The oil market seems disoriented by the tsunami of political and economic news that has characterized the year's first quarter. Trump's tariff fluctuations with Canada and Mexico, tariffs imposed on China and the European Union, news of OPEC+ opening crude production, OFAC's suspension of licenses for operations in Venezuela, the intensification of sanctions on Iran, and the Trump/Putin saga with Ukraine and Europe, among other events, are a mix that the market finds challenging to absorb. And understandably so.
What sometimes appears to be the unstoppable advance of President Trump's policy to transform the international order suffered some setbacks this week after the Trump-Zelensky altercation. As expected, Ukraine's negotiating position and the "pre-agreements" between the U.S. and Russia are incompatible, while Europe tries to support Ukraine without alienating the White House occupant. Zelensky's demand that Americans provide "security guarantees" as part of a peace agreement with Russia is not something Trump is willing to grant, nor is it something with precedents. The complexity of these geopolitical maneuvers and the expectation that OPEC+ will increase its production in the second quarter have maintained pressure on barrel prices, bringing them down to levels not seen since late 2022.
GEOPOLITICS
During his election campaign, Donald Trump continuously claimed that when he became president, he would end the war between Russia and Ukraine in 24 hours. The recent meeting between Russians and Americans in Saudi Arabia suggested that the American plan involved direct negotiation with Putin, which would then be communicated to Ukraine and its European allies. It's unsurprising to many that this initiative for "lasting peace" in Ukraine has encountered headwinds and won't be as quickly as Washington initially contemplated.
What can be distilled from the many statements issued by the White House is that President Trump thinks that ceasing to support Ukraine directly—that is, taking a "neutral" position on the points separating Russia and Ukraine—would enable him as a good faith mediator in the conflict. This supposedly neutral stance ceases to be neutral when stating that the new borders between the two countries in conflict should be drawn based on the current positions of the battle fronts, that the resulting Ukraine should become a neutral country, and that the U.S. should not be involved in Ukrainian security. These are initial boundary conditions that Ukrainians and many European leaders consider a nod to the invader. In other words, a pro-Russian neutrality.
Trump has stated that the U.S.’s tremendous economic and military weight can force his peace plan to materialize. However, what concessions or guarantees would be extracted from the Russians in that plan is unclear. As things stand, the confrontation between Presidents Trump and Zelensky last week was only novel in that it was televised, not in the existence of differences between them. As the beginning of pressure on Ukraine, U.S. aid was abruptly suspended; even military intelligence collaboration, key to defending against Russian attacks, was suspended. Russia, neither short nor lazy, and to confirm the suspicions of many, intensified its air attacks.
Reacting to events, European leaders announced on Thursday plans to increase their defense spending and continue supporting Ukraine in a scenario disrupted by Donald Trump's change of stance regarding U.S. policies on European security. The European Union defense summit in Brussels was held amid fears that Russia, emboldened by Trump's position on the war in Ukraine, might next attack an EU country and that the U.S. would probably not come to its aid. EU leaders also expressed their support for Ukraine, but that declaration was agreed upon without Hungarian nationalist leader Viktor Orbán, a Trump ally with ties to the Kremlin. In their final declaration, European leaders emphasized that there could be no negotiations about Ukraine without Ukraine and promised to continue providing aid.
Like a shark smelling blood, China signed an important grain export agreement from Ukraine to China, expressing that trade with Ukraine would help the European country's economic recovery. China is probably sending the message that it doesn't fully subscribe to the philosophy of regional powers that some in Washington postulate. After all, Xi Jinping's foreign policy is not restricted by imaginary cartographic lines.
Despite not generating relatively high-voltage news in the Middle East, there has been activity of interest in both Israel and Syria. In parts of northwestern Syria, intense clashes continue between transitional government forces and fighters loyal to the overthrown President Bashar al-Assad; according to a BBC report, the combat has turned into a settling of scores with the Alawite minority, with at least 1,000 dead.
Meanwhile, in Gaza, having concluded the first phase of the ceasefire, negotiations for the second phase have not begun. As a pressure measure, Israel has imposed a total blockade on all goods entering the strip, demanding that Hamas release the remaining hostages. The U.S. joined the campaign. President Trump demanded that Hamas "release all hostages, now, not later," including the remains of deceased hostages. Trump made his threats after a meeting at the White House with a group of Israeli hostages who were released in the first phase of the ceasefire agreement. The president concluded that meeting by saying: "I am sending Israel everything it needs to finish the job; not a single member of Hamas will be safe if they don't do what I tell them."
