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.
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