THE INSCRUTABLE DONALD J. TRUMP

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

The newly installed President Trump being a disruptive force in the economy and geopolitics should not come as a surprise. His first presidency and successful campaign had already provided sufficient clues about the many issues that occupy his fervent imagination. However, while this second term's start appears more orderly than his first administration, it is unsurprising that his initial actions, although anticipated, have raised as many doubts as certainties. For example, the uncertainty regarding when and to whom the much-discussed new tariffs will be imposed, along with the insistence on lowering energy prices, particularly for hydrocarbons, weighs on an oil market that is losing the upward momentum it had in recent weeks. In contrast, natural gas prices remained unaffected by the news and stayed true to fundamentals.

 

The central line of the new administration's energy policy—at least in hydrocarbons—is to increase supply to reduce prices and weaken inflation, energizing the world economy, particularly that of the U.S., with tax and protectionist incentives. However, the strategy details are either unclear or not entirely aligned with this megatrend; for example, lower prices mean less investment. Let's hope that greater clarity emerges in the coming weeks.

 

Geopolitics

 

In the geopolitical realm, the Trump effect, added to the dynamics already in motion, has had its first effects. In Gaza, four Israeli soldiers, between 19 and 20 years old, were released and received in Palestine Square, in central Gaza City, on Saturday the 25th morning. In exchange, Israel reported releasing 200 Palestinian prisoners. It is expected that 70 people convicted of the most serious crimes will be deported to neighboring countries like Turkey or Qatar.

 

In Europe, Ukraine continues its attacks on Russia, including Moscow, this week using more than 170 drones. According to Russia's Ministry of Defense, this is Ukraine's most significant aerial incursion into its territory in 2025. Ukraine confirmed attacks on a Russian refinery, as well as a fuel depot and a missile factory in Russia's Ryazan region, 170 km from Moscow. The refinery supplies fuel and other supplies to Russia's armed forces. Meanwhile, Russia continued bombing Kyiv during the week.

 

Apart from the second exchange of hostages for prisoners in the Middle East, non-existent military activity by Yemen's Houthis, and a new wave of attacks on oil infrastructure in Russian geography by Ukraine, it seems almost all geopolitical confrontations await definitions and action from the new U.S. administration.

 

In Washington, the newly sworn-in U.S. Secretary of State, former Cuban-American Senator Marco Rubio, has suspended all foreign aid—billions of dollars—with immediate effect, including what Washington was providing to Ukraine, in compliance with an executive order from Donald Trump. Only two countries were excluded from this suspension and review, Israel and Egypt, the two countries receiving the most significant U.S. military assistance. According to President Donald Trump's agenda, no new funds will be allocated until each new economic grant or its proposed extension has been reviewed and approved.

 

In the first movement of this political-economic symphony, uncertainty surrounding the U.S. administration's tariff threats to Canada, Mexico, and China has been the key melody this week. Oil markets are waiting until February 1st to dispel doubts about whether this is a negotiating tactic or, on the contrary, tariffs will be imposed as initially announced.

 

Closely related to U.S. international development is the Senate confirmation of Peter Hegseth, former Fox News host, as U.S. Secretary of Defense. In a dramatic vote that had to be broken by Vice President Vance's tie-breaking vote, three Republican senators voted against confirmation.

 

In the Middle East, Trump is betting on a diplomatic alliance between Israel and Saudi Arabia for regional stabilization, accompanied by an agreement with Tehran limiting its nuclear program, while deepening the offensive against terrorist organizations operating from Gaza, Lebanon, and Yemen. In line with these plans, Trump held a phone call with Saudi Crown Prince Mohammed bin Salman Al Saud, discussing potential Saudi investment in the U.S.

 

Regarding the Ukrainian conflict, Trump seems to favor a strategy of pressure and sanctions on Russia and its oil activities to force Putin to sit at the negotiating table with Ukraine and achieve a quick resolution to the confrontation that has lasted 3 years. The latest economic sanctions, imposed by the Biden administration, are working to support Trump's intention to force a final resolution of Russia's invasion of Ukraine.

 

Indeed, Russia's production, refining, and export capacity has suffered the consequences of field decline, Ukrainian drone attacks on a significant number of Russian refineries, and problems maintaining the operation of the "dark fleet" of tankers, respectively. During the last month, it was reported that one million seven hundred thousand barrels per day of oil equivalent (1.7 MMboepd) of Russian hydrocarbons could not reach their destinations in international markets. The sanctions framework established by the United States and its allies following Russia's invasion of Ukraine in February 2022 was not designed to halt the country's oil exports completely. This would have been too much volume loss for the market to absorb without a harmful economic price increase. Today, that isn't a central concern.

 

This Sunday, when no one expected it, Colombian President Gustavo Petro decided not to allow flights from the U.S. to arrive in Colombia under the undocumented immigrant deportation policy. Petro's reason, stated through social media, was that the inhumane treatment of his fellow citizens was unacceptable and had to change. This event, seemingly inconsequential at first glance, quickly escalated into a rhetorical and diplomatic battle on social networks. Summarizing something still developing, President Trump ordered the suspension of visa office activities at the embassy in Bogotá, followed by the threat of imposing tariffs of 25% and up to 50% on imports from Colombia if the South American country does not modify its position. Finally, Trump ordered the suspension of visas for the president, his family, and government members. President Petro responded that he would not be blackmailed and announced that he would take retaliatory action.

 

Although this episode of magical realism seems to be an unnecessary diplomatic storm, it's possible to infer that President Trump is taking advantage of it to message the region that his deportation policy should be taken seriously or that there will be consequences. For his part, President Petro is taking advantage of it to revive the old tale of the "ugly American" and distract internal attention from his government's problems, particularly the current security crisis at the border with Venezuela.

 

As this column closes, the crisis seems to have passed. In a hasty diplomatic negotiation outside social networks, Colombia agreed not to obstruct the repatriation of its nationals, and the U.S. suspended its threat of sanctions.

