ECONOMIC WEAPONS AND NEW GEOPOLITICS

 El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

What at first glance appeared to be a relatively stable international order—emerging from the arrangement between the victorious powers of World War II, the subsequent collapse of the Soviet Union, and a somewhat functional institutional framework (UN, IMF, WHO, WTO, etc.)—now appears to be under attack or at least threatened by the strategy being implemented from Washington. The redefinition of what has traditionally been called the Western alliance (military and commercial) is beginning to emerge as a potential result of a policy that seems to disdain the conventional rules of free trade and substitute globalism with isolationism.

 

In this new scenario, the American strategy of imposing tariffs on allies and adversaries emerges as a negotiation tool to modify trade exchanges and, by implication, the geopolitical balance. Unexpected changes in Atlantic alliances, combined with economic interests, are beginning to influence international political behavior and will undoubtedly affect the world economy and energy demand. Paradoxically, although globalization is one of the primary targets of criticism from new powers, its success has created interconnected networks through which decisions are made in two or three world capitals of the globe.

 

Markets strive to interpret and respond efficiently to signals and decisions from the White House and the reactions they elicit, though uncertainty fills the gaps. For instance, the shift in the U.S. stance on the Russia-Ukraine war is perceived as a strategy that could bring the conflict to a close. Additionally, there is speculation regarding either an imposed or negotiated resolution to the Arab-Israeli conflict. Both scenarios would significantly minimize geopolitical risk, particularly concerning restoring the free flow of hydrocarbons.

 

So, in a week that saw Brent crude prices climb to $76 per barrel due to supply disruption concerns and strong demand, geopolitical developments ultimately pushed prices down on Friday to levels below last week.

 

GEOPOLITICS

 

Although much was speculated about what the new American administration would do to end the Russia-Ukraine war, the shift in U.S. diplomatic signals has caused significant discomfort across the European continent, which, along with Zelensky, sees itself as an uninvited guest in negotiations to resolve the conflict. Few anticipated that the Americans, previously firm allies of Ukraine, would make a one-eighty turn and shift responsibility for the conflict from Moscow to Kyiv.

 

Moreover, the fact that the U.S. and Russia are directly negotiating, with Saudi Arabia mediating, gives the parley a petroleum connotation. We are witnessing meetings of the three largest oil producers in the world, representing 30% of global supply. This is highly significant for the emerging new order.

 

In the old continent, the perception is that U.S. diplomacy has attempted to empathize with Putin, portraying the aggressor as a victim and establishing precedential conditions that ought to have been negotiated. Some view this as nearly an absolution for Putin. Zelensky has shifted from hero to villain.

 

For President Trump, Ukraine's sovereignty has become a negotiating chip in shaping the new world order he envisions. The timing may not have been the most appropriate, and the implementation method could have differed. Europe, NATO, and Zelensky may feel betrayed by this situation, but they must quickly adapt to this new reality.

 

This unfortunate confrontation between allies has devolved into mutual reproaches. Trump has accused Zelensky of delaying elections due to an alleged lack of popularity, labeling him a "dictator." This claim is clearly false; the Ukrainian president enjoys substantial popular support, and elections have been postponed by the martial law established following the Russian invasion. In turn, Zelensky charges Trump with having "bought" into Russian propaganda by justifying the invasion as a defensive measure against Europe and NATO.

 

Alongside these rhetorical skirmishes, the U.S. urges Ukraine to accept a simplified proposal regarding control of its strategic mineral reserves before negotiating detailed terms. Trump's proposal suggests that in return for his support, a portion of Ukraine's resources would be allocated to the U.S., reportedly establishing that 50% of critical mineral reserves, including graphite, uranium, titanium, and lithium, would be involved. In exchange, investments for reconstruction and security against potential attacks would be guaranteed, according to unofficial sources.

 

The U.S. aims to establish a pact with Ukraine before authorizing additional military support for Kyiv or proceeding with efforts to mediate peace talks. Keith Kellogg, Trump's envoy, made surprising comments upon leaving Ukraine. He spoke of extensive and positive dialogue and praised Zelensky as "a beleaguered and brave leader of a nation at war."

 

Meanwhile, as part of the war in Ukraine, Ukrainian drones targeted the Caspian Pipeline Consortium (CPC) oil pipeline this Tuesday, which serves as the primary export route for Kazakhstan. Russia stated that the attack reduced oil flows through the CPC by 30% to 40%.                                                  

 

In the Middle East, the U.S. government has stated that it aims to isolate Iran from the global economy and eliminate its oil export revenues to curb the development of nuclear weapons. Trump also desires that Iraqi Prime Minister Mohammed Shia al-Sudani break economic and military ties with Iran. Last week, Reuters reported that Iraq's central bank blocked access to the dollar for five additional private banks involved in Iranian financial transactions at the request of the U.S. Treasury.

 

On Monday, Iraq's oil minister announced that exports from Kurdistan would resume next week. This would mark the end of a nearly two-year dispute that has cut the flow of more than 300 MBPD of Kurdish oil through Turkey to global markets. However, this volume will not increase the crude placed on the market, as much of it reaches Iran through smuggling at very low prices.

 

In any case, the pieces of the puzzle the Trump administration is attempting to assemble are establishing the framework within which it intends to shape its vision of "Make America Great Again," particularly regarding its aim for accessible and affordable energy for growth. However, it is a three-dimensional puzzle with dynamic elements- a highly complex challenge that will undoubtedly yield unexpected consequences. It cannot be ruled out that the rapprochement with Russia follows a strategy aimed at distancing Russia from China, which, in Trump's perspective, is the power that needs to be countered.

 

FUNDAMENTALS

 

This week, the most influential variable regarding fundamentals was the unforeseen reduction in crude supply. On the other hand, demand strengthened forecasts of growth of at least one million barrels per day (1 MMbpd) in 2025 as uncertainty regarding China dissipated.

