THE RUSSIAN GAMBIT

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

The Trump administration's hope of achieving an expeditious resolution to the war that began with Russia's invasion of Ukraine suffered a not entirely unexpected setback. When it became evident that President Putin intended not to negotiate but rather to reiterate his position, just as he did in Alaska, Trump canceled the scheduled meeting between the two leaders in Budapest, Hungary.

Donald Trump had already threatened to impose additional sanctions on the Kremlin, although he thought it would not be necessary to go to that extreme; it turned out to be nothing more than wishful thinking, and he had to reconsider. Treasury Secretary Scott Bessent announced OFAC sanctions against Russian oil companies Rosneft and Lukoil, which, together with pressure on India and China, have significantly reduced Russian crude sales to those countries, despite the discounts. In parallel, the European Union (EU) approved a new package of sanctions against Russia.

All these decisions aim to weaken Russia's ability to finance its military capacity amid a Russian macroeconomy plagued by inflation and headed toward recession. The oil market reacted immediately with a price rebound that recovered the losses accumulated this month.

This severe market reaction has two interpretations: on one hand, the market estimates that the sanctions imply a potential collapse in Russian exports of between 1.0 and 2.0 million barrels per day (MMbpd); on the other hand, the much-touted oil overproduction now looks less likely than the pessimistic perception assumed. In any case, this extreme price volatility does the market no favors, although it does inject dynamism, especially in short-term speculative transactions.

GEOPOLITICS

In a one-hundred-eighty-degree turn from last week, geopolitical risk returned to center stage, causing a reversal in market sentiment. This time, it concerns how rigid the Kremlin occupant's war strategy appears to be: victory at any cost.

Russia-Ukraine

Donald Trump's insistence on pressing for a solution and Vladimir Putin's intransigence in his position are generating significant effects in the global oil market. Economic sanctions, pressure on buyers, and supply disruptions raise risk perception. A short list of the West's reaction to the deafness is as follows:

·       The U.S. announced sanctions against Russia's two largest oil and gas companies, Rosneft and Lukoil.

·       Trump threatened to impose secondary tariffs on countries that continue to buy Russian oil if Russia does not cooperate with peace agreements.

·       Pressure measures against India and China apparently took effect, and both are willing to reduce purchases of Russian crude.

·       The EU approved a new package of sanctions against Russia, No. 19, which will introduce new measures on oil and gas, the shadow fleet, and the Russian financial sector, in addition to personal sanctions against Russian officials.

·       For his part, Putin has adopted a defiant stance, refusing to yield to external pressures and warning that a reduction in Russian oil supply could trigger crude oil prices, as occurred this week.

·       On the negotiation with Zelensky, the EU decided to supply Ukraine with long-range missiles manufactured by Germany. The U.S. is reconsidering providing and allowing the use of Tomahawk missiles, which would put Russia's hydrocarbon infrastructure in check.

·       Russia, to demonstrate that it also has cards, announced the successful test of a new nuclear-powered cruise missile called Burevestnik. It is designed to evade missile defenses and supposedly has unlimited range.

Control of the Donbas region remains a strategic priority for the Kremlin. Apparently, Putin's positioning is designed to buy time and achieve military control of this region, which is part of what Putin calls "Novorossiya" or New Russia. This concept dates back to the 18th century during imperial expansion toward the Black Sea and the Balkans.

The Donbas is the industrial heart of Ukraine, with an area of about 52,000 km². It is rich in coal mines, steel mills, metallurgical plants, and strategic ports, including Mariupol, on the coast of the Sea of Azov. During the Soviet era, it was considered the economic engine of industrialization, essential for the development of the USSR. Still, in recent times, leading to the collapse in 1991, the region fell into economic and demographic decline, marked by disinvestment and the obsolescence of its infrastructure.

For Russia, the Ukrainian situation comes down to a balance between the pain caused by sanctions, the loss of lives and equipment in trench warfare and bombardments, and the importance of the Donbas region for Putin and for the post-war period of the area.

From an oil perspective, the fall in Russian exports could be between a maximum of 3.0 MMbpd and a more likely level of 1.0 MMbpd, which implies a drop in monthly revenues of 2,000 to 4,400 million dollars, a not insignificant amount in lean times. It has been reported that Chinese state-owned companies have already begun canceling Russian crude purchases.

Middle East

Between Israel and Hamas, a fragile truce is maintained, which has been announced will be guarded by a multinational force. However, not much progress has been made after taking the first step of the "Trump deal." The return of the remains of hostages who lost their lives in captivity has been like a slow drip; by the end of the week, only 15 of the 28 bodies have reached Israel. Trump's visit to Israel was followed by visits from Vice President J.D. Vance and U.S. Secretary of State Marco Rubio, designed to reinforce the White House's commitment to the fragile peace agreement.

Rubio, on his visit to Israel, declared that Hamas "cannot participate in the government of Gaza in the future." Rubio also stated that the UN agency for Palestinian refugees (UNRWA) "cannot play any role in Gaza" and described it as a "subsidiary of Hamas." In Rubio's opinion, Israel should be comfortable with international contributions to a future security force in Gaza, following reports that Prime Minister Benjamin Netanyahu opposed Turkish participation.

Rubio added that more countries are willing to normalize relations with Israel, but the decision would depend on a broader and sustained regional peace agreement. This would encourage more countries to join the Abraham Accords, just as the United Arab Emirates, Bahrain, and Morocco did, which normalized their relations with Israel in 2020.

