than two dozen deaths and over 2,000 detentions, including minors and teenagers.
However, in a well-planned and unexpected operation for the regime, the opposition managed to collect 83% of the original voting records, proving EGU's triumph by a wide margin. The only international observers, the Carter Center and UN experts, reached the same conclusions: the process reported by the CNE did not meet the requirements of a democratic process, and they supported the results of the vote tallies collected by the opposition.
The international reaction of democratic countries, faced with the evidence shown by the opposition, was not to recognize the results announced by the regime. Many countries have subsequently recognized Edmundo González as Venezuela's president-elect. Maduro and González maintain that they will be sworn in on January 10, 2025. For now, EGU's swearing-in seems more like a chimera, but things are happening at extreme speed.
Meanwhile, the regime continues trying to "normalize" the electoral fraud, using economic and political actors as lobbying agents, both internally and with the new American administration. In parallel, the security forces continue its strategy of repression of dissidents, which has been censured by several international.
The Economy a Weak Flank
Before the July 28 elections, the regime kept the official dollar anchored to reduce inflation, one of the significant concerns of the population, and increased public spending in the last months of the campaign in an extraordinary effort to distribute CLAP boxes (food packages) among its militants, associates, and those vulnerable to such treatment.
Today, after the elections, the shortage of foreign currency continues to unbalance the country's economic strategy, delegated to Delcy Rodríguez, vice president and energy minister. Oil revenues are not rising; the official Venezuelan basket price hovers around $35.6/bbl, while the theoretical price is $66/bbl – a result of discounts on crudes sent to Asia and for debt payments to Chevron on those sent to the US.
Public spending is being reduced, contributing to the economy's shrinking size and general consumption decline. A good part of the oil income leveraged by an amount used from international reserves has been directed to the intervention market to stop monetary devaluation. However, the official dollar is already approaching 50 Bs, and the parallel market is at 60 Bs.
As an example of the economic and legal insecurity facing the private industry, a product of political discretion, Diosdado Cabello, interior minister, denounced a "conspiracy" of judges, prosecutors, military personnel, and businessmen from Zulia State. The procedure resulted in the detention of at least seven people and the accusation against José Enrique Rincón, owner of Grupo Lamar, the main shrimp-producing and exporting company in Venezuela.
Petroleum Operations
Crude production has normalized in northern Monagas at the expense of burning additional quantities of associated natural gas that cannot be collected: today's figure exceeds two billion cubic feet per day (2000 MMcfd) flared or vented. To put the scale of this lost gas volume in context, the figure corresponds to the daily consumption of the rest of Venezuela and Colombia combined. The volume of natural gas reaching Jose and Margarita Island, the primary victims of the Muscar plant accident, is estimated to be between 250 and 300 MMcfd.
National crude production averaged eight hundred thirty-six thousand barrels per day (836 MBPD) this last week due to the reopening of wells in northern Monagas and some Orinoco Belt wells closed due to diluent scarcity.
The regional production distribution is as follows:
• West 200 (Chevron 93)
• East 121
• Orinoco Belt 515 (Chevron 110)
• TOTAL 836 (Chevron 213)
Refining levels reached 203 MBPD of crude and intermediate products, with a gasoline yield of 71 MBPD and 66 MBPD of diesel. The El Palito distillation tower started after a prolonged inactivity, producing naphtha sent to the PLC refinery to keep it operating since all light crude was dedicated to Orinoco Belt crude dilution.
The domestic market situation is severely compromised by gasoline and diesel shortages. Gas cylinders disappeared from the market, and "bachaqueros" (black market sellers) emerged with gas cylinders at exorbitant prices. Even in the capital city, buildings and houses dependent on large cylinders have not been able to be restocked. Meanwhile, sufficient gas is arriving in the Jose area in the eastern part of the country to maintain 75% of methanol production and a train of ammonia and urea.
Crude exports, year to date, averaged around 610 MBPD, slightly higher than in 2023. Exports for the last 13 days equate to a monthly average of 580 MBPD, but this number will be better defined as the month progresses.
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