Trump was also featured in news related to Iran. In a television interview, he indicated that he wanted to negotiate a new nuclear deal with Iran and that he had sent a letter to the leaders of the Islamic Republic, suggesting talks. The White House fears that Iran is rapidly approaching the capacity to manufacture atomic weapons and has reactivated its strategy of maximum pressure through oil sanctions. Iran's first reaction was that it was Trump who undid the agreement that had already existed during his first administration.
FUNDAMENTALS
The oil market has been unable to recover during the last three quarters, particularly in the previous two months. The complexity and speed of geopolitical changes have overshadowed the importance of the industry's present fundamentals. The perspectives of some international agencies, characterized by weak demand due to political decisions, have taken the helm of the market.
The International Energy Agency (IEA) reinforced this pessimism in its most recent market outlook, warning once again that global supply will exceed demand, inventories will increase, and prices will retreat in 2025. According to the IEA, 2026 will mark only the beginning of a prolonged period of turmoil in oil markets, with excess production capacity reaching unprecedented levels by the decade's end. The IEA forecasts that by 2027, global oil demand will reach only 106 million barrels per day, barely 1.5 million barrels per day above current levels. Meanwhile, supply is expected to increase to nearly 114 million barrels daily.
Given the weight of IEA projections among energy market actors and policymakers, it's not surprising that sentiment in global oil markets has reached almost unprecedented levels of pessimism in the context of global economic uncertainty. The IEA, as is well known, has a well-documented history of underestimating oil demand. The agency has underestimated demand in 13 of the last 15 years by more than 1.0 MMBPD each year. On the supply side, in our opinion, the agency is making an equally erroneous forecast, especially in its growth forecasts for "Shale Oil" in the U.S. and in other non-OPEC countries.
OPEC+ finds itself in a trap of its own making. It presents itself to the world as the guardian of oil market stability. This position justified the continuous postponements to return to the market the crude it had closed since 2022. How, then, explain the production opening in early April, when market conditions appear more precarious than when they last postponed that opening? The explanation may lie in the fact that OPEC+ believes in the market forecasts published by OPEC with estimates of growing demand and a supply that tries, unsuccessfully, to balance with demand. It could also be the case that the associated production capacity, the "closed barrels," has largely been declining (opening instead of developing). The operation they would start in April may become a redistribution of production among member countries. The reopening could prove irrelevant if the baseline they established is placed at levels lower than in previous months.
In the Russian case, crude exports are limited by the sanctions imposed on the dark fleet that moves barrels from Russia and Iran to the point that Chinese imports of crude oil were affected by almost 5% due to the interruption of deliveries from Russia and Iran to the northeastern province of Shandong. However, some analysts point out that this could indicate weaker demand. In any case, OPEC+ emphasized that these production increases could be paused or reversed depending on market conditions, maintaining flexibility to support market stability.
In the same direction, talks to resume the flow of Kurdish oil from northern Iraq to the Mediterranean port of Ceyhan in Turkey failed for the second time in a week. The main point of contention between the parties is the price that Baghdad is willing to pay the Kurds for their oil. Washington is pressuring Iraq to resume these exports as part of its "maximum pressure" campaign on Iran, which includes efforts to restrict Tehran's oil revenues.
Regarding U.S. internal statistics, its production level remains relatively constant. The Energy Information Administration (EIA) reported an increase in commercial crude inventories of 3.6 million barrels, a reduction in distillate inventories of 1.3 million barrels, and a decrease in gasoline of 1.4 million barrels. The drilling activity reported by Baker Hughes shows a minimal weekly reduction, while the number of active fracturing crews has risen by 10 since the beginning of the year. The increase in fracturing and completion operations is mainly concentrated in natural gas basins, responding to a marked increase in Henry Hub prices.
Interestingly, the Baker Hughes report shows that the number of active rigs worldwide has been reduced by more than 70 units during the last year. In that scenario, it is difficult to imagine maintaining idle production capacity at a global level.
U.S. Energy Secretary Chris Wright plans to structure a fund of up to twenty billion dollars to refill the depleted strategic petroleum reserves (SPR) to their maximum capacity, an initiative that could take years. The concept of SPR arose as a result of the 1973 Arab oil embargo. It consists of a series of "salt caverns" in the subsoil, with a capacity of 714 million barrels. Currently, they hold about 400 million barrels.
Contrary to conventional logic, trade relations between the U.S. and Canada, far from improving, have worsened with the war of tariffs and border policies. On the contrary, with the southern neighbor, the White House postponed tariffs on most imports from Mexico until April 2, following President Trump's call with his Mexican counterpart Claudia Sheinbaum, allowing U.S. refineries to continue their heavy crude imports.
