Oil Shows Indifference to Market Volatility

  El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 

While capital markets experienced one of their worst weeks of the year, oil prices remained unusually indifferent to the US’s numerous economic and political events this week. The tariff war unleashed by the White House, which threatens to alter prices, was compounded by signs of higher global inflation, affecting central banks' already precarious growth plans and monetary control. On Friday, all markets rebounded upon learning that the threat of a US government shutdown had been averted. On the geopolitical front, new US meetings with Ukraine and the re-establishment of military intelligence exchange, as well as ongoing talks with Hamas, have partially calmed international anxiety despite the tightening of US sanctions against Iran.

In any case, additional sanctions on shadow fleets used to transport sanctioned crude and their owners, the cancellation of OFAC licenses in Venezuela, and the conditions of a possible ceasefire in Ukraine, especially regarding sanctions on Russian hydrocarbons, will influence oil prices.

Geopolitics

The center of geopolitical attention is focused on the progress of tripartite negotiations between the US, Ukraine, and Russia, seeking to end the war between Russia and Ukraine, a conflict that has lasted more than three years and is in almost total stalemate. Negotiations began a few weeks ago between the US and Russia with Saudi Arabian mediation, almost an oil conclave, followed by the disagreement between Zelensky and Trump, which led Ukraine to seek more significant support from European countries. This week, the US and Ukraine resumed talks in Jeddah, agreeing on elements for a 30-day truce. Putin was also expected to accept these conditions. Still, in a televised press conference, the Russian president stated that, although he agreed with the idea, details needed to be decided upon to eliminate the root causes of the conflict and achieve lasting peace.

Putin reiterated some of his conditions for ending the conflict. For example, Russia wants Ukraine to reject NATO weapons, limit its military size, abandon its desire for NATO membership, and that there be a change of government in Kyiv. These are, at the same time, all red lines for Ukraine. In any case, the Trump administration seems willing, at a minimum, to block Ukraine's ambitions to join NATO. Additionally, Putin dismissed the idea of a temporary pause. Putin is not in a hurry because he is recovering part of Russian territory taken by Ukraine in Kursk.

Parallel to the ongoing negotiations, the Ukrainian army launched a drone attack on a Russian refinery located in Tuapse, in the Russian Black Sea region, with 240,000 b/d capacity, marking the third drone attack on a refinery in the week. Russia responded by launching a night attack with 178 drones against civilian targets. In short, the multilateral agreement may take more time than what emerged from the initial talks between the US and Ukraine. Trump and Putin have scheduled a call for the week.

In the case of Iran, the Trump administration is determined to exert maximum pressure to force a nuclear limitation agreement and end the financing of militant groups in the region. Consequently, OFAC imposed sanctions on Iran's Oil Minister, Mohsen Paknejad, and some Hong Kong-flagged ships that are part of a ghost fleet that helps disguise Iranian oil shipments. As a result of these sanctions, India and China have begun to reduce their purchases of Iranian and Russian crude.

Trump also announced "decisive and powerful" airstrikes against Houthi terrorists in Yemen in retaliation for the campaign of piracy, violence, and terrorism against the US and other countries ships, aircraft, and drones carried out by these groups in the context of the conflict in Gaza. These attacks have cost the US and the global economy billions of dollars. The airstrike began on Saturday, March 15. In the same conflict, Hamas agreed on Friday to release Edan Alexander, the last living American hostage. Alexander, an Israeli-American, will be released along with the bodies of four other hostages, according to an agreement offered by mediators.

Fundamentals

From what initially seemed like a random policy of executive orders, a strategic direction in the actions of the Trump administration is beginning to emerge. Behind the threats and imposition of tariffs on allies and adversaries, the resistance to continue financing NATO and efforts to reduce the size of government to cut costs (DOGE) appears to be the objective of reducing the nation's gigantic budget deficit, to then refinance the heavy debt, whose service, under current conditions, makes the US economy very vulnerable. The success or failure of this strategy remains to be seen, as it will probably have to go through a politically costly recession; in any case, it is a critical process for the health of the world's largest economy. An essential part of this strategy is related to the cost of energy and will impact the fundamentals of the hydrocarbon industry.