 

As mentioned in the previous section, a Ukrainian drone attack damaged the Kropotkinskaya pumping station in Russia, reducing crude handling capacity by about four hundred thousand barrels per day (400 Mbpd). Additionally, extreme cold weather conditions in the U.S. and Canada have impacted oil production, especially in North Dakota and northern Alberta, Canada, where production has decreased by approximately 200 MBPD.

 

OPEC+ is considering postponing opening voluntarily closed barrels due to the lack of firmness in oil market prices. Brazil announced it would join the OPEC+ group, for now, only as an observer, free from quota limitations.

 

These factors contributed to a tighter supply scenario, which increased prices in the first days of the week. This increase was mitigated by another increase in U.S. commercial crude inventories. According to the EIA report, inventories rose by almost five million barrels (4.6 MMbbls) despite lower crude imports and constant refining levels. Distillate inventories were reduced by about 2.0 MMbbls.

 

The behavior of drilling activity in the U.S. was quite specific. A net increase of 4 units was recorded, which included a reduction in rigs dedicated to gas and an increase of 7 rigs dedicated to oil. Although this was concentrated in relatively minor basins in Oklahoma, the major producing basins remained unchanged. Aside from the interruptions already mentioned, crude production in the U.S. and OPEC+ remained stable.

 

The demand for natural gas for liquefaction, electricity generation, and heating has exceeded the available supply. Due to weather conditions, demand peaks coincide at certain times with the lifting of LNG export limitations and the increasing need for electricity for AI-associated data processing centers. Consequently, natural gas is priced above four dollars per million cubic feet ($4/MMcf).

 

PRICE DYNAMICS

 

This week was filled with many events, and geopolitics overshadowed conventional logic and fundamentals. Negotiations and potential alliances promising to reshape the world into three poles, with clear repercussions on wars, sanctions, and international trade, are currently in the spotlight. We should not be surprised if hydrocarbon prices exhibit unusual behavior. In a week that saw oil prices climb to $76/bbl due to concerns over supply disruptions and strong demand, significant geopolitical developments pushed oil prices down on Friday to levels below last week's.

 

As of market close on Friday, February 21, 2025, the benchmark crudes Brent and WTI were quoted at $74.43/bbl and $70.40/bbl, respectively, slightly below the previous week.

 

HYDROCARBONS IN THE BACKYARD

 

This week, we will examine the region south of the Rio Grande, which sometimes seems overlooked amidst the clamor of northern geopolitics. This area possesses hydrocarbon resources and an evolving energy sector that will undoubtedly render it globally significant in supply and demand. We will analyze trends in the pertinent countries of the region—nations with the potential to produce over 500 MBPD—while noting that Venezuela is, as always, discussed in a section at the end of this column.

 

Mexico

The hydrocarbon industry in Mexico has historically operated under the influence of its state monopoly, Pemex. Like many state-owned enterprises, Pemex has suffered from inefficiency, corruption, and political interference, resulting in significant debt and an inability to maintain oil and gas production or meet domestic market demands. This situation persists despite substantial investments in refineries that are only marginally profitable or not profitable at all. The attempt to attract private capital, initiated during President Peña Nieto's administration to revitalize the industry, was subsequently reversed by President López Obrador.

 

The situation has become alarming, especially given possible tariffs and disagreements with its northern neighbor. The new president, Claudia Sheinbaum, presented a plan for Pemex to collaborate again with private investors. The strategy seeks to share benefits with external companies in specific oil projects, reversing López Obrador's policy. According to the announcement, the agreements could represent up to 10% of Pemex's production.

 

This shift in direction for Pemex will enable revenue sharing with private partners after recovering the initial investment and paying a 30% royalty on wellhead production. Sheinbaum stated that this model would ensure profitability for both companies and the state oil firm and introduced a bill to facilitate these processes by expediting permits and permitting private investments, all while ensuring that Pemex and the Federal Electricity Commission (CFE) retain control of the energy sector. However, the crucial aspect of these "about-face" transformations is their execution and sustainability.

 

Colombia

In 2022, newly inaugurated Colombian President Gustavo Petro promised a bold energy transition, capturing the imagination of a young electorate eager for a sustainable future. However, fast-forwarding to 2025 reveals a much more complicated reality. Colombia's conventional oil and gas reserves are declining, leading to unpredictable fiscal impacts. Political tensions are rising around natural gas, which, although it could serve as the only viable bridge to a low-carbon future, currently needs to be imported at high costs. Meanwhile, the ideologized administration is formally and informally hindering the search for and development of new deposits. Although Petro shares the same ideological tendencies as the Mexican president, he has not effectively incentivized his most crucial industry.

 

Production and reserves are declining despite Ecopetrol recently presenting a reserves certification indicating that in 2024, the volumes produced were offset by additions of new reserves, remaining above one thousand eight hundred million barrels (1,800 MMbbls). Notably, most of the increase does not correspond to exploration but to revisions and secondary recovery, both of which have a highly subjective component.

 

Guyana

The fourth floating production facility departed from Singapore and was bound for Guyana. This is the FPSO "One Guyana," which will be operated by a consortium led by ExxonMobil and is expected to increase the country's production to nine hundred and forty thousand barrels per day (940 Mbpd) by early 2026; experience with previous units suggests it could happen this year. Plans indicate that at least four more FPSOs will be installed before 2030, increasing oil production to nearly two million barrels per day (2 MMbpd) and providing natural gas for electricity generation and petrochemical development in Guyana.

 

Brazil

Brazil is the leading country in the Latin American oil industry, both in terms of oil development and domestic market. It has emerged as a major center for technological advancement in deep-water operations, with nearly all of its production, exceeding four million barrels of oil equivalent per day (4.33 MMboed), coming from offshore fields. Although the state-owned Petrobras is the key player in the oil sector, private companies are actively involved in the country's oil development. Unlike some of his regional colleagues, President Lula adopts a policy aimed at maximizing mineral resource utilization despite having to tackle conflicts with the environmentalist faction of his coalition.