 

Fundamentals

 

According to analysts' estimates, China's GDP growth in 2024 improved modestly but well below official forecasts of nearly 5%. Stimulus to domestic demand, taken with some urgency, and other measures to improve the financial situation of the regions could result in China achieving growth of 3 to 4.5% in 2025, reinforcing oil demand forecasts from recent estimates.

 

Global demand pays little attention to controversies regarding international economic development, particularly concerning China and India. It continues growing at a healthy rate of more than one hundred thousand barrels per day (100 Mbpd) each month, extrapolating the trend of recent months to 2025. Therefore, supply will define crude price trends as 2025 develops.

 

OPEC+, custodian of the only shut-in barrels, has chosen not to change its quota strategy until at least April 2025, despite Trump's plea to the cartel in his objective to reduce energy prices.

 

The oil market is grappling with Trump's energy policy, which aims to boost domestic production and lessen reliance on foreign oil. Trump declared a national energy emergency and removed environmental restrictions to promote infrastructure development and maximize national output. His "Drill Baby Drill" directive urged the industry to increase drilling activities to strengthen U.S. production dominance.

 

This expectation may become ineffective, at least in the short term, as oil and gas activities are currently being carried out at optimal levels by oil companies, balancing production growth and fair shareholder remuneration; gone are the days of drilling intoxication.

 

Indeed, rig activity continues in a slow but steady decline. This past week, according to the Baker Hughes report, another four rigs were removed from operations, but most relevant is that in the most prolific basin, the Permian, the reduction was six units. This indicates that the U.S. oil industry, comprised of hundreds of private and public companies, is comfortable with the current activity level and production associated with their price vision.

 

Evidence tends to limit crude production in the United States to between 13.2 and 13.5 million barrels daily. According to Energy Information Administration (EIA) figures, commercial oil inventories fell by one million barrels (1 MMbbls), a modest reduction but significant when analyzing the context: crude imports increased by 4.5 MMbbls.

 

On the contrary, when we review the global natural gas situation, we realize its use has grown 50% in the last 15 years. While production and associated infrastructure have lagged, increasing gas transactions and prices, in the U.S., it has already exceeded $4/MMBTU. This presents an interesting challenge to the new administration, which must balance domestic energy prices and an LNG (liquefied natural gas) export release.

 

Price Behavior

 

Crude futures rose slightly on Friday after recovering from a two-week low. However, despite the modest rebound, oil prices remain under pressure from the uncertainty generated by President Trump's outlined energy plans. The hard line against Russian and Iranian regimes doesn't seem coherent with his interest in reducing energy prices to stimulate the world economy unless he believes he will be successful in twisting the Saudis' arm.

 

West Texas Intermediate (WTI) crude and Brent crude showed weekly losses of nearly 4% and 3%, respectively. Traders remain cautious and attentive to whether market sentiment changes; U.S. political decisions cloud the outlook for crude.

 

As things stand, West Texas Intermediate (WTI) crude and Brent crude showed weekly losses of nearly 4% and 3%, closing on Friday, January 24, 2025, at $78.5/bbl and $74.66/bbl, respectively.

 

VENEZUELA

 

Uncertainty Exists in Venezuela

After an avalanche of executive orders from Donald Trump in the first days of his mandate, it was surprising that none directly involved Venezuela, with the possible exception of declaring the criminal group, Tren de Aragua, as a terrorist organization.

 

The Venezuelan regime appears to be involved in two geopolitically delicate situations. In Chile, the prosecutor's office points to the regime as having ordered the assassination of Lieutenant Ojeda, a dissident former military officer residing in Chile, using Tren de Aragua as the executing arm of the crime; people involved in the plot have been captured in Chile and the U.S. On the other hand, the Colombian government is demanding that Venezuela not shelter ELN (National Liberation Army) guerrillas, as they are using Venezuelan territory as a platform to execute their attacks in the Catatumbo region and derailing President Petro's attempts to achieve negotiated peace with armed groups.

 

Venezuela was at the center of divergent declarations by Trump appointees as high-level members of his administration. The Secretary and Deputy Secretary of State, the Treasury Secretary, and President Trump himself spoke about Maduro's illegitimacy and his regime, its involvement with drug trafficking, and continued human rights violations. Meanwhile, Richard Grenell, White House envoy for special missions to Venezuela, declared on the same day as Trump's inauguration that he would hold talks with the Venezuelan regime and that meetings would begin the next day. These public differences in Washington's position, particularly after declaring that Edmundo González is Venezuela's president elected in the July 28 elections, instill doubt regarding the direction they will take concerning Venezuela.

 

The regime is preparing to survive the onslaught of more varied and severe sanctions, which complicate economic management and are already suffering from problems generated by post-election uncertainties. The shortage of foreign currency has forced reduced public spending, devaluation of the bolivar, and exposure to rising inflation. As far as possible, the regime will avoid returning to another stage of hyperinflation at the expense of reductions in consumption and the size of the economy. The official rate was allowed to slide to 56.22 Bs./$, and the parallel rate settled around 66.4 BS./$, reducing the gap between the two to less than 20%.

 

However, the treatment current OFAC licenses will receive remains highly uncertain. In case of cancellation, we estimate that net oil revenues in the next 12 months would be reduced by 40% and in the next 15 months by 53%. This would be a dramatic reduction, especially considering that in the most extreme case, due to how saturated the Southeast Asian market would be with sanctioned crude from Russia, Iran, and Venezuela, production cuts may be necessary.

 

Oil Operations

 

A series of explosions related to the natural gas system has shaken the eastern part of the country several times in recent months, the latest in the same area as the catastrophic accident at the Muscar plant. However, there is no news about the damage caused.

