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.
No comments:
Post a Comment