 

Since 2008, when production began from the strata known as "pre-salt," located beneath a thick layer of salt at depths exceeding 7 km, the country's output has been revitalized. However, production has not met the projected growth targets. This shortfall is due to delays in delivering FPSOs necessary for developing these productive fields and an underestimation of energy declines in their reservoirs. The average production for 2024 was 0.5% lower than the previous year. This year, production is expected to rise by adding two new FPSOs and satellite wells to existing production units, reaching a total of 4.68 MMboed, with 280 Mbpd of this increase coming from oil.

 

Ecuador

Ecuadorians will participate in a runoff election in April following the contentious first round between the current ruler, Daniel Noboa, a right-wing politician aiming to extend his time in office for another four years, and leftist opposition candidate Luisa González, regarded as the political heir of former president Rafael Correa.

 

The two presidential candidates present various proposals regarding Ecuador's oil sector. These ideas are reflected in their government plans or expressed during their public appearances. Some less favored candidates advocated optimizing oil production through more efficient technologies and reinvesting in renewable energies to support the transition. In contrast, others suggested eliminating Petroamazonas due to its inefficiency and corruption.

 

Daniel Noboa has indicated that he aims to boost oil production to five hundred and fifty thousand barrels per day by 2025, marking an increase of nearly 50 Mbpd from current levels, and he plans to recover production capacity by bidding rounds on mature fields. Luisa González advocates for transitioning to a post-oil economy, promoting high-value-added sectors and manufacturing, a typical left-wing strategy during elections. Polls favor Luisa González, as the indigenous electorate is leaning towards her candidacy.

 

Argentina

Argentina will surpass Colombia as Latin America's third-largest oil producer, with 800,000 barrels daily, only behind Brazil and Venezuela. Significant oil and gas production growth has come from developing the Vaca Muerta basin, a world-class shale.

 

The southern country achieved a fiscal surplus in 2024 by operating pipelines at full capacity and transporting the remaining barrels from Vaca Muerta via tanker truck. It also exports gas to Chile and Brazil through aging pipelines in Bolivia. Oil and gas pipelines are currently under construction, enabling it to reach the goal of 1.0 MMbpd and eventually enter the competitive LNG market.

 

However, not everything is rosy. Norwegian state-owned Equinor has decided to divest its assets in the unconventional Vaca Muerta basin, and it is not the first company to do so. Previously, ExxonMobil sold its Argentine assets, casting doubt on Argentina's great promise.

 

Petronas also withdrew from the large gas liquefaction project, but Argentina, with its new pro-investment stance, managed to interest Anglo-Dutch Shell in Petronas's remaining participation. If Shell decides to invest in the project, Argentina will emerge stronger from the obstacle, as Shell is one of the dominant companies in the LNG business. An additional pipeline, which will open early this year, will offer more capacity to send exports to Puerto Rosales, 30 kilometers from Bahía Blanca.

 

In summary, the net balance of oil activities in Mexico and South America contributes to the global supply, projected at about 400 MBPD in 2025 and expected to grow to more than 600 MBPD by 2026.

 

VENEZUELA

At your service, Mr. Trump

 

Illegal Venezuelan immigrants sent to Guantanamo are already in Venezuela. Using Honduras as a bridge, 170 Venezuelans arrived this week in Maiquetía on a Conviasa plane. For now, the guidance from the Venezuelan regime seems to be not to alienate Trump and, in case of any complaint, to blame Secretary of State, Marco Rubio. The regime feels comfortable, for now, with the Trump administration's inaction regarding the elimination or modification of oil licenses, the only tool Caracas can use to obtain foreign currency that prevents a new collapse of the bolivar.

 

The rapprochement between Trump and Putin is currently viewed as advantageous for sustaining the delegitimized regime, yet it appears to function within the framework of Trumpist geopolitics. We do not know whether this precarious situation instills the confidence required for private oil companies to resume their production growth programs or if they are taking a wait-and-see approach regarding the evolution of the relationship.

 

In any event, the regime seems willing to follow Trump's lead. There are even rumors that the departure of the Indian company Jindal from the joint venture PetroCedeño has been addressed by handing that "Crown Jewel" over to Harry Sargeant III's company, with the hope that stronger commercial ties with American companies will complicate an eventual rupture.

 

Low oil prices, political uncertainty for oil companies, and a collapsing economy diminish the possibility of acquiring more foreign currency or collecting higher taxes; the regime is compelled to issue inorganic money to finance reduced public spending. It is easy to predict that the outcome of this scenario will be a continuous devaluation of the Bolivar, leading to increasingly accelerated inflation. The official exchange rate has already reached Bs 63.4/$, pushing the parallel exchange rate to hover around Bs 80/$.

 

Beyond the deportation of illegal migrants and the repatriation of U.S. citizens, two variables could indicate U.S. policy toward Venezuela. The first is the monthly renewal date of Chevron's General License 41. OFAC's handling of that date will illuminate Venezuela's oil future. Similarly, the AMOS investment fund project in the Gulf of Paria, which is seeking an OFAC license, represents another indicator regarding the willingness to license new players in the Venezuelan oil environment.

 

Meanwhile, the internal political situation is apathetic. The opposition is engaged in divisive discussions about whether to participate in the general elections called by the regime's CNE.

 

Oil Operations

The burning and venting of natural gas remain significant operational and environmental concerns. However, reducing these practices would significantly affect the production of light and medium crude necessary for the Merey-16 crude blending operations and as feed for the Puerto la Cruz refinery. The output of these crudes has declined to the point that regular imports of light crudes are required to supplement local production. In the meantime, the shortage of natural gas is forcing the population to use firewood and charcoal for cooking. At the same time, the production of petrochemicals in the Jose complex has had to be limited due to this lack of inputs.