Netanyahu ordered a halt to the advancement of bills in the Israeli Parliament related to the annexation of the West Bank after U.S. Vice President J.D. Vance expressed his disagreement with the voting on two proposals in the Knesset. The bills seek to apply Israeli legislation in the occupied West Bank, which would imply the annexation of territories claimed by Palestinians to establish a State, without considering the preliminary approval of the plan previously proposed by Trump by the Knesset.

In Egypt, delegations from Hamas and Fatah met to discuss agreements on the post-conflict period in Gaza, according to a report Thursday by the newspaper Al-Qahera News, an Egyptian state-linked media outlet. According to the 20-point plan proposed by Trump, an international security force made up of Arab and Muslim allies would manage the transition in Gaza during the progressive withdrawal of Israeli troops.

In southern Lebanon, Hezbollah terrorists are attempting to regroup, but Israeli forces are bombing them.

U.S.-China Trade

At the end of October 2025, trade negotiations between the United States and China are at a critical juncture, marked by fruitless talks and an escalation of tensions. A meeting between U.S. President Donald Trump and Chinese President Xi Jinping is scheduled for October 30 in South Korea, generating hope and great uncertainty.

Senior economic officials from both countries met in Kuala Lumpur on October 25 to reduce tension before the leaders' summit. A U.S. Treasury spokesperson described these talks as "very constructive" and stated they would continue. Much is at stake, as President Trump has threatened to impose 100% tariffs on Chinese imports starting on November 1 if an agreement is not reached.

In general, Donald Trump continued with active diplomacy, maintaining various confrontations in parallel: Venezuela, Mexico, and Colombia over narcoterrorism (President Petro was subject to OFAC sanctions). He also suspended trade negotiations with Canada for what he considered propaganda manipulated by the government of the province of Ottawa. Trump accused China of using Venezuela as a bridge for fentanyl trafficking.

In Argentina, the unexpected electoral victory of parties aligned with President Milei changed the board, providing critical support for the changes advocated by the occupant of the Casa Rosada. This will be well received by companies promoting the development of the Vaca Muerta basin.

U.S. Government Shutdown

The U.S. government remains partially closed. Monday's vote in the Senate did not reach the necessary support of 60 votes, as Democrats rejected the short-term funding measure approved by the Republican majority in the House of Representatives. That was a short-term measure to extend the "wrinkle" until November 21; hence its name: "continuing resolution."

No tangible signs of negotiation have emerged between congressional leaders since President Donald Trump met with them last week. The White House said Trump had spoken with Republican leaders, but not with the leading congressional Democrats. "His position is apparent," he said. "There is nothing to negotiate."

FUNDAMENTALS

Oil fundamentals took a back seat this week as geopolitics captured the market's attention.

In the U.S., as is now customary, there were no surprises. The Energy Information Administration (EIA), in its weekly report, maintains the production level at around 13.5 million barrels per day (13.5 MMbpd) and commercial crude inventories falling by a modest 1.0 million barrels (1.0 MMbbls). However, that volume becomes more significant considering there are about 4 MMbbls of additional imported crude and 1.5 MMbbls less refining than the previous week.

Baker Hughes reports an increase of 2 rigs activated during the week; the balance of 2 rigs that stopped operating in unconventional basins in Texas and four rigs activated in deep waters, which points to what was mentioned regarding the greater relevance of activity in those basins.

Although without a short-term effect, limitations on drilling offshore in Alaska were removed, and it is expected that, with this new regulation, the decline in production in the state will be mitigated or reversed.

In neighboring Canada, oil activity is on a plateau of caution. Drilling continues to be limited, as producers exercise caution with their capital spending programs due to downward pressure on crude prices. A 30% increase in Canadian oil exports to China provided a positive note; Canada and Venezuela appear to be replacing Russian crude in the Chinese market.

OPEC+ has been closing the gap between crude opening announcements and actual production; at the close of September, the cartel had increased its output by about 500,000 barrels per day (500 Mbpd), still 600 Mbpd below the total announced since April. As the geopolitics section explains, Russia's problems exporting crude will affect the gap.

Price Behavior

The pessimism generated by announcements of an oversupplied market and predictions of unusually low demand increases was silenced by a sudden rise in geopolitical risk threatening Russian exports.

Geopolitical risk has pushed into the background news about record volumes of crude on the water, the flattening of backwardation curves, and China's weakening of strategic reserve purchases.

At the close of markets on Friday, October 24, the benchmark crudes, Brent and WTI, were trading at $65.94/bbl and $61.50/bbl, respectively—a week-over-week gain of around 7%.

VENEZUELA

Rising Uncertainty

Venezuela faces a crisis characterized by multiple variables. Political instability, external threats linked to narcoterrorism, high country risk, and economic recession interact and aggravate the national situation. Added to this are the humanitarian emergency affecting millions of people, the increase in political repression, the renewal of international sanctions, and the economic deterioration that nullifies any previous progress; all these factors configure a complex and challenging scenario for the country.

The presence of the U.S. naval force, stationed in the southern Caribbean Sea and, recently, in Trinidad, has so far resulted in the elimination of 9 boats and one submersible unit, allegedly in service for drug trafficking; about thirty deaths are reported. One of the two survivors of these attacks, a native of Ecuador, turned out to be a criminal convicted in the U.S. and deported to his country of origin, where he was released for lack of evidence.

According to statements by the U.S. president, the second phase of the operation consists of reducing narcoterrorist activities on land, which implies a potential increase in pressure on the Venezuelan regime. The deployed force is also increasing by incorporating the destroyer USS Gravely, which arrived in Trinidad. There is speculation that the aircraft carrier Gerald Ford is sailing toward the Caribbean.