In the longer term, but with the capacity to affect the fundamentals of U.S. trade and refining, is the new administration's announcement of its intention to reactivate the Keystone XL pipeline project, reversing the Biden administration's decision to cancel it. The project, which would transport oil from Alberta's oil sands to Texas, with an estimated investment of $8 billion, has faced fierce opposition from environmentalists and Native American groups for over a decade. The biggest obstacle to the project has been the back-and-forth of American politics.
Trump has promised that starting January 2025, "easy approvals" will be obtained to restart construction of the project, emphasizing the urgency of securing energy resources. The United States imports almost 4 million barrels of crude oil daily from Canada, ten times more than Mexico, the second largest supplier. Once operational, Keystone XL could move 830,000 barrels daily, reinforcing Canada's role as the leading foreign oil supplier to the United States. Washington maintains that the project will boost energy security and create jobs throughout the Midwest. However, Trump's threat to impose 25% tariffs on imports from Canada could complicate the project, while his suggestion that the neighboring country could become the 51st state adds diplomatic friction.
PRICE DYNAMICS
Two elements have affected the short-term oil market. First, the geopolitical effect was confusing and difficult to decipher. Second, the announcements from OPEC+ were interpreted as more barrels entering the market. This combination drove oil prices, mid-week, to levels not seen in the last two years. On Friday, after digesting the volumes related to the supposed OPEC+ opening (120 MBPD per month from April) in the context of global fundamentals, prices recovered part of their losses. The week ended with a net loss of around 3% compared to the previous week. As things stand, at market close on Friday, March 7, 2025, benchmark crude oils Brent and WTI were trading at $70.36/bbl and $67.04/bbl, respectively.
VENEZUELA
In Search of Alternatives
Many commentators, experts, and laypeople have dedicated themselves to clarifying the potential consequences of the cancellation of OFAC licenses granted to oil companies for their petroleum activity in Venezuela. Many think that the return of sanctions will put the regime in check and impact a population suffering from a continued humanitarian crisis. Others argue that the licenses only favored the regime and its interest groups. The fact is that the concessions of the Biden administration (GL41 and others) were designed to incentivize the regime to allow a transparent presidential electoral process with democratic guarantees, broad participation, and respect for human rights. According to the U.S. administration, this licensing regime is now revoked because of the flagrant non-compliance by the regime with what was agreed upon in 2022. More than six months after the electoral fraud of July 28, the country and the licensed oil companies seemed to have become accustomed to the fact that the northern country was not interested in enforcing the Venezuelan regime's commitments. A hope that has proven to be in vain.
OFAC has begun undoing the existing licenses by issuing a new license (GL41A), which orders Chevron to end its activities in Venezuela and its relationship with PDVSA in a one-month wind-down period. Considering the complexities of Chevron's operation, this is a very brief period, and it surprises those who expected a more extended period of six months.
The regime seems to think, or hopes, that not everything related to the oil lifeline is lost. Consequently, they have maintained a prudent position on the issue. Instead of vociferous protests against what they indeed consider the arbitrariness of the “imperialist” Trump and his Secretary of State, as would have been the typical script used in the past, the regime has concentrated on trying to convince the "friends from the north" that they are making a mistake, that the decision is not convenient for U.S. interests. They have also tried to shift the blame to María Corina Machado for the "misunderstanding" between the administrations, seeking to exploit the divisions that seem to exist in the U.S. administration regarding this issue.
Meanwhile, the regime must be rushing its contacts with those in charge of oil lobbying, and even with Mr. Grenell, including elements such as the release of hostages and reception of deportees, trusting that Trump might change his mind. However, the situation has reversed compared to a month ago; time is no longer on the regime's side. The issue of national politics around this topic is very thorny. The discussion contrasts those who think that sanctions are useless instruments that only harm the population and those who believe that without external pressure, there will be no possible change; the latter group argues that the population's suffering is only the regime's responsibility. A discussion that sometimes turns out to be Byzantine for most of the population.
Continuing on the political level, there are disagreements and internal fights in the PSUV over the nominations for the general elections. The elections may be postponed once more to try to hold them on a less agitated date and after trying to smooth out internal tensions. On the other hand, whether to vote or not emerges as the element dividing the opposition ahead of the elections. However, those who advocate participation do not have significant popular support.
On the economic level, the injection of a large amount of foreign currency into the exchange market has temporarily halted the increase in the gap between official and parallel exchange rates. However, this remains extremely high: 20% at the end of the week. The February inflation, published by the Venezuelan Finance Observatory (OVF), is 12%, reaching three-digit levels annually.