The International Energy Agency (IEA) reduced its global demand forecast for 2025 to just over one million barrels per day, reaching 103.9 million barrels per day. The agency cited worsening macroeconomic conditions and tariff wars to justify the change. On the other hand, the IEA forecasts a greater surplus in supply, six hundred thousand barrels per day, compared to 450 MBPD last month. As we commented last week, the IEA has a history of inaccurate forecasts.

On the other side of the spectrum, OPEC maintains its demand forecast for the year. The cartel forecasts demand growth of just one hundred thousand barrels per day year-on-year in OECD countries. In contrast, in non-OECD countries, growth of approximately one million three hundred thousand barrels per day year-on-year is forecast. They also expect solid oil demand growth to continue in 2026. On the supply side, OPEC forecasts an increase in liquids from countries outside the OPEC+ sphere of one million barrels per day year-on-year in 2025. According to the cartel’s March report, the main growth drivers would be the US, Brazil, Canada, and Norway.

Interestingly, in its report, OPEC projects an increase of 100 MBPD from OPEC+, despite the announced policy of beginning to add about one hundred and twenty-eight thousand barrels per day each month, starting in April. The most logical explanations for this apparent contradiction are: 1) a much more gradual opening process than announced or 2) the projected increase is a net between what will be opened and reductions in production from Iran and possibly Russia and Venezuela due to US sanctions policy. Crude oil production from OPEC+ countries increased by 363 MBPD in February, compared to January, averaging forty million barrels per day (40.01 MMbpd), as reported by secondary sources used by OPEC.

The US oil industry had a week of very few changes. At the CERA Energy meeting, the oil "Davos" that took place this past week in Houston, oil executives indicated that they are not open to increasing production at current crude prices, so activities are more oriented towards maintenance than growth. The goal is to remunerate their shareholders better and reduce debt levels. If this strategy is maintained, supply growth forecasts for the near future will have to be adjusted, as they all include an increase of at least three hundred thousand barrels per day coming from the US. According to Baker Hughes, there were no changes in drilling activity, while the EIA reported an increase of one million four hundred thousand barrels per day (MMbpd) in commercial crude inventories; those of distillates and gasoline showed similar declines.

While US companies look cautiously at new investments, other producing countries see an opportunity. Among them are India, Mexico, and Venezuela. The latter will be covered in the section below, which is dedicated to Venezuela.

In India, parliament has given final approval to amend a decades-old exploration and production law to expand the scope of its exploration policy beyond oil and natural gas. The amendment extends the scope of the Act to include "shale oil and gas" and coal bed methane, in addition to conventional oil and gas. It also incorporates the freedom to resort to international arbitration in case of disputes and the extension of the period of agreements.

"The current global energy landscape and the hydrocarbon landscape have changed dramatically. Therefore, it was necessary to modify the law to reflect current reality and national priorities, promote ease of doing business, decriminalize provisions, and harmonize India's exploration and production framework with the practices of competing regions," said Oil Minister Hardeep Singh Puri, after the approval of the amendments by the lower house, paving the way for their enactment.

In parallel, in Mexico, a new model of private investment with Pemex was approved. The new conditions were designed with the typical ideological nationalism that led President AMLO to end President Peña Nieto's opening and have not generated much interest from private oil companies. According to some analysts, the new model is not competitive with the legal/fiscal frameworks of Guyana, Suriname, and Brazil, among others.

Specifically, the conditions associated with cost recovery and the inability to use reserves to obtain financing for development are criticized. This is a questionable decision in the context of the Aztec country's falling production, problems meeting the domestic market for gas and fuel, and indebtedness on the part of Pemex that requires assistance from the central government to service it. What they call in Mexico "a beggar with a club."