On the Venezuelan side, Maduro and his administration focused on presenting themselves as a power in defensive armament. They spoke of more than 5,000 anti-aircraft missiles of Russian origin deployed in the national territory and of militia training. In the diplomatic sphere, he made efforts to obtain sympathy and close ranks with leftist governments and his traditional allies, Iran, Russia, and China.

There was also friction between the authorities and the Catholic Church. Without presenting evidence, Maduro accused Cardinal Baltazar Porras of attempting to obstruct the canonization of Dr. José Gregorio Hernández before the Vatican and claimed credit for having personally promoted the canonization process of the new Venezuelan saint. This was a response to the messages of Cardinal Porras, which replicate the message of the Vatican Secretary of State, Cardinal Pietro Parolin, who presided over a thanksgiving mass for the canonization of the first two Venezuelan saints and denounced the existence of "unjust imprisonments" and "oppression" in the country.

The economy continues to be the weakest link due to the need for foreign currency, which is not obtained through the sale of hydrocarbons. The continued shortage of foreign currency has generated the need for monetary financing, which has translated into an increase in the gap between the official and parallel exchange markets. So, the financial authorities have dedicated themselves completely and with some success to reducing that gap.

Thus, public spending was reduced, tax collection increased, and, perhaps most relevant, the bolivar's devaluation rate was accelerated. The injection of foreign currency at the official exchange rate was considerably reduced. Meanwhile, via cryptocurrencies, mainly USDT, it increased to values well above the official rate.

All these measures managed to reduce the gap between both markets, going from a maximum of 65% to half (32%), with a downward trend. However, this is not extrapolable because some adjustment sources have already been used, and October revenues will likely be lower than September's.

Oil Operations

Activities in the hydrocarbon field designed to generate greater production through mixed companies (EM) and participation contracts (CPP) are ineffective due to adverse investment conditions, either for legal or ethical reasons or due to pressure from U.S. sanctions. Under these limitations, it is impossible to structure a sustained recovery of the national oil business.

Having said this, production has shown a modest increase to 870 Mbpd, distributed geographically as follows:

•          West                225       Chevron:          109

•          East                  119

•          Orinoco Belt     519      Chevron:          124

•          TOTAL              863      Chevron           233

The increase in production in the West comes from the mixed company PetroZamora. The PetroPiar upgrader produced 91 Mbpd of Hamaca crude.

National refineries processed 220 Mbpd of crude and intermediate products, yielding 73 Mbpd in gasoline and 77 Mbpd in diesel.

In the petrochemical sector, no changes have been reported since last week.

So far this month, in 24 days, about 20 million barrels of crude oil have been dispatched or loaded, equivalent to 650 Mbpd. The most significant part (480 Mbpd) is destined for the Far East (China), 135 Mbpd to the U.S., and 35 Mbpd to Cuba.

The exported segregations were: 410 Mbpd of Merey, 80 Mbpd of Hamaca, and 60 Mbpd of Boscán.

We estimate that the weighted price of exported crudes is $31.4/bbl.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute

 

OIL PRICES COLLAPSE AS GEOPOLITICAL RISKS DILUTE

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

The fragile implementation of the ceasefire and the beginning of the hostage exchange between Israel and Hamas, coupled with the promise of a summit between Presidents Trump and Putin in Budapest, which fuels hopes that it will lead to an outcome similar to that of Gaza's in Ukraine, have reduced the perception of geopolitical risk to a minimum.

The reimposition of tariffs by the United States on imports from China has reignited concerns about the strength of the economy and, consequently, oil demand. If we add to this the forecasts of a significant expansion in supply—in line with projections made by the International Energy Agency (IEA)—the perception has begun to consolidate in the markets that they are going through a period of economic slowdown accompanied by abundant oil supply.

The recent report of increased crude oil inventories in the United States has only added to this pessimism, which was reflected in a new decline in oil prices, reaching their lowest levels since the 2020 pandemic.

On the other hand, the potential effect on demand of the stimulus measures that central banks are reconsidering has an impact that is difficult to estimate. If we add to this the difficulties in determining the real capacities of producing countries, particularly the estimation of field declines, a better scenario than what is currently perceived as the base case could well occur.

In any case, we believe that current productions do not support the announced supply levels despite OPEC+'s month-over-month increase in September of approximately five hundred thousand barrels per day (500 kbpd) since production increases from the U.S., Canada, and Brazil could be overestimated.

GEOPOLITICS

Russia-Ukraine

The oil market has interpreted the upcoming meeting between Presidents Trump and Putin in Budapest as a possible starting point for resolving the conflict in Ukraine. The financial pressures from economic sanctions that significantly limit Russia's ability to continue the war continue to increase, making some type of compromise more likely. However, in Russia and Ukraine, the expectation prevails that this meeting will not generate substantial progress. It should be noted that Budapest was chosen as the venue because Hungary is not part of the International Court of Justice, which exempts Putin from concerns regarding possible arrest for charges filed at The Hague.

During a meeting at the White House between Donald Trump and Volodymyr Zelensky, no agreement was reached for the supply of Tomahawk missiles; this decision seeks to preserve these missiles as a negotiating tool in relations with Russia. On the other hand, NATO defense ministers are scheduled to meet on Wednesday to strengthen military support for Ukraine, in response to the significant decline in shipments of weapons and ammunition to that country.

The ministers will also debate a request from the NATO commander to lift restrictions on using their aircraft and other military equipment so they can be used to defend the alliance's eastern border with Russia, Belarus, and Ukraine more effectively.