 

Crude production during the last week remained constant at 860 MBPD, geographically distributed as follows:

 

• West: 214 (Chevron 99)

• East: 128

• Orinoco Belt: 518 (Chevron 119)

• TOTAL: 860 (Chevron 218)

 

Refining runs averaged 214 MBPD of crude and intermediate products, with a gasoline yield of 78 MBPD and 74 MBPD of diesel. Exports align with what was scheduled for February: 626 MBPD of crude and around 70 MBPD of products. The average sale price of barrels marketed under OFAC licenses, net of debt payment, was 51.9 $/bbl.

TRUMP, TRUMP... AN OMNIPRESENT MELODY

 El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

In last week's article, we noted that the relationship between the market and traditional oil geopolitics seemed to be shifting toward one in which the market is more volatile in the short term, responding to news dynamics, and less attentive to medium-term fundamentals: "The distinction between traditional fundamentals and geopolitical catalysts is blurring..." The week's events are a new point on the curve, indicating that, at least in the short term, news from the White House will set the energy agenda.

 

The announcement of a phone conversation between Trump and Putin impacted markets, including oil. The call was interpreted as the possible beginning of the end of the conflict between Russia and Ukraine, which could lead to the normalization of sanctions and regional boycotts, thus reconfiguring trade flows and causing a decrease in oil prices.

 

Furthermore, direct negotiation between the United States and Russia, without considering Ukraine, European powers, or NATO, reinforces the perception that the three major powers (the United States, China, and Russia) manage global strategies primarily to maintain a balance among themselves. A peace agreement around Russian pretensions in Ukraine would influence relations in the Middle East and the Americas and between China and Russia.

 

The oil market reacted to geopolitical events. After a mid-week recovery based on fundamentals, crude prices were affected by the Ukraine effect—the presumption of lower eventual political risk—and settled at levels from the previous week's close. Regarding natural gas, prices dropped considerably, as Ukraine has been the main umbilical cord between Europe and the Russian supply.

 

Geopolitics

 

The most significant international event of the week was the phone call between Trump and Putin, which apparently initiated negotiations to end the conflict in Ukraine. After that first telephone "summit," President Trump called Volodymyr Zelenskyy to update him on what he had discussed with his nemesis. Zelenskyy indicated that the conversation was very satisfactory, but considering the situation, we don't believe he had any other option but to appear positive.

 

In his first trip to Europe, U.S. Secretary of Defense Pete Hegseth made headlines with surprising statements. Hegseth, breaking traditional negotiation strategies, seemed to give a priori concessions to the Russians, categorically ruling out that Ukraine could return to its pre-2014 borders (Crimea invasion) or that Ukraine would become a NATO member as a guarantee of its future security. Hegseth also told NATO members that the U.S. no longer sees European security as its main priority and that while Ukraine requires security guarantees, these would have to be provided by Europeans. It is a message designed to increase Europe's defense budget but a statement that makes any negotiation for Ukrainian aspirations to regain sovereignty over occupied territories an uphill battle.

 

What was made public about the conversation between Trump and Putin and Hegseth's statements evoked adverse reactions in Europe. It can be deduced that neither the European powers nor NATO knew this unusual American strategy.

 

In the same vein, Vice President J.D. Vance addressed the audience at the Munich Security Conference, dedicating a large part of his speech to criticizing European democracies. That speech provoked a strong reaction from German Deputy Defense Minister Boris Pistorius, who also abandoned diplomatic parsimony and accused Vance of interfering in a Germany about to elect a new government. Vance also met with Zelenskyy in Munich, but no substantial announcements were made beyond photos for the press. For now, announcing a vital mining agreement, central to Kyiv's attempt to gain President Donald Trump's support, is just that, an expectation.

 

The current phase of negotiations between the U.S. and Russia has bilateral implications and could also be a catalyst for a broader restructuring of the world order. How these conversations develop, and their results will have lasting repercussions on global political geopolitics.

 

Indeed, European leadership has interpreted Trump's announcements and Vance's message in Munich as a break from the traditional relationship between the U.S. and Europe. They have called emergency meetings to define continental policy.

 

Although Vladimir Putin undoubtedly smiles at the events, he finds himself in a weaker negotiating position than he would like. Russia has made gradual territorial advances since late 2023 but at an extraordinarily high human and economic cost. Russia has also been advancing a campaign against Ukraine's energy infrastructure, aiming to leave it without electricity and increase its vulnerability during winter.

 

Ukraine has taken its own initiatives. It controls a piece of Kursk, which is strategically important for Russia. Ukraine has also maintained a relatively successful campaign against targets within Russia, including oil refineries and military equipment factories.

 

Trump proposes a ceasefire as soon as possible, primarily based on the current line of contact between the two groups of forces, which would be followed by negotiations on a longer-term peace agreement with all the territorial sovereignty issues that would entail for Ukraine. If the newly incubated negotiations were to fail and if Putin ends up being blamed for the failure of this peace effort, the situation could reverse, and Trump would end up supporting Kyiv and imposing more sanctions on Russia. Vice President Vance did not rule out the possibility of deploying American forces.

 

Meanwhile, in the Middle East conflict, the ceasefire between Israel and Hamas has been maintained despite persistent tensions between the parties. This past Saturday, three Israeli hostages were released in Gaza following the intervention of mediators who helped prevent the collapse of the fragile cessation of hostilities. Likewise, Israel released approximately 369 Palestinian prisoners and detainees from West Bank prisons.

 

On this side of the world, specifically in Ecuador, the first round of presidential elections resulted in a virtual tie between incumbent President Daniel Noboa and his leftist rival, Luisa González, with 44% each. The second round, to be held in mid-April, is unclear. Both candidates will seek votes from the candidate representing indigenous people. Although the left is the natural ally in indigenous politics, Correa's decade of repression against indigenous movements will continue to weigh against that support.