Environmental Uncertainty

Since the signing of the Paris Agreement in 2015, in which 196 countries committed to reducing their greenhouse gas (GHG) emissions and collaborating to adapt to the impacts of climate change, a series of energy scenarios have been published that would limit global warming to 1.5°C or 2°C by mid-century. Over time, each new scenario, according to the application of conventional scientific methodology, should be more concrete, detailed, and with less uncertainty. However, we are observing the opposite. Despite the time that has passed, a consensus on global energy demand has still not been reached, much less on how to meet that demand from a transitional perspective.

BP's early "Net Zero" scenarios predicted the rapid growth in renewable energies, electrification, electric vehicles, green hydrogen, and circular economy to almost eliminate fossil fuels, mainly coal and oil. Today, it can be concluded that these early forecasts have been simplistic, deterministic, and even ignorant of the interactive problems generated by attempts to force an accelerated transition.

Recent realities, such as the 2021 energy crisis, the priority of energy security due to global geopolitical conflicts, greenhouse gas emissions associated with the manufacture of solar panels, windmills, batteries, and electric vehicles, complications in energy supply chains and their components, as well as the United States' withdrawal from the Paris Agreement, demonstrate that is easier to predict the energy transition than to implement it. The constant increase in global GHG emissions suggests that, despite all efforts, the world is not currently on an emissions trajectory consistent with achieving carbon neutrality by mid-century. Therefore, to approach that trajectory, technological advances, broad cooperation rather than disqualification between different primary energy sources, and public policies capable of balancing the elements of the so-called "Energy Trilemma" must be achieved: security of supply, affordability, and sustainability.

So far, the emphasis has been on sustainability, knowing that energy security will always be the most crucial factor in truth, as we learned from the energy crisis and Russia's invasion of Ukraine. Society's need to maintain access to secure and affordable energy throughout the transition adds greater complexity and urgency. Due to existing differences in countries' energy and economic development and the geographical distribution of resources and population, the energy transition will vary considerably between regions and countries.

Emerging economies need more energy for their development, and accessing the financing level for renewable sources constitutes a bottleneck that the different COPs have been unable to resolve. In contrast, these economies may choose to use energies different from those recommended by the energy transition. Daniel Yergin developed this concept well in his book "The New Map": energy policies sometimes reflect the priorities of more politically active or influential groups while potentially overlooking impacts on broader populations that may be more concerned with immediate economic considerations.

BP is a good example of changing trends. After emerging as a leader in environmental decarbonization, BP announced plans to focus increasingly on renewable energies and gradually reduce its exposure to hydrocarbon projects. However, BP has been under pressure from investors, particularly activist Elliott Management, to change its strategy because the British multinational's performance has been inferior to that of its peers, such as Shell and Exxon. BP wants to sell 50% of its solar unit to a strategic partner.

Recalibrating the energy transition has collateral effects on the hydrocarbon industry. Fatih Birol, director of the IEA, said on Monday at CERA WEEK that there is a need to invest in oil and gas fields to support global energy security. The comment puts the energy watchdog for industrialized nations more in line with President Donald Trump's pro-drilling agenda after being pressured by fossil fuel enemies years ago to propose an end to new oil and gas projects.

Price Dynamics

An interesting stance characterized the oil market during the last week; it did not succumb to the stock market panic and extreme volatility experienced by capital markets and seemed determined to wait for the resolution of the most immediate concern of the economy: the negotiation to approve a solution to the, already repetitive, threat of shutting down the US government. Indeed, the Senate approved a provisional spending bill on Friday, avoiding a partial government shutdown, after Democrats backed down in a confrontation motivated by President Trump's campaign to cut the federal workforce. The news caused a modest rebound in oil prices, barely enough to close the week with a marginal gain of 0.3% compared to the previous week. Thus, at the close of markets on Friday, March 14, 2025, the benchmark crude oils Brent and WTI were trading at $70.58/bbl and $67.18/bbl, respectively.

Venezuela

Hard Times Ahead

After the cancellation of General License 41 and the other licenses and comfort letters assigned by OFAC to carry out activities in the hydrocarbon sector, the regime has maintained a prudent tone but announced the cancellation of repatriation flights for Venezuelans who arrived in the US illegally. They also blamed ExxonMobil's lobbying for the cancellation of Chevron's license, avoiding pointing directly at President Trump. At the end of the week, Trump's envoy, Richard Grenell, wrote on social media that flights would be restored starting March 17, information that regime officials confirmed.

