While the real oil industry faces daily complexities in supplying the more than 100 million barrels demanded worldwide, the oil market oscillates between fragility and firmness, chaos and precision.
Amidst the continuous avalanche of events and news, market perception is driven by the most significant event, at least in the short term, avoiding overload from excessive information. Last week, the announcement of a ceasefire between Israel and Hezbollah reinforced the perception of reduced geopolitical risk in the Middle East despite ongoing news from Syria. This week, the OPEC+ decision on production cuts, though anticipated, was the market's key factor. The oil market interpreted the postponement of production increases as evidence that demand, or at least its near-term growth, is threatened, fueling speculation along these lines.
Other significant developments, such as the precarious situation of Bashar al-Assad's dictatorship in Syria, the drop in crude oil inventories in the U.S., and increased fuel demand in India, were largely ignored by the oil market.
Geopolitics
Given the proliferation of global " hot spots, " it’s not far-fetched to suggest that “global warming,” often used in energy scenario analyses, is equally applicable to geopolitics.
In addition to the escalating confrontations between Russia and Ukraine and the conflict between Israel and Iranian-backed proxies in the Middle East, there’s now a potentially anarchic scenario in Syria. This comes alongside Chinese ambitions in the Far East, turmoil in South Korea, and political crises in France and Germany. These interconnected events arise amid a potentially disruptive change in the U.S. administration.
Just over a month before Donald Trump assumed office, discussions of potential peace agreements to end the Ukraine war and reduce Middle Eastern tensions emerged, voiced by Russian Foreign Minister Lavrov and Ukrainian President Zelensky.
Meanwhile, Syria’s long-dormant civil war has reignited over the past two weeks. The reduced Russian presence and Iran's weakening regional influence have emboldened Syrian dissidents, who have swiftly taken control of major cities, including Aleppo, Hama, Homs, and finally, Damascus, effectively ending over five decades of Assad family rule. Bashar al-Assad has fled the country, reportedly seeking asylum in Moscow, granted on “humanitarian grounds.”
The most prominent figure to emerge from this crisis is Abu Mohammad al-Golani, leader of HTS, a group with roots in Al-Nusra, formerly Al-Qaeda’s Syrian affiliate, though it now denies such ties. HTS’s offensive includes other opposition groups supported by Turkey.
Israel closely monitors these developments, preparing to adjust its border policies and adapt to the new power dynamics. Israeli Prime Minister Benjamin Netanyahu has announced the temporary occupation of a demilitarized buffer zone in the Golan Heights, declaring the 1974 agreement with Syria “collapsed” following the rebels’ takeover.
An Israeli spokesperson suggested the rebels appear rational, emphasizing continued governance of Syria’s needs until a formal transition plan is devised. Celebratory gunfire has been prohibited to maintain order.
This marks the end of a long and cruel era, reshaping the balance of power and regional alliances. Russia and Iran emerge as significant losers. However, no “good” geopolitical outcomes seem likely from this upheaval.
Meanwhile, a fragile ceasefire between Israel and Hezbollah is being tested by airstrikes and missile launches. The Israeli military has carried out operations against Hezbollah targets in Lebanon, retaliating against missile attacks near Mount Dov, a disputed area at the Lebanon-Syria-Israel intersection.
Other Geopolitical Developments
- President-elect Donald Trump has threatened 100% tariffs on BRICS nations if they move to create a currency independent of the U.S. dollar.
- Trump attended a ceremony alongside global dignitaries, using the opportunity to discuss Russia-Ukraine tensions and the Syrian conflict with Presidents Macron and Zelenskyy. Curiously, Trump appears to disregard the Logan Act, which prohibits unauthorized foreign diplomacy by private citizens.
- A vote of no confidence against the French prime minister weakens President Emmanuel Macron, while opposition leader Marine Le Pen gains strength.
- Protests demand President Yoon Suk-yeol’s resignation after his failed attempt to impose martial law.
- Georgia: Anti-Russian protests threaten the newly elected government, which has been accused of slow progress toward EU integration and pro-Putin stances.
- Romania: The Supreme Court annulled the presidential election amid allegations of Russian interference, restarting the entire process.
- China-Taiwan Conflict: Military drills near Taiwanese waters and provocations in Philippine waters maintain regional tensions.
Market Fundamentals
Efficient markets rely on reliable, timely, and transparent information. Divergent opinions on supply-demand balance stem from a need for such information. Data and projections from producers, consumers, and organizations like OPEC and IEA often reflect biased interests or omit critical details.