 

Ecuador was an OPEC member, although today, its oil industry has lost dynamism. The suspension of oil drilling in Yasuní National Park in 2024, following a national referendum, has reduced production capacity by 12% (four hundred and sixty-seven thousand barrels per day in January 2025). It is one of the few countries with infrastructure capacity far superior to its production.

 

Fundamentals

 

The Organization of Petroleum Exporting Countries (OPEC) maintains its forecast of relatively strong growth in global oil demand in 2025, relying on air and road travel supporting consumption, and that possible trade tariffs are not expected to affect economic growth.

 

In its monthly report, OPEC forecasts that global oil demand will increase by 1.45 million barrels per day (bpd) in 2025 and by 1.43 million bpd in 2026. Both forecasts remained unchanged from last month. In the report, OPEC states that the new U.S. administration under President Donald Trump's trade policy has added more uncertainty to markets, creating potential imbalances between supply and demand that do not reflect market fundamentals. However, the cartel made no changes to its economic growth forecast for 2025.

 

The International Energy Agency (IEA) estimates that demand growth in 2025 will reach 1.1 million barrels daily (MMbpd). Although this figure is lower than that of OPEC, the gap between the forecasts of both organizations for 2025 is narrower than in 2024. According to the IEA, global oil supply is projected to rise by 1.6 MMbpd, reaching 104.5 MMbpd in 2025. If OPEC+ voluntary cuts remain effective, non-OPEC+ producers will account for most of this increase. However, when analyzing production increase forecasts, we can only definitively identify contributions of 150 Mbpd from Guyana, 170 Mbpd from Brazil, 100 Mbpd from Argentina, and 230 Mbpd from Canada without factoring in declines from various other countries.

 

Consistent with our calculations of a slightly under-supplied market, the IEA maintains that:

 

"Global observed oil inventories fell by 17.1 million barrels (MMbbls), month-on-month, to 7,647 MMbbls in December. OECD (Organization for Economic Cooperation and Development) industry inventories continued to decrease by 26.1 MMbbls to 2,737.2 MMbbls, 91.1 MMbbls below their five-year average. Preliminary January data shows that total global inventories fell by another 49.3 MMbbls, resulting from a large reduction in crude stocks in China."

 

These inventory drops are due to continued demand growth, delays in incorporating new supplies, field decline due to low investment, and the discipline exhibited by OPEC+. In the last two months, OPEC+ has produced 40.6 MMbpd, about 0.3 MMbpd less than the 2024 average.

 

The U.S., the world's largest hydrocarbon producer, continues to produce around 13.2 MMbpd. This week, the Energy Information Administration (EIA) reported a relatively high increase in commercial inventories, at 4.1 MMBBLS of crude. According to Baker Hughes, two new drilling units were activated this week. In any case, American statistics show no material change in the global crude balance in the short term.

 

The Trump administration also favors fossil fuels at the expense of policies designed for an accelerated energy transition. It has removed the U.S. from the Paris Climate Agreement as the spearhead of a new policy that will change its former emission targets: a reduction of  50% to 52% by 2030.

 

In the same vein, Trump issued an Executive Order to Unleash American Energy, which suspends the disbursement of funds allocated through the Inflation Reduction Act (IRA). The order will also allow an increase in fossil fuel extraction and the relaxation of restrictions on energy infrastructure, including the release of federal and offshore lands for hydrocarbon exploration and exploitation activities. This week, President Donald J. Trump signed an Executive Order establishing the National Energy Dominance Council.

 

Trump quickly supported natural gas, approving the first LNG export permit after Biden's pause and creating the National Energy Dominance Council to recommend policies increasing U.S. oil and gas production. This measure is a radical policy change that seeks to reinforce the U.S. position as the world's leading hydrocarbon producer.

 

Likewise, U.S. financial institutions are beginning to abandon their sustainability commitments, which they acquired in response to the environmental policies that had become a global norm. In fact, several major U.S. banks recently withdrew from the Net-Zero Banking Alliance (NZBA), indicating that hydrocarbon development projects will once again have access to banking activities related to loans, investments, and capital markets.

 

Following the same trend, major energy multinationals are refocusing their portfolios on the most profitable areas, generally related to upstream development in the hydrocarbon sector.

 

Other countries have opted for a pragmatic approach, prioritizing economic benefit over energy transition. Brazil and Argentina, for example, support the development of their deep maritime resources and Vaca Muerta, respectively. In contrast, under Gustavo Petro's administration, Colombia seeks a radical transition toward sustainability. The president is pressuring Ecopetrol into selling its stake in a fracking project in Texas, a technology that Colombia is trying to ban via a law. Colombia is walking down an economic path that could be unsustainable.

 

In any case, and separate from the fundamentals, the hydrocarbon business will be affected by the United States' tariff war. This war has generated responses from other countries to American measures it considers protectionist.

 

Price Dynamics

 

Oil prices fluctuated during a confusing and volatile week, fueled by White House announcements about conflicts in Europe and the Middle East and U.S. tariffs on steel and aluminum.

 

As things stand, at market close on Friday, February 14, 2025, the benchmark crude oils Brent and WTI were trading at $74.74/bbl and $70.74/bbl, respectively, practically equal to the previous week's close, despite having oscillated between $77/bbl and $74.15/bbl, in terms of Brent, during the week.

 

VENEZUELA

Pragmatism or Political Change

 

Current political realities are confusing and confirm that, for now, the U.S. strategy of maximum pressure regarding oil sanctions and licenses, which played a significant role in the electoral campaign, has been sidestepped. Both administrations seem focused primarily on the issue of illegal Venezuelan migrant deportations, which has received extensive media coverage. Not unexpectedly, the departure of the first plane from the state airline, Conviasa, carrying Venezuelan deportees had to wait until Mr. Grenell arrived for a photo-op. At the other end, in Maiquetía, a similar event took place, albeit with a tropical twist: Justice Minister Diosdado Cabello welcomed the deportees as heroes , and heartfelt embraces were plentiful for what the regime euphemistically calls the Return to the Homeland Plan.