Oil Economy
The cancellation of OFAC licenses and, probably, comfort letters, which were granted to Chevron, Repsol, Maurel & Prom, Reliance, and others of lesser relevance, will have a significant effect on the oil industry and the national economy, which will end up reflecting on the population. The most critical effects correspond to the decline in production and change in export destination, which entails significant changes in the sale price of crude and products. There will also be collateral effects derived from the complexities in acquiring and managing diluents and fuels to satisfy local demand. We estimate that production will decline, to a greater or lesser degree, depending on the management of diluents: between 60 and 120 MBPD in the next 12 months, assuming that PDVSA will not invest to compensate for the natural decline (see graph).
The main impact of the reactivation of sanctions corresponds to the difference in sales prices between premium markets (U.S. and Europe) and sanctioned crude markets (Southeast Asia / China). This is due to how competitive that market is due to the presence of Russia and Iran, the high discounts required, and the complications of using intermediaries, "dark" tankers, and multiple transfers on the high seas; a separate point would be the financial "management" of those sales, which in the past has generated corruption (Al Aisami, etc.). The graph shows that gross income from crude sales was close to $12 billion (excluding volumes for Chinese debt payments) in 2024. With the reactivation of sanctions, gross income from oil sales for 2025 and 2026 is estimated at around $8 billion and $7.8 billion, respectively. As seen in the graph, if the volumetric need for diluents and fuels is maintained over time, the net income of foreign currency would be reduced to approximately half versus the licensing scenario. In that scenario, there would be substantial devaluations and increased inflation.
Oil Operations
Activities in the hydrocarbon field have developed without setbacks, perhaps due to what they call calm before the storm. Regarding natural gas, total consumption is around 1200 million cubic feet per day, of which half of the volume is produced as free gas through licenses from Cardón IV and Yucal-Placer. The other half comes from Lake Maracaibo, its surroundings, and the greater Anaco area. The gas produced in northern Monagas is burned and/or vented, about 2000 million cubic feet per day, and a smaller amount is used in regional processes. The shortage of natural gas continues to limit petrochemical production and the use of gas and gas liquids as domestic fuel.
On the oil side, there is a persistent shortage of domestic light crude and diluent to meet the requirements for diluted crude blending and refining. This shortage is managed using imported diluent, Hamaca crude for Merey crude blending and maintaining limited refining levels in Puerto la Cruz. In addition to the products produced in national refineries, the national market also receives imported products, mainly through barter agreements.
Crude production during the last week averaged eight hundred and seventy-one thousand barrels per day (871 Mbpd), geographically distributed as follows: • West 220 (Chevron 102) • East 128 • Orinoco Belt 523 (Chevron 120) • TOTAL 871 (Chevron 222)
National refineries processed 218 Mbpd of crude and intermediate products, with a gasoline yield of 79 Mbpd and 76 Mbpd of diesel. The average sale price of barrels marketed under OFAC licenses, net of debt payment, was $50.1/bbl.
March has become a critical month, as operations and crude sales to Chevron must cease on April 3 unless OFAC publishes an amendment to License 41-A. PDVSA and Chevron will seek to maximize the volume sent to the U.S. market. For now, it is believed that the rest of the OFAC licenses and comfort letters will receive the same treatment, but due to their private nature, OFAC is not obligated to publish information.
CITGO
CITGO Petroleum Corporation ("CITGO"), PDVSA's subsidiary in the U.S., reported this Friday, March 7, its financial and operational results for the fourth quarter and the year 2024. According to the report, low refining margins led to a net loss of $146 million in the fourth quarter, EBITDA of $2.0 million, and adjusted EBITDA of $15 million, compared to a net profit of $66 million, EBITDA of $281 million, and adjusted EBITDA of $290 million in the third quarter of 2024.
According to the company, a continuously deteriorating refining margin environment, combined with lower processing volume early in the year due to scheduled maintenance shutdowns executed in the second quarter, contributed to a decrease in profit in 2024 compared to 2023. For 2024, net profit was $305 million, with EBITDA of $1.2 billion and adjusted EBITDA of $1.1 billion, compared to a net profit of $2.0 billion, EBITDA of $3.3 billion, and adjusted EBITDA of $3.2 billion obtained in 2023.
Following the policy established in 2019, OFAC renewed the suspension of General License 5 (GL5R) until July 3, 2025. This suspension prevents holders of PDVSA 2020 bonds from taking control of 50.1% of Citgo Holding shares. The validity of that collateral remains under discussion in the New York court.
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