The initial interpretation of this "about-face" was that negotiations between Jorge Rodríguez and Grenell were continuing and that the regime perceived a small crack through which an arrangement on Chevron's operations could slip. However, subsequent movements by the Trump administration incline us to think there is no turning back regarding the cancellation of licenses.

Indeed, the US government invoked the Foreign Enemies Act this Saturday, March 15, to combat the "invasion" of the Tren de Aragua. The decision, announced by President Donald Trump, authorizes the immediate apprehension and deportation of members of this criminal network found in US territory. According to the statement, the Tren de Aragua develops drug trafficking, extortion, kidnapping, and murder activities in coordination with the Cartel of the Suns, an organization linked to Nicolás Maduro's regime, and has been used as an operational arm of the Venezuelan regime to destabilize democracies in the region. 

Additionally, Secretary of State Marco Rubio accused the regime of trying to install an Iranian military base in Venezuela.

Meanwhile, Maduro and his administration are trying, without much success, to shore up the Venezuelan economy. The fundamental objective is to curb devaluation and, therefore, inflation. For this, they are using all elements at their disposal: public spending remains at comparatively low levels to limit printing inorganic money, controlling banks to avoid any increase in credit and trying to reduce consumption, and extraordinary efforts to maximize tax collection. In other words, they are further reducing the size of the economy. The cancellation of OFAC licenses will make these efforts less effective, and the economy will be subject to less availability of foreign currency and a reduction of interventions in the foreign exchange market.

The celebration of CERA Week, the most important oil forum in the world, was the chosen scenario to launch, with interventions by Edmundo González Urrutia and María Corina Machado, the energy program of the president elected on July 28, 2024. They indicated that it is about transforming Venezuela into the energy center of the Americas. It is an ambitious program that is only doable in democracy and is based on private investment at all levels. With a competitive legal/fiscal framework, with strong institutions that would guarantee transparency and guarantees of compliance and protection of investment, including international arbitration. As expected, the program presented was described by Maduro's regime's foreign minister, Iván Gil, as a "treasonous aberration." While paradoxically, the Maduro regime continues to call on foreign investors to go to Venezuela to develop oil.

In the internal political environment, despite no clarity regarding the proposed electoral process, it was known that the government party would launch candidates this weekend. In the opposition, internal discussions about the elections forced the executive secretary, Omar Barboza, to resign as coordinator of the opposition coalition Democratic Unitary Platform (PUD). Barboza is a leader of A New Time (UNT). This organization announced its decision to participate in the elections set for May 25, even though opposition leader María Corina Machado and most of the PUD member parties do not agree with going to the polls until the popular will of July 28 is respected.

Oil Operations

Operational activities continued practically the same as last week, with an apparent rush to maximize production and export from joint ventures with Chevron participation. Significant volumes of diluent also arrived through swaps with Reliance and Repsol and the customary import from Chevron. This bulky volume of diluents augurs sufficient availability for the blending activities of Merey 16 crude, at least during April. In addition to products produced in national refineries, the national market receives imported products mainly through swap agreements. Regarding natural gas activities, it was known that starting next week, there will be a greater supply to the petrochemical complex in Jose, which would allow partial production of ammonia and urea to begin.

Crude production during the last week averaged eight hundred and seventy-six thousand barrels per day (876 Mbpd), geographically distributed as follows: 

• West: 224 (Chevron 104) 
• East: 128 
• Orinoco Belt: 524 (Chevron 121) 
• TOTAL: 876 (Chevron 225)

National refineries processed 212 Mbpd of crude and intermediate products, with a gasoline yield of 76 Mbpd and 77 Mbpd of diesel. The average sale price of barrels marketed under OFAC licenses, net of debt payment, was $50.3/bbl, and the weighted average, using all exported barrels, was $35.1/bbl. To date, no activity indicative of cessation of operations by licensed companies has been observed; on the contrary, the barrels that went to the US are ahead compared to last month.