 

After achieving migration success, the merits and drawbacks of the licenses may be reassessed, leading to a long-term decision. The Venezuelan situation may be part of global negotiations between Trump and Putin.

 

In any event, companies licensed by OFAC and currently operating in Venezuela are heading back to their operational activities after a brief hiatus to digest the new relationships between the regime and the northern power.

 

OFAC is also considering new licenses, including the recently publicized project in the Gulf of Paria, where the Chinese company SINOPEC sold its stake to an American oil fund. The governments of Trinidad and Tobago are also continuing negotiations to maintain the licenses they obtained for joint projects with Venezuela in natural gas fields that straddle their borders.

 

Poor economic performance has forced the regime to reduce public spending and impose strict bank reserves, limiting their ability to grant credit. Tax collection is also contracting, accelerating the vicious cycle. The BCV had to devalue the Bolivar, with the official rate reaching 62 Bs/$ and the parallel rate almost 77 Bs/$, widening the gap between both to 24%.

 

The intervention by USAID during the new administration, along with its alleged involvement in irregular financing, enabled the Venezuelan regime to make unfounded accusations of corruption and misappropriation of funds against members of Guaidó's interim government and the 2015 National Assembly. This served to distract attention from the corruption allegations and electoral fraud surrounding the regime itself, which was an unintended consequence of Trump's disruptions.

 

Oil Operations

 

The latest monthly OPEC report indicates that Venezuelan production in January, according to their secondary sources, was eight hundred and ninety-two thousand barrels per day (892 Mbpd), a modest reduction compared to the previous month. Meanwhile, direct information sent by Venezuela to the OPEC Secretariat shows an increase to 1032 MBPD. We attach a graph showing the figures reported by different sources for the second and third quarters of 2024 and for November and December 2024 and January 2025, an example of how uncertain the analysis of this industry is.

 

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

 

• West                                   212 (Chevron 97)

• East                                     130

• Orinoco Belt                 518 (Chevron 119)

• TOTAL                                860 (Chevron 214)

 

Due to the low availability of local light crude for the Merey-16 grade blend, imported crude and Hamaca crude produced at the PetroPiar upgrader are being used. In any case, deviations in specifications have been reported.

 

Exports align with the programmed February amount: 626 MBPD of crude and around 60 MBPD of products. The average sale price of barrels commercialized under OFAC licenses, net of debt payment, was $53.8/bbl.

 

Refining runs continue averaging 206 MBPD of crude and intermediate products, with a gasoline yield of 72 MBPD and 75 MBPD of diesel, volumes that continue to demonstrate PDVSA's inability to remedy the situation beyond sanctions. While the natural gas shortage problem is not improving and has become a chronic problem, little is known about the facilities that suffered damage at the end of last year.

INCENTIVES, TARIFFS, AND SANCTIONS: A COMPLEX EQUATION TO SOLVE

 El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

 

Less than a month after being sworn in as U.S. president, the world continues trying to decipher President Trump's ultimate intentions beyond the turmoil caused by executive orders. For example, finding coherence between his energy domination policy and incentives to increase hydrocarbon production is complex, particularly in the U.S. The handling of economic sanctions also appears contradictory, and using tariffs as a negotiating element to amend trade imbalances goes against his objective of lowering living costs. The oil market, somewhat bewildered, has reacted with lower prices, interpreting that the sum of announced measures could ultimately erode oil demand. A possible trade war between the U.S. and China has become the main topic of conversation in the markets and their biggest concern.

 

Oil markets briefly rose after the Trump administration issued its first set of sanctions against Iran on Thursday, a sign of the volatility generated. The sanctions targeted what the administration said was an illegal international network facilitating the shipping of millions of barrels of crude to China. The upward momentum didn't last long, and prices resumed downward. They erased gains they had achieved during the first days of 2025 and headed for another week of losses.

 

Geopolitics

 

Announcements from the new U.S. administration have replaced conflicts in oil-producing nations as the most relevant variable for the market. A few days ago, the United States imposed tariffs on imports from Canada, Mexico, and China; in the case of the first two, this represents a violation of the Agreement between Mexico, the United States, and Canada (USMCA), negotiated in 2018. However, the tariffs' implementation was suspended for one month for Canada and Mexico, who showed a willingness to reinforce their borders to control immigration and drug trafficking, especially fentanyl.

 

For its part, China responded to the 10% surcharges on its exports to the U.S. by imposing tariffs of 10 to 15% on imports from the U.S., the first salvo of a possible trade war. Investors are also looking for potential trade measures from Washington aimed at Europe.

 

Moving away from the trade area, President Trump signed an executive order imposing sanctions on the International Criminal Court (ICC) for its investigations into Israel, a close U.S. ally.

 

Neither the U.S. nor Israel are members of or recognize the ICC, which has issued an arrest warrant against Israeli Prime Minister Benjamin Netanyahu and his former Defense Minister for alleged war crimes during the military response in Gaza following Hamas's attack on Israel in October 2023. "The ICC has no jurisdiction over the United States or Israel," states the order, adding that the court had set a "dangerous precedent" with its actions against both countries.

 

Human rights activists said that sanctioning judicial officials would have a chilling effect and would be contrary to U.S. interests in other conflict zones where the court is investigating, a close example being the investigations into Nicolás Maduro's regime.

 

In the Middle East, President Trump's unexpected announcement proposing that the U.S. take control of the Gaza Strip and that its population be relocated to neighboring countries enraged the Arab world. The unexpected proposal surprised U.S. allies and other world powers and even bewildered members of his party. The reaction in Israel was markedly different, seeing it as a vindication of their actions.

 

The idea of forcibly relocating nearly two million Palestinians, previously relegated to the margins of the country's political discourse, has found fertile ground among an Israeli public traumatized by Hamas's attacks of October 7, 2023, seeking ways to feel secure again, however implausible they may seem. Israeli politicians across the political spectrum enthusiastically embraced the idea. Newspaper columns praised its audacity. The country's Defense Minister ordered the military to make plans for its eventual implementation.