The British government has included Russia's two main oil companies, Rosneft and Lukoil, in its latest sanctions package, as well as 44 tanker vessels identified as part of the "shadow fleet"; it has also added to the sanctions the Nayara refinery in India, which is majority controlled by Russian capital. However, these measures did not generate a market response.

Simultaneously, President Trump stated that India's Prime Minister, Narendra Modi, agreed to cease purchasing Russian oil. This is part of U.S. efforts to exert economic pressure on Russia and force it to negotiate an end to the conflict in Ukraine.

Middle East

Following the start of the ceasefire between Israel and Hamas, the exchange of hostages was carried out without incident. This was not the case with the bodies of hostages who died in captivity: of the 28 that had been agreed upon, as of October 19, only 9 had been returned. According to Hamas, they had problems recovering the rest of the bodies from the rubble in the strip and were receiving help from other countries to locate them.

Apparently, Hamas intends to maintain security control in Gaza. A senior Hamas official indicated that he could not commit to the group's disarmament. Mohamed Nazzal, a member of Hamas's politburo, also said the group was ready for a ceasefire of up to five years to rebuild devastated Gaza and would provide guarantees for what happens afterward based on Palestinians being given "horizons and hope" of obtaining their own state. Nazzal, from Doha, defended the repression the group is carrying out in Gaza, where it conducted public executions on Monday. "Exceptional measures are always applied during war, and those executed are criminals guilty of homicide," he stated.

While Hamas has expressed these opinions before, they are evidence of the main obstacles obstructing efforts to consolidate a complete end to the war in Gaza. The ceasefire negotiated by the United States in Gaza appears to have survived its first major test this weekend, as Israel and Hamas affirmed their commitment to the agreement after two Israeli soldiers were killed in the enclave on Sunday, triggering waves of airstrikes.

While the ceasefire has held, the other fronts, such as Hezbollah and the Houthis, have not changed their stance toward Israel, and several bombings, mainly in southern Lebanon, have been carried out by Israeli forces in retaliation or prevention.

Iran

For unknown reasons, Iranian-flagged tankers have activated their automatic identification systems (AIS), which had been deactivated since the U.S. imposed sanctions on Iranian oil exports in 2018. That decision sought to hide the traffic of tankers that violated sanctions, including frequent ship-to-ship transfers. Groups monitoring tanker movements reported that more than 80% of Iranian vessels have transmitted location signals.

The measure seems counterintuitive, given that sanctions have intensified. The possibility is raised that these actions seek to reaffirm legitimacy and sovereignty; however, considering Iran's current situation, it is more plausible that they respond to warnings issued by the United States. According to these warnings, sailing without activated transponders violates regulations established by the International Maritime Organization, which constitutes a legitimate cause to prohibit the circulation of any vessel on the high seas. The measure could have also responded to demands from China, which imports 90% of Iran's oil exports.

Transporting Iranian crude directly to China again would represent substantial savings for Iran, provided China continues accepting the shipments. In any case, shortly afterward, the tankers deactivated their signals again.

U.S.-China Trade

China and the United States reported on Saturday, October 18, that they will hold another round of trade negotiations next week to avoid imposing new tariffs. Last week, Beijing implemented new restrictions on the export of rare earths, which led the U.S. president to raise the option of establishing 100% tariffs on imports from China. Additionally, the possibility of canceling the meeting between the U.S. president and Chinese President Xi Jinping in South Korea during the Asia-Pacific Economic Cooperation (APEC) summit was mentioned.

Chinese state media reported that Vice Premier He Lifeng and U.S. Treasury Secretary Scott Bessent held "frank, in-depth and constructive exchanges" during a call on Saturday morning and that both parties agreed to hold a new round of trade talks "as soon as possible."

U.S. Government Shutdown

The federal government shutdown extended into its third week on Wednesday, after lawmakers failed to advance in negotiations.

The ninth failed Senate vote occurred when the parties met separately at the Capitol to accuse each other of being inflexible. Meanwhile, military families and federal workers generally face the prospect of having their paychecks interrupted by the end of the month. A new attempt is scheduled for the afternoon of Monday, October 20, but without much hope of finding a compromise.

FUNDAMENTALS

An unusual convergence is observed between physical factors, such as increased production by OPEC+ countries and the rise in crude oil inventories in the United States. Forecasts anticipate weak demand and high supply, generating a dual pessimistic sentiment in market perception.

Our analysis indicates that during September, OPEC+ cartel members increased their production by approximately 500,000 kbpd compared to August. This increase places the total voluntary opening of shut-in crude, since April of this year, at 1.7 MMbpd, compared to the 2.2 MMbpd announced by the group. It should be noted that the primary source of this data is OPEC itself and its secondary sources, except for Russia, whose values we have adjusted according to additional specific observations.

According to the weekly report from the Energy Information Administration (EIA), commercial crude oil inventories increased by 3.5 MMbbls but remained 4% below the five-year average range. Meanwhile, gasoline and distillate inventories decreased by 4.8 MMbbls.

Regarding the supply increase forecast by the International Energy Agency (IEA) and retransmitted by other sources, chronological analysis of information from original sources leads us to conclude that they overestimate the production increase. For the remainder of 2025, we believe there will only be increases in crude production from Guyana, 80 kbpd; Brazil, 25 kbpd; and Argentina, 18 kbpd, a total non-OPEC+ increase of 123 kbpd. During 2026, we anticipate an increase in global production of 1.5 MMbpd.