Building robust opinions requires analyzing available data and applying technical correlations and adjustments, culminating in informed predictions. For instance, in 2024, we estimate oil supply will fall 300,000 barrels per day short of demand, slightly below IEA’s demand growth forecast. By 2025, supply is unlikely to exceed demand even under OPEC+ production plans, leading to a modest inventory drawdown.
Our October calculations indicate that in 2024, 78 million barrels were drained from various terminals and storage centers globally while floating storage increased by approximately 62 million barrels. This resulted in a net inventory decline of about 16 million barrels. Based on the mentioned supply-demand balances, global crude inventories are projected to end the year at around 8 billion barrels. It is worth noting that inventory figures are the hardest to estimate accurately.
The obvious question is: why doesn’t the market price of crude reflect this analysis? The answer lies in the recurring perception that future demand might not be robust enough. This stems from concerns over China's economic weakness and the central government's inability to stimulate growth effectively, combined with potential advancements in energy transition, particularly electric vehicles.
On the supply side, part of the answer lies in the perception that the “Trump effect” could incentivize North American production. For instance, investment bank Goldman Sachs projects a global oil surplus of about 400,000 barrels per day next year. They argue that strong supply growth from non-OPEC+ countries offsets the group’s production cuts. However, our data does not support this “strong growth” cited by Goldman Sachs.
OPEC+ Announcement
This week, OPEC+, which produces around 40 million barrels per day (MMbpd), announced its widely expected decision to postpone planned supply increases for another quarter. The group has committed to rolling back production cuts from April 2025, with increases spread over 18 months until September 2026.
Contrary to expectations, this news did not boost prices as anticipated by the cartel. Instead, as with the previous postponement, prices fell, reflecting concerns that OPEC+ is worried about weak demand growth. Chinese oil imports remain below forecasts, although India helped narrow this gap in November.
U.S. and Global Developments
· U.S. Production: Activity picked up as Baker Hughes reported an increase of seven rigs, primarily focused on natural gas to meet winter demand. U.S. commercial crude inventories fell by 5 million barrels, below the five-year range.
· Employment Data: The Bureau of Labor Statistics reported 227,000 jobs created in November, surpassing expectations. Unemployment slightly rose to 4.2%.
Other Headlines
· Colombia: Petrobras and Ecopetrol announced the “largest gas discovery in Colombia's history,” confirming more than 6 trillion cubic feet of original gas in place from the offshore Sirius-2 well.
· Shell & Equinor: The companies will merge North Sea assets into a joint venture, creating the largest oil and gas company in the mature basin with a production of about 200,000 barrels of oil equivalent per day.
· Hungary & Gazprombank: Hungary requested that the U.S. exempt Gazprombank from sanctions related to natural gas payments, citing potential negative impacts on U.S. allies.
Price Trends
Despite heightened geopolitical conflicts, including the fall of Bashar al-Assad and its repercussions, the market has not reacted significantly. As of Friday, December 6, Brent and WTI crude traded at $71.12/bbl and $67.20/bbl, respectively, down nearly 2.5% from the previous week. Prices began to rise slightly in response to the Syrian crisis.
Venezuela
Judicial Measures and Political Fallout
The week saw setbacks for the Venezuelan regime. The International Court of Justice prosecutor Karim Khan demanded measures to uphold human rights. Meanwhile, the UN Human Rights Committee ordered Venezuela to preserve all electoral materials from the controversial July presidential elections amid allegations of manipulation.
Despite these developments, the Maduro administration plans to proceed with the January 10 swearing-in ceremony, while opposition leader Edmundo González Urrutia announced his intent to be sworn in within Venezuela, discarding an exile option.
The regime is doubling down with new legal measures, including controversial laws to tighten control over NGOs and political dissidents. Economically, Vice President Delcy Rodríguez traveled to China to seek investments and lobby BRICS countries for Venezuela's inclusion.
Economic Situation
Venezuela's economy remains derailed by currency issues and declining revenues. The official exchange rate stood at 48.3 Bs./USD, while the parallel market reached 58 Bs./USD. Lower oil prices have nullified these gains despite slight increases in crude volumes exported.
Oil Operations
- Production: Weekly national crude production averaged 812 Mbpd, with regional distribution as follows:
- Western Venezuela: 200 Mbpd (93 Chevron)
- Eastern Venezuela: 130 Mbpd
- Orinoco Belt: 482 Mbpd (108 Chevron)
- Exports: Crude exports reached 590 Mbpd, with destinations including China (293 Mbpd), the U.S. (243 Mbpd), Europe (85 Mbpd), and India (66 Mbpd).
Operational challenges persist, including reduced refining capacity (196 Mbpd) and issues with natural gas supply in key regions. This turbulent period reflects Venezuela's ongoing struggle to stabilize its political and economic landscape.
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