 

The ceasefire continues, and Hamas announced five new hostages to be released. On Saturday morning, Hamas released three Israeli hostages in Gaza, and Israel released 183 Palestinian prisoners. Since January 19, 21 hostages and 566 prisoners have been released. The first stage of the agreement includes the release of 33 hostages in exchange for 1,900 prisoners and Hamas fighters; subsequent stages will release the remaining hostages and the bodies of those who did not survive. There remain 76 hostages, of whom 42 are alive.

 

Regarding the conflict between Ukraine and Russia, which has been ongoing for 1,080 days, Donald Trump stated this Friday that he would "probably" meet with his Ukrainian counterpart, Volodymyr Zelenskyy, next week. He also repeated his intention to speak with Russian President Vladimir Putin. The Kremlin indicated that neither a meeting nor a call with President Trump was scheduled.

 

In an interview with Reuters, Zelenskyy spoke about rare earth deposits and other strategic minerals in Ukraine, intending to include this topic in negotiations with Trump to end the war. The U.S. President mentioned Monday that he wanted Ukraine to supply rare earths and other minerals to the U.S. in exchange for financial support for its war effort.

 

Ahead of negotiations, Ukrainian forces launched a new series of assaults in the Kursk region in southern Russia on Thursday, advancing up to five kilometers behind Russian lines southeast of Sudzha. The strategy of annexing more territory is to value the incursion when negotiating the war's end.

 

With a different objective, Ukraine successfully attacked another oil refinery in the Russian city of Kstovo, about 800 kilometers from the front lines in eastern Ukraine. According to Ukrainian media, four drones hit a Lukoil facility, and the installation suffered significant damage.

 

Regarding the Russian advances in eastern Ukraine, the city of Pokrovsk (Donetsk) is currently under siege by Russian troops. Pokrovsk serves as the primary supply center for Ukrainian forces and troops operating on the front lines in the region, making it a key target for Russian forces. Given the likelihood of continued attacks on the city, Ukrainian officials and police have been working to persuade the last remaining residents to evacuate.

 

Syria, which is surrounded by conflicts involving Iran, Turkey, Israel, and Saudi Arabia, is striving to normalize following the fall of Bashar al-Assad. Ahmed al-Sharaa has been appointed interim president and is working to gather international support for reconstruction. Turkish President Erdoğan met with Ahmed al-Sharaa in Ankara to discuss Syria's economic recovery and stability.

 

With the new powers installed in Syria, Russia has conducted multiple flights to an air base in the Libyan desert. Moscow appears to be seeking an alternative stopover for its growing military involvement in Africa and a way to maintain its military presence in the Mediterranean. For almost a decade, the Jmeimim Air Base and Tartus Naval Base on the Syrian coast have served these purposes.

 

Libya, a conflict-ravaged nation in North Africa, is currently central to Russian efforts to project its power in the Mediterranean. Flight tracking data indicates that these flights are conducted from Moscow and Jmeimim to al-Khadim, a base near Benghazi in eastern Libya, using giant Antonov An-124 and Ilyushin II-76 transport aircraft.

 

Geopolitical relations are increasingly interdependent, especially in hydrocarbons. The distinction between traditional fundamentals and geopolitical catalysts is blurring, highlighting the growing importance of energy in countries' actions and alliances. The U.S., China, Russia, and Iran directly or indirectly influence all conflicts and their impacts on the oil market.

 

Fundamentals

 

Although early, the "Drill Baby Drill" policy in the U.S. has generated more noise than real investment intentions. It will need incentives such as royalty reductions on federal and offshore lands and tax reductions for corporations to be effective. Without these incentives, companies will probably maintain their investment balanced with decline, sustaining production at around 13.2 million barrels per day.

 

This week, there has been a significant rise in commercial crude inventories in the U.S. The Energy Information Administration (EIA) reported an increase of 8.7 million barrels. This substantial rebound was mainly due to a decrease in refinery processing levels and a rise in crude imports, which accounted for an addition of 6.1 million barrels. In distillate inventories, a decline of 5.5 million barrels was noted; half of this reduction can be attributed to the lower levels of refinery operations. According to Baker Hughes, drilling activity rose by 4 units, with two in natural gas basins.

 

The United States imposed additional sanctions on Iranian crude exports, temporarily increasing prices. However, this rebound quickly reversed, as it was considered unlikely that the sanctions would immediately impact Iranian exports to China. Analysts also indicated that any successful U.S. policy to reduce Tehran's oil revenues to zero would require support from the broader OPEC group, which is not guaranteed.

 

Trump has also urged OPEC to add more barrels to the market to cool energy prices. OPEC downplayed Trump's request, and according to some reports, they have expressed that it is they and not Washington who set the price of oil. The OPEC+ Joint Ministerial Monitoring Committee (JMMC), chaired by Saudi Arabia and Russia, decided this Monday to maintain its plan to increase crude supply starting in April gradually.

 

Iran's president, Masoud Pezeshkian, urged OPEC members to unite against possible U.S. sanctions after President Trump said he would seek to reduce Tehran's oil exports to zero. Pezeshkian made the request during a meeting with OPEC Secretary General Haitham Al Ghais. Iranian crude oil exports currently amount to about 1.5 million barrels per day, most of which go to China.

 

In South America, Argentina continued increasing its production, mainly from the Vaca Muerta basin. It surpassed Colombia's production in January, reaching 765,500 barrels per day.

 

Canadian pipeline operator Trans Mountain is considering short and long-term expansion projects that could add three hundred thousand barrels per day of transportation capacity to the company's system. The pipeline, which can currently transport up to 890,000 bpd of crude from Alberta to Canada's Pacific coast for export, has been in the spotlight since Trump brought additional tariffs.

 

Global production has not materially increased this year despite Brazil increasing production in two of its Floating Production Storage and Offloading units (FPSO). According to the EIA, global production in 2024 was slightly higher (500 Mbpd) than in 2023.

 

Price Dynamics

 

While President Trump's "Drill Baby Drill" policy has primarily been sidestepped by oil executives gathered in Houston this week, Trump enthusiastically insists on more excellent U.S. production, adding another bearish note to market sentiment, reflected in a drop of almost 2% compared to last week. At market close on Friday, February 7, 2025, Brent and WTI marker crudes traded at $74.66/bbl and $71/bbl, respectively.

 

VENEZUELA

 

A Tale of Two Diplomats

 

The best description of relations between the Venezuelan regime and the White House is that they are confusing. The regime, however, boasts publicly that the visit of special envoy Richard Grenell and less publicized contacts indicate that a kind of agreement was reached: accepting U.S. conditions to receive Venezuelan deportees and the release of American prisoners in exchange for maintaining oil licenses and perhaps eliminating sanctions in general.

 

There is no conclusive evidence that this agreement is anything more than an aspiration of the regime. However, the lack of an official denial from the United States and various media reports has discouraged many Venezuelans. Many anticipated that the outcomes of the July 28 elections last year would garner more explicit international recognition and support, particularly from the new U.S. administration.

 

An article in the Miami Herald has received particular attention. It associates talks between the White House and the Maduro regime with oil businessman Harry Sargeant III, supposedly a friend of Trump and a major Republican party donor, and his interest in Venezuelan oil without sanctions. Although somewhat speculative, it is said that Sargeant and his company would be incorporated into the mixed company PetroCedeño, whose last private partner, Jindal of India, abandoned the project.

 

We also cannot overlook the influence of oil lobbying led by Mike Wirth, Chevron's president, who claims to have informed the White House about the negative geopolitical consequences that would stem from his company's departure from Venezuela. He argues that this decision would enable China and Russia to expand their regional influence. Wirth seems to be unaware that, in the meantime, Sinopec, China's most prominent national oil company, was finalizing an agreement to transfer its assets in the Gulf of Paria to an investment fund managed by Chevron's former president in Venezuela.

 

We must not forget the comments of recently elected Senator Bernie Moreno, who, in an interview with Caracol News in early January, declared: "They had an election, people say it wasn't fair, but at the end of the day, U.S. interests are to stop drug trafficking, to take back all illegal Venezuelans who are in this country, and to do business with the United States, to stop doing business with Russia and China." At the time, not much importance was given to the Colombian-American senator's comment, contrary to then-nominated Secretary of State Marco Rubio's position and inconsistent with the official U.S. position regarding the elections and recognition of Edmundo González as president-elect.

 

During his recent tour of several Central American and Caribbean countries, Marco Rubio continued his criticism of the Venezuelan regime. Still, he was careful to describe Grenell's recent trip to Caracas and the negotiation outcomes as nothing more than a victory for Trump and a defeat for Maduro. The White House must soon clarify which way the diplomatic balance will tilt.

 

On the other hand, the elections called by the National Electoral Council (CNE) for April this year, where governors, the national legislature, and local offices are elected, have become the most significant component of the regime's strategy to, once again, divide the opposition that unitedly won the 2024 presidential elections. Zulia state governor Manuel Rosales and former governor Henrique Capriles, who exemplify the division within the opposition, have already urged participation in elections that González Urrutia and María Corina Machado reject.

 

The mechanisms for controlling the exchange rate have been inadequate. The BCV has permitted its continuous decline. This week, the official rate closed at 60.52 Bs/$, while the parallel rate was at 72.11 Bs/$, creating a gap of 19.2%. Without a significant change in circumstances, this will likely lead to increasing triple-digit inflation, despite control efforts, and would shrink the economy's size.

 

The current economic situation, highly compromised by the lack of oil activity and awaiting definition, could change if the pragmatic negotiation scenario between Maduro and Trump described above is confirmed.

 

The cancellation of the TPS extension, which protects approximately 600,000 Venezuelan immigrants in the U.S., is a source of concern among them. The Department of Homeland Security (DHS) claims that "Venezuela no longer meets the conditions that led to the designation in 2023," citing significant improvements in the country's economy, public health, and crime rates following consultations with several departments, including the State Department.

 

Although we haven't seen a thorough analysis of this issue, the return of large numbers of immigrants to Venezuela will have an immediate social, economic, and political impact, exacerbating an already challenging situation despite what the Trump administration claims.

 

We await the coming weeks to determine whether we move towards "license cancellation" or maintain the "status quo," which would result in diametrically different conditions for regime financing.

 

Oil Operations

 

Natural gas and gas liquids shortages in the form of cylinders have been the most relevant news of the week; collaterally, the deterioration of these cylinders' integrity has caused two explosions during the last few days.

 

In January, 390 Mbpd of crude oil was placed in the international market under a combination of production and marketing authorized by OFAC licenses.

 

The average sale price, net of debt payment, associated with exports under the OFAC license was $53.1/bbl, while the weighted official price of all exported barrels was $37.2/bbl. This latter price results from weighing barrels that do not generate income, such as debt payments and barrels to Cuba.

 

Crude production during the last week averaged 861 Mbpd, geographically distributed as follows:

 

- West:                                    210 (Chevron 95)

- East:                                      131

- Orinoco Belt:                 520 (Chevron 119)

- TOTAL:                                  861 (Chevron 214)

 

However, it should be noted that, due to the low availability of light crude to blend the crude to Merey 16 segregation, the marketed volumes have been dispatched with slightly modified specifications, and part of the upgraded Hamaca crude was used as diluent.

 

Refinery runs averaged 215 Mbpd of crude and intermediate products, with a gasoline yield of 77 Mbpd and a diesel yield of 73 Mbpd.

 

While it is still too early to determine export levels for February, we estimate that Merey 16 will be lower than last month because some of the inventories at the Jose terminal were utilized to fulfill exports to China.