The IEA suggests more than 2.0 MMbpd increases in 2025 and 2026, reaching production of 108.3 MMbpd, which exceeds our calculations by more than 2.0 MMbpd. The most likely explanation is that the IEA has an agenda to discourage investment in fossil fuels, as its pronouncements often affect the management decisions of small and medium-sized oil companies and financial entities. This would be a curious agenda, to say the least, since the IEA has also spoken about the need to increase investment to avoid a supply crisis.

OPEC and its allies are naturally on the other side of the argument. According to Amin Nasser, CEO of the Saudi state oil giant Aramco, the oil industry must intensify exploration and investment in new supplies; otherwise, the world risks suffering a supply shortage. "If that doesn't happen, there will be a supply crisis," Nasser told the Financial Times.

Saudi oil company Aramco and OPEC have warned for years that the reduction in oil exploration, driven by recent net-zero emissions policies, would harm consumers and world economies with an insufficient oil supply. We estimate that an investment of $800 billion annually is required to avoid an energy crisis over the next 25 years.

Returning to the present, U.S. oil companies plan to maintain a balance between their investments and remuneration of their investors, so that potential-generating activities remain relatively constant in shale basins and there is a slight uptick in offshore developments.

Guyana is increasing production at its fourth floating production, storage, and offloading (FPSO) facility, Guyana 1, from about 112 kbpd today to 250 kbpd in April 2026. The next FPSO will arrive in Guyana at the end of the year, but the production increase will be perceived in 2027.

In Brazil, production recently began from the FPSO installed in the Bacalhau field in the Brazilian Pre-salt: the most significant offshore project operated by Norway's Equinor and its partners ExxonMobil, PetroGal, and the Brazilian company PPSA. Peak production will not be reached until 2027. Another unit, FPSO P-78, which recently arrived at the Búzios field, is estimated to be commissioned and begin production in 2026. Argentina, for its part, plans to increase output in Vaca Muerta by about 60 kbpd during 2026.

Price Behavior

The almost complete alignment of geopolitical factors, fundamentals, and forecasts of demand and supply behavior caused the market to enter panic mode, and prices fell to their lowest levels in five years and almost 20% lower than at the beginning of the year. All this in a scenario full of short—and medium-term uncertainties.

Thus, at the close of markets on Friday, October 17, the benchmark crudes, Brent and WTI, were trading at $61.29/bbl and $57.54/bbl, respectively, a loss of almost 2% compared to the previous week's close.

VENEZUELA

"The pitcher goes so often to the well that it breaks."

In the last week, Venezuela's political situation has once again revolved around diplomatic tensions with the U.S. and the regime's internal actions to convey security to its allies and fear to its opponents. Meanwhile, in the economic sphere, the substantial currency devaluation stands out.

Nicolás Maduro, alluding to President Trump's recent declaration that CIA actions should be carried out in Venezuela against drug cartels, resorted to the well-worn 20th-century playbook of the northern enemy's "coups d'état" to promote regional solidarity. It is sometimes difficult to understand whether or not there is a coherent strategy or if both sides are just reacting to events. Do financial markets seem to bet on political change, allowing them to negotiate and recover part of the state's enormous debt?

Two days after the CIA announcement, Trump confirmed the attack on a kind of submersible vessel loaded with drugs north of Venezuela, this time with a couple of survivors who were recovered by American helicopters and repatriated to Colombia and Ecuador, their alleged countries of origin. Another surprising news, which appeared in newspapers but was later confirmed by Trump, was that Nicolás Maduro had offered the U.S. preferential access to oil and other resources in exchange for a regime survival agreement. Curiously, the regime has accused the opposition, particularly María Corina Machado, of making the same offers.

On the economic side, the availability of foreign currency has not improved. On the contrary, lower prices for oil exports are hurting that front. The foreign currency deficit generates monetary financing to cover public spending needs, but the bolívars thus generated end up putting pressure on the foreign exchange market, forcing the devaluation of the bolívar and the consequent increase in inflation.

Venezuela's official exchange rate rose 451.8% in one year, a severe depreciation of the bolívar. The shortage of foreign currency has triggered the gap between the official exchange rate and parallel markets, which has only been mitigated by restricting the dollars injected into the market at the official rate and offering the remainder at higher prices using dollar-linked cryptocurrencies, USDT, and others, creating a parallel exchange market controlled by the ruling party. This allows certain companies and officials to obtain foreign currency at a price higher than the official rate.

Naturally, this process has intensified the country's transactional dollarization, particularly in purchasing basic basket products. The Venezuelan Finance Observatory (OVF), a prestigious private reference, has reported significant economic contractions, suggesting an ongoing recession.

Oil Operations

Operations in the hydrocarbon sector have continued their normal course. It is reported that in northern Monagas, approximately 300 million cubic feet per day (300 MMcfd) of natural gas is being collected and injected into the reservoirs, thus reducing the volume of gas flared and vented to below 1,500 MMcfd.

Crude oil production during the last week averaged 863 thousand barrels per day (863 kbpd), distributed geographically as follows:

•        West                    225    Chevron:     109

•        East                     119

•        Orinoco Belt         519    Chevron:     124

•        TOTAL               863    Chevron     233

National refineries processed 230 kbpd of crude and intermediate products, with yields in terms of gasoline of 76 kbpd and diesel of 78 kbpd.

A spill was reported on the western coast of the Paraguaná peninsula, coming from the Cardón refinery, affecting the activities of fishing communities.

In the petrochemical sector, Fertinitro's production train No. 1 was started up, while No. 2 continues in maintenance. In the methanol plants, one of Metor's plants is paralyzed due to a lack of natural gas, while the other two are operating normally. The SuperOctanos plant remains paralyzed.