 

During the last week, crude production averaged eight hundred and sixty thousand barrels per day (860 Mbpd). The regional distribution of production is shown below:

 

    Region                                                   Mbpd

    • West                                                     208 (Chevron 93)

    • East                                                      131

    • Orinoco Belt                                         521 (Chevron 120)

    • TOTAL                                                 860 (Chevron 213)

 

Refining volumes averaged 214 Mbpd of crude and intermediate products, with a gasoline yield of 78 Mbpd and 71 Mbpd of diesel. The domestic market would be another victim of license cancellation, as it would make difficult the barter that today completes the supply.

 

The domestic LPG cylinder market situation continues to be very deficient. The yield of fractionated liquids corresponds to one-third of the volumes before the accident at Muscar.

 

Crude exports to the U.S. will average around 260 Mbpd marketed by Chevron for January, to China about 210 Mbpd, to India 90 Mbpd, to Spain 60 Mbpd, and 20 Mbpd to Cuba, for a total of 640 Mbpd of exported crude, plus about 60 MBPD of residual fuel and asphalt.

 

Natural gas availability continues to limit the operation of Jose petrochemical plants. Methanol plants operate at 70% capacity, and the fertilizer plant has a single manufacturing train.

WILL THE OIL MARKET RETURN TO FUNDAMENTALS AFTER EASING OF GEOPOLITICAL TENSIONS?

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

After many failed attempts, an agreement for a ceasefire between Hamas and Israel has finally been reached, which includes the release of Israeli hostages in exchange for Hamas war prisoners and convicted terrorists. If sustainable, this would constitute a significant geopolitical event. The agreement has multiple ramifications in international relations in this conflictive region and the energy sector. For now, it seems to have halted the rise in oil prices observed in recent days, probably due to a possible change in the attitude of the Houthi rebels in Yemen. If the Houthis decide to end or at least reduce their maritime war in the Red Sea, freight costs from the Middle East to the Mediterranean could decrease and stabilize.

 

From an oil perspective, it is no less important that buyers are rushing to secure shipments for their needs in a market characterized by limited supplies caused by intensified economic sanctions, the decline of some oil fields, and discipline from OPEP+.

 

Geopolitics

 

Multiple events are occurring in international relations, most directly or indirectly related to Donald Trump, who will have assumed office as the 47th President of the U.S. at the time of this publication.

 

Indeed, Trump had threatened Hamas with retaliation if the hostages were not released before he took office, and he also sent a representative to the negotiations in Qatar to join the Biden administration's representation. After months of negotiations without acceptable results for the parties, suddenly white smoke emerged, and the ceasefire and exchange of Israeli hostages for Hamas prisoners was agreed upon. The process began near noon on Sunday the 19th, Israel time, with a three-hour delay; in the afternoon, the first 3 Israeli hostages were handed over, as well as the first batch of Palestinian prisoners. A kind of "déjà vu" of the U.S. hostage crisis where Americans were captured in Iran by the Revolutionary Guard during Jimmy Carter's presidency and were released after negotiations that included collaboration from then president-elect Ronald Reagan; the hostages were released on January 20, 1981, minutes after the new president took office. Similarly, humanitarian aid was being prepared to enter Gaza as part of the agreement.

 

However, the situation in the Middle East remains complex. Among other events, the fall of Bashar al-Assad's regime in Syria created a unique problem for Arab states, especially Saudi Arabia and the United Arab Emirates (UAE), who see it as positive that their regional rival, Iran, has lost its power and influence in the Mediterranean countries of the region. On the other hand, Assad's disappearance has strengthened Sunni Islamists in Syria, whom Riyadh and Abu Dhabi have spent many years and large amounts of money trying to neutralize. Sunni Arab states will now have to deal with Islamists at the state level.

 

The recent agreements signed between Russia and Iran regarding nuclear matters and other far-reaching issues concern both their neighbors and the Western coalition. Therefore, even if the current détente in the Gaza Strip continues, the region will continue to face significant geopolitical challenges that have the potential to shake up the global oil business.

 

The Biden administration's intensified sanctions on Russia's maritime crude oil and products export system are affecting the global hydrocarbon supply/demand balance. This would represent a decisive blow to Moscow's financial capacity to finance the failed invasion of Ukraine, which has turned into a three-year war, and to keep the Russian economy afloat.

 

In the war between Russia and Ukraine, bombings of Ukraine's energy infrastructure have been met with attacks on Russian gas infrastructure. The Ukrainian army has attacked the last gas pipeline connecting its invader with the European Union, barely two weeks after Kyiv cut off Russian gas supply to eastern Europe through its territory. The Russian Ministry of Defense has confirmed that Ukraine has attacked a TurkStream station in southern Russia with drones. The pipeline, over 900 kilometers long, is one of the alternative routes for Russian gas supply to Europe; one of its sections crosses the Black Sea, connecting the Russian town of Anapa and the Turkish town of Kiyikoy, 100 km from Istanbul.

 

In the same conflict, North Atlantic Treaty Organization (NATO) representatives confirmed that around one-third of North Korean forces incorporated into Russian troops in Ukraine have been wounded or taken out of action.

 

President-elect Trump confirmed on Friday that he spoke with Chinese President Xi Jinping days before Trump took office. "I just spoke with Chinese President Xi Jinping." The conversation was very positive for both China and the United States. I hope that together we will solve many problems and start immediately. We discussed how to balance trade, fentanyl, TikTok, and many other issues. "President Xi and I will do everything possible to make the world more peaceful and secure," Trump commented.

 

In summary, although geopolitical risk is at low levels relative to 2024 and with a favorable trend in the eyes of the oil market, global problems remain a swarm of potential conflicts that must be handled firmly but with kid gloves.

 

Fundamentals

 

The volumes of crude reaching buyers are being affected by the latest sanctions imposed by the U.S. on tankers, shipping companies, and market operators involved in the trade of sanctioned crude. Indeed, in early January, the U.S. Treasury Department's OFAC sanctioned more than 180 tankers engaged in more than 2,000 shipments since the invasion of Ukraine began. The insurers of these tankers were also sanctioned, as were two major Russian oil companies, Gazprom Neft and Surgutneftegas. The sanctions imposed on these oil companies are the first direct sanctions against these companies, which the United Kingdom also sanctioned on the same day.

 

China and India, which have purchased 81% of Russia's maritime crude exports since the invasion of Ukraine, have been careful, until now, not to violate OFAC sanctions. We estimate that, at least initially, one million seven hundred thousand barrels per day (1.7 MMbpd) of Russian crude and products could leave the market – or face significant difficulties – which exceeds the surplus supply predictions that the International Energy Agency (IEA) scenarios projected for the year.

 

As a result, China and India have rushed to secure the crude volumes they need, especially in the Middle East. Iran is omitted, as it is indirectly affected by the sanctions on Russia. Venezuela could find itself in a similar situation. All of this is pushing prices upward. Additionally, compliance with OPEC+'s global quota, which has remained at 40.6 MMbpd, and the financial discipline of U.S. oil companies have reinforced the market's tight situation.

 

The behavior of the U.S. oil industry, due to its stability, reinforces the trend that the market assigns to the new realities. The relative uniformity of production in recent months, around 13.4 MMbpd, according to the Energy Information Administration (EIA), the drainage of crude inventories (2 million barrels), added to the reduction of another four drilling rigs, according to Baker Hughes, complete the current picture of a relatively limited North American supply. The continuous fall in drilling activity, with no apparent effects on production, is a paradox that deserves analysis. In the next section, we present a summary of an initial conclusion.

 

Meanwhile, Arctic conditions in North America will extend throughout January, and some forecasts extend the cold wave into February, which would increase demand for heating fuels. Additionally, below-zero temperatures could threaten production, particularly in southern states, where equipment is less prepared for harsh conditions.

 

In the same vein, but on the demand side, the Chinese economy grew at a surprisingly strong rate of 5.4% in the fourth quarter, coinciding with a rebound in crude imports last December, possibly indicating that the applied fiscal stimulus policies were taking effect. It should be remembered that official Chinese figures always have a political component and should be examined with caution.

 

In the United States, higher-than-expected job creation and an unchanged unemployment rate point to a solid economy, to the extent that doubts are beginning to emerge about the Fed's next steps. Against many predictions, current oil demand exceeds one hundred and three million barrels per day (103 MMbpd).

 

The Shale Oil Paradox

Week after week, a downward trend in active drilling rigs in the U.S. is reported (more than 40 in 2024 alone), and relatively constant production with an upward trend, according to the EIA.

 

This apparent paradox raises questions among analysts, as standard logic would indicate that fewer active rigs mean lower production. Rig activity has been published by Baker Hughes since 1944 and has proven to be a highly reliable source. Regarding crude oil production in the U.S., it is somewhat more complex to calculate; however, all sources, including the EIA, agree that average production during 2024 exceeded that of 2023 by around three hundred and fifty thousand barrels per day.

 

The most common explanation is that incorporating new technologies in the last 18 months has improved development efficiency in shale oil and gas basins. However, this logical reasoning has drawbacks: The higher initial production per well in shale basins is related to longer horizontal sections, which require more drilling time, offsetting the "efficiency gains" in drilling time.

 

From public figures, we can determine that the average horizontal section of wells drilled in the Permian, Eagle Ford, and Bakken basins increased from nine thousand six hundred feet (9,600') in 2023 to 9,900' in 2024 and that the average annual production of new drilled wells contributes seven hundred barrels per day (700 BPD) per well, but at the expense of longer drilling time for new well architectures; only an increase of less than fifty thousand barrels per day (50 Mbpd) can be attributed to technological improvements.

 

However, when analyzing the operational management of these basins, the continuous reduction in the inventory of drilled but uncompleted wells (DUC) is identified—a reduction of around 500 wells that were completed during the year and are currently in production. Considering the high initial decline of this type of well, the production contributed by these wells corresponds to about 320 MBPD, which is in line with the increase in average production between 2023 and 2024. This reduction in DUCs and fewer active rigs makes continued production growth unlikely unless operators change their investment policy.

 

Price Behavior

The expectation of reduced conflicts between Israel and its neighbors has generated reduced geopolitical risk, which coexists with a nervous oil market due to the lack of barrels to satisfy growing demand.

 

At market close on Friday, January 17, 2025, Brent and WTI benchmark crudes were trading at $80.79/bbl and $77.88/bbl, respectively. This week, crude closed with a gain of more than 1.2% compared to the previous week.

 

VENEZUELA

An Illusion of Normality

The invalid swearing-in of Nicolás Maduro as president of Venezuela on January 10 has not been recognized by a significant majority of the world's democratic countries, an illegitimacy stronger and more justified than that which followed the 2018 elections. To remedy this mess, the regime has tried to incentivize the government to enter a multiple electoral process, for which they are using bizarre or judicially controlled versions of formal political parties with structures and people of little relevance in the real political world. The regime has also raised situations designed to attract international attention, such as the announcement that Venezuela, along with the Brazilian army, would liberate Puerto Rico from U.S. imperialism.

 

Meanwhile, at the OAS, a vote in favor of González Urrutia is being managed. The regime is currently counting 14 votes out of the 18 required. The regime was not very pleased with Edmundo González Urrutia's invitation to Donald Trump's inauguration.

 

From the prevailing winds, and if Senator Marco Rubio's words during his confirmation process as the new Secretary of State are a faithful sample of the new administration's policy, relations with Venezuela will tend to harden, whether that implies toughening oil sanctions, disavowing Maduro, and providing support and collaboration to the president-elect remains to be seen.

 

The economy continues to deteriorate in a vicious circle of lack of foreign currency, reduced public spending and consumption, a shift from formality to informality, and lower SENIAT collection. This leads to a move from the market economy towards a controlled economy, money injection to minimize the devaluation of the official exchange rate, which increases the gap with the parallel exchange rate. This entire circular process would lead to a significant increase in inflation.

 

To all this complexity, we would have to add the possible effects of the eventual intensification of sanctions once the new U.S. administration is in office. We estimate that if a total cancellation of OFAC licenses materializes, net income, maintaining constant purchases of diluent and fuels, would be reduced by more than 50%.

 

Oil Operations

Another accident shook the Anaco area. This time, a 16" gas pipeline was undergoing maintenance. The causes and effects of the explosion are unknown. Still, they occurred in an area currently fundamental to gas supply in the eastern part of the country until the Muscar facilities, which we'll remember also suffered a catastrophic accident, were rebuilt.

 

During the last week, crude production averaged eight hundred and fifty-eight thousand barrels per day (858 Mbpd). The regional distribution of production is shown below:

 

• West                                    206 (Chevron 91)

• East                                     131

• Orinoco Belt                         521 (Chevron 112)

• TOTAL                                 858 (Chevron 214)

 

Refinery runs averaged 210 Mbpd of crude and intermediate products, with a gasoline yield of 75 Mbpd and a diesel yield of 71 Mbpd.

 

The domestic LPG cylinder market continues to be very deficient due to various accidents in the gas system.

 

Crude exports to the U.S., India, and Spain are accelerating, probably due to the uncertainty raised by President-elect Trump's spokespersons' comments. The rest of the shipments are being fulfilled according to schedule. We maintain the estimate of 670 Mbpd for January.

 

Natural gas availability continues to limit the operation of petrochemical plants in Jose, in the eastern part of the country. The methanol plants operate at 70% capacity, and the fertilizer plant has one ammonia train that began operations this week.

 

 

SHORT-LIVED PREDICTIONS

 El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

Just a few weeks ago, at the end of 2024, many oil market analysts, primarily investment banks like JP Morgan, Citi, Wells Fargo, and Goldman Sachs, revised their price forecasts downward, predicting an oversupplied market in late 2024 and throughout 2025. Their analysis logic was based on weak demand due to China's economic decline and energy transition. Additionally, they factored in significant production growth from countries outside OPEP+, whose strategy of maintaining cuts during the first quarter of 2025 confirmed this analysis.

 

It only took the mention of potential increased sanctions on Russia by the US and the presence of cold fronts in the northern hemisphere for the apparent robustness of this analysis to falter. While it's unsurprising that many analysts now view 2025 with optimism and are announcing much higher price predictions than a couple of months ago, we shouldn't place too much confidence in these changing winds. After all, the truth is that the price increase so far this year places prices near last year's average, mainly because neither global demand has decreased nor have the barrels from the mentioned countries appeared, except for Canada and Argentina, at least in the last months of 2024.

 

Crude oil prices have strengthened, reaching their highest levels since early October 2024. The price recovery is fueled by low temperatures and the effect of the latest sanctions from the Treasury Department, which has been more active and aggressive in the last month and a half than in the previous 46 months. Thus, the change in perception of fundamentals and geopolitical effects have contributed to January's correction.

 

Fundamentals

 

Two components, representing more than half of global crude production, have helped stabilize the supply side: OPEP+ discipline and US production.

 

OPEP+ has stayed close to the established quota for the cartel regarding crude placed in the market, though with differences in expected volumes from some countries. The slight overproduction from Saudi Arabia, UAE, and Kazakhstan has been more than offset by production reductions or capacity to place produced barrels in the market from Russia, Iraq, Iran, and Mexico. New sanctions against both countries' dark fleet ships and related shipping companies have affected Russia and Iran. Meanwhile, Iraq has had to reduce production in the Rumaila field, the country's largest, due to reduced electricity generation from insufficient natural gas from neighboring Iran.

 

The US, for its part, has maintained constant production, according to the Energy Information Administration's (EIA) weekly report, at thirteen million five hundred thousand barrels per day (13.5 MMbpd), relatively constant over the last 6 months. In contrast to this production profile, rig utilization, according to Baker Hughes' weekly report, fell by five units, distributed between gas and oil. In the same report, the EIA reported another drop in commercial crude inventory levels related to lower imports and reduced refining runs. However, gasoline inventories continued to rise, partly due to the closure of two pipelines in Los Angeles due to power outages related to forest fires.

 

The forecasted increases in non-OPEP countries for late last year and early 2025 have yet to materialize. Most of these increases are scheduled for the last three quarters and collectively offset demand growth, which most forecasters now, except for the International Energy Agency (IEA), place at one million five hundred thousand barrels per day (1.5 MMbpd).

 

Additionally, short-term elements, such as arctic temperatures experienced in the northern hemisphere, have supported gas and fuel demand. In the longer term, energy requirements for data centers and AI will boost demand, especially for gas and nuclear energy. However, this will also be reflected in oil prices.

 

We are in a seller's market, and the probability of it remaining that way is increasing, or at least that's how the market perceives it.

 

Geopolitics

 

Although Donald Trump hasn't yet been sworn in as US president, he has opened several surprise boxes. The president-elect has insisted that the Panama Canal should return to the US. He also stated that Greenland should become part of his country and suggested that Canada should be the 51st US state; to not give his southern neighbor a free pass, he announced that the Gulf of Mexico would be renamed the Gulf of America. As expected, all four countries reacted negatively, but the warning flag was raised, although it's difficult to know if it's anything more than fireworks.

 

According to Trump, these territorial changes are necessary for "America's defense" and to curb Chinese/Russian imperialism. He also proposes that NATO countries substantially increase their defense budgets, an aspiration he inherited from his previous administration.

 

The mere presence of Trump and his programs to return the US to a supposed past glory has made the Biden administration, in its final moments, make hurried decisions that it hadn't made for almost 4 years. In particular, the outgoing administration has issued new regulations to limit fossil fuel development, immigration, and international policy, particularly in sanctions. The latter has the potential to affect the oil trade materially.

 

For example, it's reported that the Shandong Port Group, operator of key oil ports used by China's independent refineries, in response to US sanctions, has banned access and services to tankers sanctioned by the US Treasury. The ports where the ban is in effect are Qingdao, Rizhao, and Yantai, on China's east coast, which are key crude import sources for independent Chinese refineries, known as teapots, buyers of sanctioned crude from Iran, Russia, and Venezuela.

 

Regarding military conflicts in the Middle East, there is pressure to achieve a ceasefire in the Gaza Strip and exchange hostages for prisoners of war; the goal is to reach the agreement before President Biden's departure. But while negotiations continue, Israel continues with bombardments seeking to eliminate remaining terrorist forces. Additionally, according to the Houthi-affiliated television station, it was reported that Israel launched airstrikes against the western ports of Ras Isa and Hodeidah, the central Hezyaz power plant near Sanaa, and the Harf Sufyan district of Amran province.

 

On the Russian/Ukrainian front, confrontations have continued, with supposed advances announced by both sides; even North Korean prisoners of war are mentioned, but true hope centers on possible negotiations that Trump has been announcing since before his appointment. Now, there's talk of a meeting between Donald Trump and Russian President Vladimir Putin as soon as Trump takes office.

 

In summary, the most critical result of geopolitics so far this month is the effect being produced by incremental sanctions related to crude oil transport from Russia, Iran, and, eventually, Venezuela.

 

Price Behavior

 

With the revival of oil market optimism, evidenced by inventory reductions, prices reached last year's average levels and the highest in several months.

 

Thus, at market close on Friday, January 10, 2025, the marker crudes Brent and WTI were quoted at $79.76/bbl and $76.57/bbl, respectively. This week, the barrel price increased more than 4% compared to the previous week. Oil markets opened higher this Monday, January 13, with Brent crude surpassing $81/bbl.

 

VENEZUELA

A New Totalitarianism

 

On January 10, despite incontrovertible evidence of electoral fraud and widespread condemnation from the international community, Nicolás Maduro was sworn in for a new presidential term. In a brief ceremony, Maduro consolidated what can be described as a new-style Latin American Totalitarianism, surrounded by supporters, inner circle members, and a strong military presence. The anemic ceremony had limited attendance from prominent international representatives, perhaps except for OPEC’s Secretary General; notably absent were Presidents Lula, Petro, and Sheinbaum (although their ambassadors were present).

 

The regime temporarily closed the borders with Colombia and Brazil, as well as the airspace, and deployed missiles as a threat against any possible attempt by Edmundo González Urrutia, the legitimate winner of the July 28, 2024 elections, and his companions, to enter the country to be sworn in as Constitutional President of Venezuela, as had been announced. The opposition leadership avoided any incident, even by error, and canceled the arrival for a more convenient opportunity.

 

Perhaps the most disappointing aspect of this Venezuelan episode is realizing, if it was necessary, the ineffectiveness of international institutions as guarantors of democracy and the freedoms they claim to protect and represent.

 

On January 9, responding to the call of María Corina Machado and Enrique González Urrutia, massive demonstrations materialized in almost all cities across the country; the one in Caracas featured the reappearance of María Corina Machado after months of being in hiding. At the end of her intervention, MCM was pursued by security forces and kidnapped for a brief period, after which she was released, apparently due to a change of plans or counter-orders from the dictatorship. This is further evidence of the opposition leader's courage and the thorny path she has traveled so far, along with her team and political allies.

 

The events of January 9 and 10 undoubtedly disappointed the population, which desires and needs political and economic change and must now regroup to face the challenging times ahead.

 

Following Maduro and his military clique's assault on democracy, the European Union imposed additional sanctions on more regime officials, both civilian and military. Meanwhile, the U.S. government increased the reward for the capture of Nicolás Maduro and Diosdado Cabello to $25 million each and $10 million for Defense Minister General Padrino López. Additional sanctions, including review of OFAC licenses, could result from the new U.S. administration that begins on January 20.

 

The economy continues to deteriorate as uncertainty and adverse reactions to the consummation of electoral fraud increase. The regime has been actively intervening in the exchange market to stop currency devaluation. Still, the official exchange rate is already at 53.88 Bs/$, and the unmentionable parallel rate is reaching 70 Bs/$. Consequently, annualized inflation is now approaching 90%.

 

Chinese ports' refusal to accept ships sanctioned by OFAC could also affect oil revenues. The Biden administration has decided to pass the baton of Chevron and other licenses to Trump, so we won't have to wait long.

 

Oil Operations

 

No material change has occurred regarding production, refining, availability, or natural gas flaring. However, an additional spill was reported at the Paraguaná Refining Center (CRP) Paraguaná, where a storage tank collapsed, and some crude reached the Gulf of Venezuela.

 

Production during the last week averaged eight hundred and fifty-five thousand barrels per day (855 Mbpd). The regional distribution of production is shown below:

 

• West                                    204 (Chevron 91)

• East                                     131

• Orinoco Belt                        520 (Chevron 112)

• TOTAL                                855 (Chevron 213)

 

Of the total production of 855 Mbpd, almost 300 Mbpd correspond to joint ventures operated under OFAC licenses by Chevron, Repsol, Maurel, and Prom; that is, 35% of the total to be commercialized using market prices and to pay part of the debts.

 

Refining runs averaged 212 Mbpd of crude and intermediate products, with a gasoline yield of 77 Mbpd and a diesel yield of 70 Mbpd.

 

The domestic LPG (liquefied petroleum gas) cylinder market situation continues to be very deficient, as pumping from Jusepín to Jose has not been restored.

 

Crude exports are below the month's planning. However, it's too early to know if the January programming of 670 Mbpd will be met.

 

The operation of Jose petrochemical plants continues to be limited by natural gas availability; methanol plants are operating at 70% capacity, and the fertilizer plant has stopped.

THE OIL MARKET BEGINS 2025 WITH CAUTIOUS OPTIMISM

 El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

After the end-of-year holiday season, which affected transaction volumes and activity, oil market activity has been marked by apparent price optimism. The reduction in U.S. crude inventories, coupled with renewed hope in the effectiveness of economic stimulus in China and the conviction that Trump's tariff ultimatums are more of a negotiation ploy than a unilateral decision, have induced this optimism.

 

Signs indicate that, for now, the “bad scenarios” of economic recession have been removed from the board, improving global economic growth predictions. This short-term relief is accompanied by weather forecasts of a sharp decline in January temperatures that should boost energy demand.

 

Hydrocarbon market participants should pay attention to natural gas prices, which led to the energy price rebound at year-end; benchmark indices in the U.S. and Europe recorded highs in 2024. Weather changes, combined with geopolitical and operational complications in the pipeline and liquefied natural gas business, increase natural gas prices and favor using liquid fuels for availability and economic reasons.

 

Markets also found support in OPEC+'s quota discipline following the cartel's decision to delay planned production increases.

 

The incoming Trump administration is also expected to move toward tightening sanctions targeting Iran and possibly Venezuela, adding to the recent U.S. and European offensive against Russia's parallel maritime fleet.

 

Fundamentals

Much of the early-year optimism is due to renewed hopes that Chinese demand will regain momentum after the central government promised various stimulus measures to boost economic activity.

 

President Xi Jinping said this week that China's economy is on track to close 2024 with 5% growth, in line with official growth targets, while downplaying concerns that the incoming Trump administration would harm Beijing's prospects through a series of tariffs. Xi said China's economy was “generally stable and progressing,” adding that risks in key economic sectors had been effectively addressed.

 

However, it cannot be ruled out that China will face trade negotiations and restrictions with the U.S., while the real estate sector will continue to drag the overall economy.

 

Meanwhile, Chinese manufacturing activity grew in December, albeit slower than expected, according to a Caixin/S&P global manufacturing survey. Overall sales were affected by a drop in export orders amid concerns about international trade prospects.

 

On the other side of the world, oil faces headwinds due to the rise in the U.S. dollar, pushing prices downward. The U.S. dollar index gained more than 2.5% in December, marking the third consecutive month in positive territory.

 

Meanwhile, U.S. Energy Information Administration (EIA) data revealed that U.S. crude inventories fell by 1.2 million barrels (MMbbls) despite a 3.5 MMbbls increase in crude imports. However, gasoline and distillate inventories recorded the most significant increase in almost a year due to lower post-holiday demand and increased domestic oil processing.

 

U.S. oil activity and crude production have been remarkably steady, around thirteen million barrels per day (MMbpd), which has motivated OPEC+ to maintain its price defense policy and postpone opening the supposed volumes cut by the cartel.

 

According to AccuWeather, the U.S. will be affected by Arctic cold waves, significantly increasing energy demand and the risk of freeze-related damage in southern states. Meteorologists predict that “This could end up being the coldest January since 2011.”

 

On another front, Russian supply has also decreased. The reasons are various: on the one hand, Moscow has been under increased pressure to align with its OPEC+ quota, while increased sanctions pressure on Moscow's “shadow fleet” of tankers has also influenced the reduction in Russian shipments; on the other hand, the simple decline of fields due to insufficient investment.

 

Saudi Arabia has regained some of Russia's market share in Asia as its exports increased. At the same time, Russian crude sales in the world's most crucial oil-importing region fell amid lower purchases from Moscow's two key markets, China and India.

 

Geopolitics

The impact of military conflicts has temporarily taken a back seat. The geopolitical variables influencing oil market perception in these first days of the year were more subtle elements of economic sanctions management strategy and attempts by sanctioned entities and their instruments to avoid them.

 

Iranian oil shipments, for example, are increasingly accumulating as floating inventory offshore in Southeast Asia rather than reaching final markets. A recent series of U.S. sanctions on tankers carrying Iranian oil has caused Chinese buyers to be more cautious.

 

The U.S. Treasury and State Departments designated several companies based in Suriname, India, Malaysia, and China, among others, for “knowingly engaging in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran.”

 

In the Middle East, Israel has continued its campaign to eliminate what remains of Hamas, including bombings this past Saturday. The Israeli Army made no immediate comments about the incident. Still, the army stated in a Saturday statement that it continued its operations this week in the town of Beit Hanoun, where the army has been operating for three months, and destroyed a military complex that Hamas had used.

 

The increase in Israeli operations recently comes amid renewed pressure to reach a ceasefire in this 15-month war and push for the release of Israeli hostages before U.S. President-elect Donald Trump takes office on January 20.

 

In Yemen, the Houthis reported several attacks their forces carried out, 22 events in one week, against U.S. and Israeli targets. The targets were Tel Aviv, Ben Gurion Airport, Nevatim Air Base, a power plant in Jerusalem, and the USS Harry Truman aircraft carrier. Presumably, all these attacks were intercepted, as there were no reports of damage.

 

Regarding the war between Russia and Ukraine, about to enter its fourth year, and with Trump coming to power, the question of how and when Europe's most significant conflict since World War II might end is on the table.

 

Zelenskyy says that Trump's strength and unpredictability could help end the war in Ukraine. The current situation is that Russia controls approximately one-fifth of Ukraine in the east, an advance achieved partly last year when it took advantage of weaknesses in Ukrainian defenses in these areas despite heavy losses of troops and equipment. For its part, Ukraine holds on to Russian territory in the Kursk region, which Zelenskyy describes as a “powerful trump card” in any future peace negotiations. However, the development of events does not favor Ukraine, which lacks personnel at the front and needs continued support from its Western partners.

 

Trump responded favorably to French President Emmanuel Macron's suggestion of deploying Western peacekeeping forces in Ukraine to oversee an agreement ending the fighting. As observed, everything seems to revolve around the position and activism that the U.S. will take after Trump's inauguration.

 

Price Behavior

The oil market shook off the pessimism it had been carrying since last year and decided to give Chinese economic stimulus the benefit of the doubt. The forecasted frigid temperatures hinted at increased demand. Inventories generally do not indicate overproduction, and OPEC+ provides some coverage for volumetric risk. The gas problems in Europe also present potential incremental demand.

 

Thus, at market close on Friday, January 3, 2025, Brent and WTI benchmark crudes were trading at $76.51 and $73.96/BBL, respectively. The first week of 2025 closed with an average gain of 4% compared to the previous week.

 

Natural Gas

The U.S. and Europe are preparing for a significant temperature drop, coinciding with the cessation of Russian natural gas flow to Europe through Ukraine. Ukraine says Russia has not designated any gas flow through Ukrainian pipelines for January 1. The decision was made when Ukrainian President Volodymyr Zelenskyy announced he had no plans to renew the five-year agreement signed in 2019 between the two countries, now at war. The agreement allowed Russian natural gas exports to the European continent to transit through Ukraine before being routed to their destination. The agreement was very lucrative, paying billions to the Kremlin in revenue and to Kyiv in transit fees. Ukraine will lose around 800 million euros annually in transit fees, and Gazprom will lose 5 billion euros in revenue from this agreement. Russian pipeline gas constituted about 8% of the European bloc's gas imports in 2023 (total European Union imports of Russian gas were around 15% of its consumption that year, combining pipeline and liquefied natural gas imports). In contrast, pipeline imports were more than 40% in 2021.

 

The European Union presented several contingencies in a report to help affected countries. Some existing contingencies include covering needs through Greek, Turkish, and Romanian gas supply via the trans-Balkan route and increased supply from Norway, both through pipelines and as LNG; Germany can help with gas distribution through Central Europe. The report also envisions strengthening liquefied natural gas (LNG) purchases from Qatar and the U.S.

 

However, unforeseen events always arise, including the slower growth in U.S. LNG availability due to restrictions imposed by the Biden administration, which have delayed the execution of some projects. In the short term, the unexpected shutdown of the Hammerfest LNG plant, owned by Equinor, located in northern Arctic Norway, presents specific supply problems; according to a regulatory statement published Thursday on the website of Gassco, the Norwegian pipeline operator, this has halted all production for at least a week.

 

Global LNG supply is expected to have grown by 2% for all of 2024, the slowest growth rate since 2020. As several large LNG projects come online, LNG supply growth is expected to accelerate to close to 6% in 2025.

 

Trump has promised to encourage production in the early stages of the production chain and is also expected to lift a Biden-era moratorium on licensing new liquefied natural gas export facilities. For now, these events have raised gas prices in Europe by around 25% in the past two weeks.

 

VENEZUELA

The Moment of Truth…

 

The long wait is about to end, and strategies for both sides are being implemented. Edmundo González Urrutia and Nicolás Maduro have announced their decision to be sworn in as president of the republic on January 10. On one side, the regime, with much publicity, shows military and police preparations with the apparent objective of instilling fear in the population. They went to the extreme of publishing banners displayed at airports and streets, offering a reward of US$100,000 for the capture of President-elect Edmundo González Urrutia. Security forces have interrupted normal traffic flow to Caracas to prevent popular movements. Maduro's objective is to be sworn in at the regime's NA, an act that could be declared illegitimate by dozens of democratic countries.

 

The democratic opposition side, which continues to claim victory in the past elections, does not publicize its plans. On the contrary, it handles them with the strictest confidentiality. Only a communication from María Corina Machado addressed to the Venezuelan people, military, and police forces is known, indicating that the time has come to enforce the people's mandate in the 28J elections.

 

Edmundo González began his South American tour before January 10. On Saturday the 4th, he arrived in Argentina, where he was received at the Casa Rosada by President Milei and a concentration of Venezuelans who cheered him. Several possible scenarios have been proposed for his eventual swearing-in, but the strategy remains confidential.

 

Latin America, including countries with ambiguous positions, such as Brazil, Colombia, and Mexico, follow the events in great detail, as the outcome will profoundly affect their respective countries. In any event, the scenario where Maduro takes position and exercises usurped authority would have economic and political consequences that would make it difficult to sustain his position for an extended period.

 

In fact, the uncertainty that has existed since the denial of electoral results has rapidly derailed the country's macroeconomy. The shortage of foreign currency, apart from what oil companies invest, combined with the prevalence of low oil prices, has not allowed the regime to meet its budgetary obligations and maintain control over the official Bs./$ exchange rate. The gap with the parallel exchange rate remains high despite intense interventions. Annualized inflation for 2024 is estimated to be approaching 100% again.

 

The events of January 10 and afterward will define the economy's path based on the future of democracy in Venezuela.

 

Oil Operations

The year begins with hydrocarbon production, which is still impacted by the Muscar gas plant accident. The increase in natural gas flaring and venting, oil spills in Barinas, the Orinoco Belt, and northern Monagas, quality problems in exported crude specifications, and a persistent shortage of gasoline, diesel, gas, and gas liquids (propane and butane) are external signs of continuous deterioration.

 

Crude oil production for the first week of January averaged eight hundred and fifty-three thousand barrels per day (853 Mbpd). The regional distribution of production is shown below:

 

       REGION                       Mbpd

·      West                           204 (Chevron 91)

·      East                            130

·      Orinoco Belt               519 (Chevron 112)

·      TOTAL                        853 (Chevron 213)

 

Refining levels remained above 200,000 barrels per day (200 Mbpd) of crude and intermediate products, with a gasoline yield of 75 Mbpd and 70 Mbpd of diesel.

 

The domestic LPG cylinder market continues to be compromised following a leak in the 16" line transporting gas liquids between Jusepín and Jose.

 

Crude exports in the last month of the year averaged 560 Mbpd, somewhat lower than programmed. Exported segregations were Merey 366 Mbpd, Boscán 95 Mbpd, Hamaca 61 Mbpd, and DCO 38 Mbpd. Of these exports, 301 Mbpd were sent to the U.S. (240 Mbpd by Chevron and 61 Mbpd by Repsol), 162 Mbpd to China, 63 Mbpd to India, and 36 Mbpd to Cuba.

 

Despite the decline in the last month, the year's average exceeded the 2023 average thanks to incremental volumes placed under OFAC licenses, which have achieved modest increases since 2022.