Mid-week, crude oil exports exceeded 10 MMbbls, again destined for China and the U.S. Six shipments, a total of 2.0 MMbbls, were sent to refineries on the Gulf Coast of America.

We estimate that the weighted price of exported crude is $29.8/bbl.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute

GEOPOLITICS AND MARKET SENTIMENT WEAKEN OIL PRICES

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA 

GEOPOLITICS AND MARKET SENTIMENT WEAKEN OIL PRICES

During this week, the oil market experienced the impact of four relevant factors:

1.     Reduced geopolitical risk: The possibility that the agreement proposed by President Trump for the Middle East may be sustainable reduces geopolitical risk.

2.     Supply and demand dynamics are determined by weak forecasts and OPEC+ production opening announcements, although the cartel continues to face difficulties placing physical barrels in the market.

3.     Trade tensions: Tensions have increased in the trade war between the United States and China, resulting from the Chinese imposition of export controls related primarily to rare earths.

4.     Crude inventories: The moderate increase in crude inventories in the United States, although perfectly justified, was the fourth element contributing to the decline in oil prices.

The oil price retreat, even if temporary, hits the economies of producing countries hard, particularly Russia, and its ability to continue financing the war with Ukraine. Economic pressures are increasingly intense on the immutable Putin, while consuming countries rub their hands.

Additionally, the market closely observes various political events: the internal conflict regarding budget approval in the United States, which keeps the administration partially paralyzed; the removal of Peru's president, Dina Boluarte, following a unanimous censure motion; President Macron's difficulty in forming a stable government in France; and the complex diplomatic situation between the United States, Venezuela, and Colombia.

GEOPOLITICS

Israel-Hamas Agreement

Without a doubt, the most important event of the week has been the signing of phase one of an agreement to end the more than two-year war between Israel and Hamas, which represented a clear and positive advance. However, unresolved issues (such as Hamas's disarmament and its role in the territory's future) will preserve a degree of uncertainty about the associated geopolitical risk. The problem that most divides the parties is the creation of a Palestinian state, and the current agreement is far from outlining a sustainable solution.

In any case, and vital for the civilian population of the strip, a ceasefire in the Palestinian territory went into effect at 12:00 p.m. local time on Friday, and the Israeli army has begun to withdraw from parts of the Strip toward a defined line, after the Israeli cabinet approved the first phase of the agreement. Seeing Hamas members parade uniformed, hooded, and armed through Gaza, just left behind by Israeli forces on screens, is evidence of how complex the path is to achieve sustainable peace.

This Monday, in compliance with the first phase of Trump's agreement, the release of the 20 Israeli hostages known to be still alive was carried out, and the delivery of the bodies of deceased hostages began. For its part, Israel started the release of about 250 Palestinian prisoners and 1,700 Gaza detainees. An increase in the entry of humanitarian aid to the Strip has also begun to be evident.

A multinational task force in Israel, known as a civil-military coordination center, is being formed through the U.S. military, which will include troops from the U.S. (who would not enter Gaza), Egypt, Qatar, Turkey, and the United Arab Emirates, to oversee the ceasefire. Assuming the exchange of hostages and prisoners is completed, the intention is to build a so-called International Stabilization Force, but this must still be agreed upon between the parties.

War context

To try to understand what happened in these years of war, we must remember that what started the war was the surprise attack that Israel suffered in October 2022, in which more than 1,200 Jews were massacred and Hamas terrorists took hundreds hostage. Israeli military intelligence has still not given coherent explanations for why it could not detect what ended up being the most serious attack against Jews since the Holocaust.

Prime Minister Netanyahu, amid the surprise and gravity of the events, promised that Israel's response would "change the Middle East." During the following two years, against all odds, including dissent in his own country and international criticism and sanctions, Netanyahu used Israeli military capacity and intelligence (Mossad) to decimate Hezbollah in Lebanon and Houthi leaders in Yemen. His actions also contributed to the overthrow of Bashar al-Assad in Syria. While Israel defended itself from air attacks from Iran, it carried out unprecedented attacks against the financial center and brain of regional terrorism, Tehran, which severely weakened it.

The greatest effort of the Israeli defense forces was dedicated to pursuing and trying to annihilate Hamas in its lair, the Gaza Strip. The terrorist group, reduced and battered, took refuge in an impressive network of tunnels and used civilians as human shields. The war, in addition to the initial Israeli victims, has claimed tens of thousands of Palestinian lives and caused countless material damages.

The weakening of jihadist/terrorist groups, amid pressure and accusations against Netanyahu and Israel, which reignited global anti-Semitism, created a fertile scenario for the Trump White House's influence to force the parties, including Arab countries, to make a substantial change in their positions and that the search for a diplomatic agreement with credible and feared guarantors was the best solution to the military violence of the last two years.

If lasting peace is achieved in Gaza that includes the Palestinian Authority and excludes Hamas, with a government supervised by Arab countries, the regional repercussions would be enormous, and its reverberations would be felt around the world, including in oil demand.

Russia-Ukraine Conflict

The confrontation situation between Russia and Ukraine has not changed much; Russia continues with its drone and missile attacks, lashing Ukrainian territory and population. The most recent attack wreaked havoc on the capital, Kyiv's, electrical supply system. Meanwhile, Ukrainians have concentrated on attacking Russian energy infrastructure; in October, more than a dozen attacks on Russian refineries and pipelines were recorded. President Trump is beginning to lean toward the Ukrainian cause and is about to authorize the use of long-range missiles by Ukraine. The European Union (EU) and NATO are structuring a network of aid to Ukraine that could include deliveries of part of the Russian funds frozen in the European financial system.

However, diplomatic initiatives are not entirely ruled out. Kremlin adviser, Yuri Ushakov, said Thursday that Russia and the United States' efforts to end the conflict in Ukraine remain in force, the TASS state news agency reported. This contradicts Russia's Deputy Foreign Minister Sergey Ryabkov, who declared the "powerful momentum" for peace talks since August had been lost. In any case, Ukrainian President Volodymyr Zelensky has said he does not believe in President Putin's good intentions.

Currently, after 1,327 days of conflict, Russia's initial territorial objectives have not yet been achieved, and the morale of the Ukrainian population remains firm despite the trench warfare and continuous attacks on their cities. The confrontation is at a stalemate and is generating, particularly in Russia, considerable resource consumption in a significantly weakened economy. Indeed, for Putin, the situation is becoming economically increasingly unsustainable, since, in addition to the adverse effect on his oil infrastructure from Ukrainian attacks, low oil prices and the increasing costs of circumventing sanctions considerably reduce his income.

Political Crisis in the United States

In the U.S., the partial federal government shutdown has entered its second week without a clear path to resolution. Both houses of Congress remain mired in disputes over health policies as the October 15 military pay deadline approaches, creating significant political and market pressure. It is reported that President Trump has ordered his Secretary of Defense to pay military salaries as due.

Senate negotiations remain stalled, with no additional vote until October 14. Democrats continue to demand a permanent extension of tax credits for Affordable Care Act premiums (Obamacare) and reversal of Medicaid cuts before supporting any budget approval. The political dynamics have been further complicated by Senate Minority Leader Chuck Schumer's (Democrat from New York) comment that the shutdown helps them politically "more every day," which Republicans have interpreted as proof that Democrats are willing to prolong.

U.S.-China Trade Tensions

Trade relations with China are also going through a rocky stretch. On Thursday, China announced new restrictions on exports of rare earths and related technologies, expanding controls on the use of these critical elements for many high-tech and military products. This is before a meeting in approximately three weeks between the U.S. president and Chinese leader Xi Jinping.

The regulations announced by the Chinese Ministry of Commerce require foreign companies to obtain special permission to export items containing even small traces of rare earth elements from China. These essential minerals are used in various products, from jet engines, radar systems, and electric vehicles to consumer electronics such as laptops and cell phones. China controls 70% of the production and 90% of the processing of this raw material.

President Trump announced this Friday that, in response to the "extraordinarily aggressive" controls the Asian giant announced on its exports, the United States will impose 100% supplementary tariffs on China starting November 1. Trump added in his Truth Social network that the United States will also impose its own controls on exports of strategically important software beginning November 1. The president has suggested that the meeting with Xi could be cancelled.

This situation could be part of a tough trade negotiation strategy. Still, the oil market interpreted it as a threat to demand, sowing even more uncertainty in the global economy.

FUNDAMENTALS

During the week, fundamentals could do nothing to prevent the near panic in oil markets. First, the [Energy Information Administration] (EIA) reported an increase in commercial crude inventories of 3.7 million barrels (3.7 MMbbls). The market reacted to the number without factoring into its analysis that during the week, 4.0 MMbbls more had been imported than the previous week and that gasoline and distillate inventories had fallen more than 3.6 MMbbls during the same period.

In any case, the U.S. remains in a kind of oil lethargy. The marginal decline in shale oil and gas basins is offset by higher offshore production in the Gulf of America (formerly Gulf of Mexico), where several fields are at the start of their development phase or satellite production increase.

According to [Baker Hughes], rig activity has fallen by two units; however, these are four rigs dedicated to oil, as those dedicated to gas increased by two units. Similarly, the slight increase reported corresponded entirely to natural gas drilling in Canada.

South America on the global energy map

On the other hand, South America is beginning to recover a more prominent role on the global energy map, with Bloomberg projecting that the region will cover more than one-third of world oil demand growth through 2030. After years of decline due to Venezuela's crisis and the pandemic, activity in other countries places Latin America again in positions of importance in terms of contributions to global supply, despite setbacks in Colombia, Mexico, and Ecuador. Brazil, Guyana, and Argentina set the pace.

Brazil consolidated as the region's largest producer with the development of "Presalt" discoveries and has reached production of 3.8 million barrels per day (3.8 MMbpd). In Guyana, projects in the Stabroek block, operated by ExxonMobil, show impressive vitality, producing 830 Mbpd and on track to reach one million barrels per day. In Argentina, the dynamism of the Vaca Muerta basin drives growth: it currently produces 825 Mbpd, an Argentine record for the 21st century.

In contrast, Mexico maintains its production around 1.5 million barrels per day (1.5 Mbpd) after a sustained decline. Venezuela remains below 0.9 MMbpd, despite a slight recovery during the OFAC license period. Colombia, which previously provided stability, fell to 0.7 MMbpd. Examples of how bad policy can outweigh natural resources.

Exploration is also accelerating in Suriname, which shares a geological basin with Guyana. The region's relative institutional stability and low geopolitical risk reinforce its attractiveness compared to other producing areas.

OPEC+ and market forecasts

Finally, OPEC+ continues announcing accelerated production openings while trying to generate production potential to make true its announcements, which it has not yet achieved.

Most forecasts and analysts, except OPEC, announce supply surpluses for the remainder of the year and in 2026, based on strong supply growth and demand growth of about half of what it had been in recent years.

Those analyses also mention an increase in tanker inventories in transit and floating inventory as an argument for overproduction. However, as we mentioned last week, this phenomenon is due to increased navigation time and the detours used to deliver sanctioned crude to customers rather than overproduction.

We do not share this vision and have revised our projections, concluding that supply growth will exceed the IEA's forecast and reach a balance with OPEC's forecast toward the end of 2026.

PRICE BEHAVIOR

At the first opportunity, the ceasefire agreement between Israel and Gaza reduced geopolitical risk premiums in oil futures and led to a nearly 3% weekly decline in crude prices. Likewise, the evident escalation of tensions between China and the U.S. is also not boosting crude, and everything points to an impact on world trade in 2026 if the current pace of sanctions and reciprocal tariffs is not moderated.

Thus, at the close of markets on Friday, October 3, the benchmark crudes, Brent and WTI, were trading at $62.73/bbl and $58.90/bbl, respectively.

VENEZUELA

The Nobel Peace Prize irritates the not-so-peaceful

For Venezuela, the event of the week was the surprising but well-deserved award received by Venezuelan opposition leader María Corina Machado (MCM): the 2025 Nobel Peace Prize. The significance of the news has been such that it has polarized not only Venezuela but the world in general. Particularly noteworthy was that neither King Felipe VI nor President Sánchez of Spain congratulated MCM. Others, ideologically opposed to MCM, such as President Petro and President Sheinbaum, diminished the value of the award. To date, the Venezuelan regime has said little, while MCM's political enemies are busy attacking her.

In a bizarre episode, the White House criticized that the prize had not been given to President Trump. MCM moved quickly to neutralize the potential crisis and communicated with the U.S. president to thank him for supporting Venezuela.

In any event, as the award text reads: "The committee has decided to award the 2025 Nobel Peace Prize to María Corina Machado for her tireless work in promoting democratic rights for the people of Venezuela and for her struggle to achieve a just and peaceful transition from dictatorship to democracy." A firm declaration of political support for the country's democratic opposition.

Tensions with the United States

The conflict between the Trump administration and drug cartels, particularly the Cartel of the Suns, has become more serious. Trump announced that diplomatic contacts with Venezuela had been suspended, in apparent reference to contacts between Jorge Rodríguez, Venezuela’s chief negotiator, and special envoy Richard Grenell. At the same time, various sources reported the presence of U.S. forces in Trinidad, and it became known that the U.S. requested the island republic of Grenada to install radar equipment and military personnel on its territory.

The U.S. Senate rejected an initiative on Wednesday to halt the military campaign initiated by President Donald Trump in Caribbean waters, which seeks, in principle, to stop drug trafficking to his country. The initiative, led by Democratic Senator Adam Schiff of California and co-sponsored by his party's Senators Tim Kaine of Virginia, Ron Wyden of Oregon, and Vermont independent Bernie Sanders, was defeated 48 votes in favor and 51 votes against. It remains unclear what the military board is on which the U.S. is moving its pieces, nor what its preferred gambit is: negotiation or intervention.

Maduro and his associates, sensing the imminence of a negative outcome from the tense situation, have sent letters to different international authorities to intervene in favor of resolving differences through diplomatic channels. The letters were sent to President Trump, Pope Leo XIV, the UN Security Council, Guterres, and the UN Secretary General, among others. In the country, Russian anti-aircraft missiles and other military equipment continued to be deployed in high-visibility sites, and military exercises were carried out in La Guaira and Valencia.

Economic Situation

The Venezuelan economy continues in intensive care, trying to control a runaway exchange market. The official rate approaches 195 Bs./$, but the injection of foreign currency into that market continues to decrease in favor of currencies used at higher exchange rates to reduce the gap between the official and other alternative markets. The gap has been reduced to around 55%, and in the alternative market, U.S. currency trades are above 300 Bs./$. The combination of monetary financing and continuous devaluation incentivizes dollarization of the economy, reduces consumption, and pushes inflation to dangerous levels.

Oil Operations

The self-elevating rig (Jack Up) Alula remains docked at the Lagunillas Pier, on the eastern coast of Lake Maracaibo. It is being rigged up for activities, probably in the Lagocinco Block, but without a specific start date.

Oil operations in the country were modestly affected by failures in electrical supply. Shipments of heavy naphtha from Russia were received.

Crude production during the last week averaged 860 Mbpd, geographically distributed as follows, in Mbpd:

·       West: 224 (Chevron: 109)

·       East: 119

·       Orinoco Belt: 517 (Chevron: 123)

·       TOTAL: 860 (Chevron: 232)

National refineries processed 235 Mbpd of crude and intermediate products, with a yield in terms of gasoline of 77 Mbpd and diesel of 78 Mbpd.

In the petrochemical sector, Fertinitro's train No. 1 was restarted, while train No. 2 continues in maintenance. One of Metor's plants is out of service due to a lack of natural gas, and the other, like in Supermetanol, operates normally. SuperOctanos continues out of service.

During the first ten days of the month, crude exports totaled 6.4 million barrels, similar to the beginning of September. Two shipments were destined for the U.S. market, about 850 thousand barrels.

We estimate that the weighted price of exported crudes is $31.1/bbl.

North Paria Gas

Trinidad's attorney general announced on Thursday that the U.S. government has given multinational Shell and Trinidad and Tobago permission to develop an offshore natural gas field near the maritime border in Venezuela (Dragon Field north of the Paria Peninsula).

In recent years, the project to supply Venezuelan natural gas to Trinidad has progressed slowly, due to frequent changes in U.S. policy toward Venezuela. Venezuela has remained under U.S. energy sanctions since 2019. The Venezuelan regime has not declared on this latest license how it would affect the agreements it had already negotiated with Trinidad.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute