M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA
In a week that coincided with the commemoration of Jewish Passover —the liberation of the Hebrew people from slavery in Egypt—and Christian Holy Week, markets experienced a change in their downward trend. The pessimism generated by the uncertainty of the trade war unleashed by the White House gave way, at least temporarily, to welcome optimism in an oil industry battered by the growing probability of a collapse in demand, given the threat of a recession in major economies.
The tightening of U.S. sanctions against Iran, somewhat better-than-expected economic results, positive news about U.S. negotiations with Japan and the European Union, through contacts with Prime Minister Melloni, and new compensation quotas from OPEC+, managed to mitigate the market's anxiety level; However, there is still an understandable caution regarding the results of the Chinese-American trade confrontation. Overall, increased supply risks derived from sanctions, investment, and production cuts, coupled with a modest trade confidence improvement, boosted oil prices.
Fundamentals
Despite reductions in forecasts from both the International Energy Agency (IEA) and OPEC, oil demand has been relatively robust over the past 12 months. Still, supply has not been incentivized enough to balance it. The risk associated with a supply that fails to rebound in response to demand is once again becoming relevant in market calculations, at least in the short term.
Indeed, the latest forecasts from the IEA and OPEC have reduced demand growth for 2025 to seven hundred and thirty thousand barrels per day (730 Kbpd) and nine hundred thousand barrels per day (900 Kbpd), respectively. On the supply side, both sources forecast increases of 900 Kbpd for the year, mainly from countries outside the OPEC+ sphere.
According to the IEA, global oil supply reached 103.6 million barrels per day in March, representing a year-on-year increase of nine hundred and ten thousand barrels per day, with non-OPEC+ countries leading monthly and annual increases. OPEC+ will raise its production targets by four hundred and eleven thousand barrels per day in May. Still, the actual increase could be substantially lower due to some countries' inability to meet their quotas. The IEA maintains that global supply growth for 2025 has been reduced by two hundred and sixty thousand barrels per day, to one million two hundred thousand barrels per day (1.2 MMbpd), due to decreased production in the United States and Venezuela. Production in 2026 is expected to increase by 960 Kbpd, led by offshore projects.
On the other hand, OPEC forecasts that the supply of liquids from countries not belonging to the Declaration of Cooperation (outside the OPEC+ sphere) will grow by approximately nine hundred thousand barrels per day (900 Kbpd) in 2025. The main drivers of growth are expected to be the U.S., Canada, Brazil, and Argentina. For 2026, supply growth from this group of countries was also slightly revised downward, to approximately nine hundred thousand barrels per day (900 Kbpd).
These estimates do not consider the effect that the reduction in investments may have, nor the closure of fields/wells generated by the fall in prices. Preliminary indications point globally to cuts of between 10% and 25% in investment budgets to avoid affecting dividend programs and share buybacks, in the case of listed oil and service companies. As for companies not listed on the stock exchange, the reductions are more aggressive. Although representative figures of the production closures companies have had to make to stay financially afloat have not been published, our conservative estimate suggests that the closed volume could reach about 400 KBPD since the beginning of March.
As reported last week, OPEC+ is adopting strategies against the grain, given the oil market situation. The result of accelerating the opening of production that is currently closed and the announced overproduction compensations, coupled with some members' inability to meet their quota, creates an uncertain situation regarding the incremental volume that will reach consumers from OPEC+ countries.
The measure to accelerate the process of undoing voluntary closures seems to confirm rumors that Saudi Arabia is weighing the idea of abandoning its traditional role as the OPEC's "swing producer," tired of financing market control because of countries that fail to comply with production quotas, such as Kazakhstan, the United Arab Emirates, and Iraq. Since the end of last year, the Saudis' discomfort with the distribution of burdens to balance the market has been known: the kingdom assumes almost 70% of the total OPEC+ cuts.
However, changing strategy and increasing oil production will have financial consequences for Saudi Arabia, which needs high oil prices to develop Crown Prince Mohammed bin Salman's ambitious Vision 2030. Although Saudi production is currently below nine million barrels per day, the lowest level in 15 years, the country has several ways to face the problem of lower income: reprogramming the Vision 2030 economic plan, financing schemes by issuing sovereign debt, or drawing on bulky international reserves to face a period of low prices. Furthermore, the commercial opportunities presented by the 10% low tariff imposed by Trump on the Persian Gulf countries may serve as leverage to benefit the local economy.
The Trump administration is reportedly in multiple negotiations with authorities from up to 50 countries that want to reach mutually beneficial trade relations and is, in parallel, managing the trade confrontation with China. This situation generates uncertainty and instability, affecting the appetite of oil investors. As a result, U.S. oil production is slightly declining due to reduced investment and adaptation to lower barrel prices.
The Chinese economy, which was beginning to show signs of recovery, will likely be affected by the tariff war with the U.S., which goes beyond commercial logic. On the other side of the coin, China is receiving growing volumes of Russian crude with discounts, especially those from the Russian Arctic, using a ship-to-ship transfer scheme on the high seas (STS) from sanctioned vessels to non-sanctioned tankers, near Malaysia and Singapore. This same journey will be followed by the incremental volumes of Venezuelan crude arriving in the region starting this month.
This generalized uncertainty in the oil market will affect the bidding processes for exploration blocks that several countries are conducting; several have already been awarded, and others are in process, for example, in Indonesia, India, and Brazil.
Geopolitics
The main military conflicts shaking the world, the Russian invasion of Ukraine and Israel's war against Iran's multiple proxy groups, have taken a turn for the worse in recent days. In Ukraine, in addition to the continuous harassment of its civilian population through incessant bombing by Russia, President Zelensky is also receiving political pressure from the U.S. to yield and reach a negotiated peace quickly, under penalty of the U.S. abruptly disengaging from the conflict.
Even though the government in Kyiv has already agreed to a framework agreement on minerals with Washington, which would allow the U.S. to invest in Ukraine's recovery in exchange for a stake in future profits from the development of the energy mining sector, the White House has not expressly condemned the increase in Russian attacks. Ukraine expected the agreement and the U.S.'s growing impatience with Russia to translate into new sanctions for Moscow. Instead, the threat to disengage from ongoing peace efforts benefits the Kremlin more than Kyiv.
A tangible warning was sent after the first round of peace talks between U.S., European, and Ukrainian officials in Paris. At the close of that meeting, Secretary of State Marco Rubio said: "We are reaching a point where we must decide if this is even possible, because if it's not, I think we'll simply move on. It's not our war. We have other priorities to focus on." Another meeting is expected next week in London, and Marco Rubio suggested that this meeting could be decisive in determining whether the Trump administration continues its participation in the negotiations. Reading between the lines, the promised peace in Ukraine is no longer a priority for the American administration.
Regarding the Middle East, we observe steps forward and backward. On the one hand, in the positive sense, Iran and the U.S. began a second round of negotiations on Saturday about Tehran's nuclear program, with apparently good results. The meetings are being held at the Omani embassy in Rome, with the presence of Steve Witkoff, President Trump's envoy for the Middle East, and Iranian Foreign Minister Abbas Araghchi. The negotiations are again mediated by Oman's Foreign Minister, Badr al-Busaidi.
The mere fact that talks are taking place represents a crucial element, given the decades of bad relations between the two countries, and that it was precisely Trump, during his first term, who withdrew the U.S. from Iran's nuclear deal with world powers. The talks are taking place under a shadow of risk of a possible military attack by the U.S. or Israel against Iran's nuclear facilities, or that the Iranians fulfill their threats to develop an atomic weapon.
On the other hand, in Gaza, military tension has increased. Israeli troops are intensifying attacks to pressure Hamas to release hostages and disarm. Israel has promised to intensify its attacks and occupy large "security zones" within the Strip. The Houthi rebels in Yemen have remained active, launching missiles and drones towards Israel and attacking navigation in the Red Sea, which provoked U.S. attacks on positions in Yemen. The U.S. Central Command said Thursday that the attacks on the Ras Isa fuel port in Al Hudayda province were aimed at cutting off revenue to the Houthis, and added that the port has been used as a source of illicit earnings for the group. The situation in Yemen seems to be escalating. Late Saturday, local media reported that forces opposing the Houthis are gathering for a ground offensive. Unofficially, it is noted that the operation will be coordinated with Saudi support and the Guardians of Prosperity coalition.
Across the Atlantic, in Ecuador, the second round of presidential elections was held normally. The current president, Daniel Noboa, was re-elected with about 56% of the votes, against 44% for the left-wing candidate, Luisa González, who, without much evidence, denounced fraud in the elections. The new president's policies could affect the oil production capacity of this country, which, although with ample reserves and infrastructure, suffers from an oil industry handicapped by political interference and corruption.
Price Dynamics
Crude oil prices during this week reacted to new U.S. sanctions against Iranian oil exports, which have increased concerns about a more limited global supply. On the other hand, production cuts offered by some OPEC+ members, such as Iraq and Kazakhstan, also supported prices this week. The market also has optimism about possible progress in trade negotiations between the U.S. and some essential trading partners, such as Japan. There are rumors of an opening with China that could result in better economic growth and oil demand than the market perceives. As a result, prices closed with an increase of more than 5% compared to the previous week. Thus, at the close of markets on Friday, April 18, 2025, the benchmark Brent and WTI crudes were trading at $67.96/bbl and $64.68/bbl, respectively.
VENEZUELA
An Agonizing Economy
Venezuela has just commemorated the 215th anniversary of April 19, 1810, which marked the beginning of its independence struggle from the Spanish Empire. Today, as on that significant date, changes are demanded in the face of a subsistence economic and social situation that is progressively worsening. The country risk remains high due to the regime's lack of legitimacy, and the hydrocarbon industry is affected by international sanctions and restrictions on electricity supply.
The Trump administration’s cancellation of oil licenses, the imposition of secondary tariffs on Venezuelan crude buyers, and the shortage of foreign currency create a critical situation for the regime's survival. Remember that the country and its institutions cannot access international financial markets to escape the quagmire. Consumption is declining, the exchange rate is sliding, and no one wants to mention the projected inflation. The near future is full of questions. Will China be able and willing to take most of Venezuela's hydrocarbon exports? How will sanctions affect the fleets and intermediaries used for such transport? Where will the diluent and fuel for crude blending and the domestic market come from? How will the financial flow from the ultimate crude buyer to Venezuela be? How much will be lost along the way? We don't have answers, but undoubtedly the foreign currency that will reach Venezuelan coffers will be less than what we were accustomed to during the "opening" supported by the licenses, the elements of which we can only reconstruct from external sources, because the information is hidden behind the confidentiality clauses of the Anti-Blockade Law.
To try to narrow down the problem that is coming, we have analyzed three scenarios representative of net income from the sale of hydrocarbons (Net Income = Export Income - Import Expenses). The calculations were made at a Brent crude price of $70/BBL.
- Scenario 1 corresponds to the case where China absorbs all the crude and product (600 Kbpd of oil and 50 Kbpd of residual) that the rest of the markets are unwilling to accept due to the risks of tariffs or other U.S. sanctions.
- Scenario 2 represents a maximum offtake by China of 500 Kbpd, which would cause a production closure equivalent to the unexported crude, around 150 Kbpd.
- Scenario 3 reflects the potential problems of obtaining diluent, including the difficulties of keeping the PetroPiar Upgrader running, which would reduce the capacity to blend Orinoco belt crude to 400 Kbpd.
The graph below shows that in scenario 1, net foreign currency income would remain around $500 million monthly. Still, under the other scenarios (2 and 3), net income for early 2026 would be $340 million, an insufficient sum for the economy.
*Own calculations
Oil Operations
This was a week to reorient export shipments, mainly those scheduled to be taken to the North American market, which will now be redirected to the Far East. The crude destined for India has some OFAC authorization and could be the source of diluent through barter. However, we suspect this authorization will only last until May 27, when all OFAC licenses expire. Natural gas production, particularly that handled by Repsol and ENI for the domestic market, has been negotiated with U.S. authorities. Still, it is unknown how the payment for the supplied gas and the recovery of the accumulated debt with those companies will be handled.
Crude production during the last week averaged 870 Kbpd, geographically distributed as follows, in Kbpd:
- West 217
- East 127
- Orinoco Belt 519
- TOTAL. 863
Joint ventures with Chevron now function as PDVSA-only ventures, like pre-General License 41. The management of partner B's contractual volume remains unclear — potentially a new debt?
National refineries processed 205 Kbpd of crude and intermediate products, with a gasoline yield of 74 Kbpd and 76 Kbpd of diesel. The average sale price of barrels marketed under the protection of OFAC licenses, net of debt payment, was $52.12/bbl, and the weighted average was $32.67/bbl.
[1]: International Analyst [2]: Nonresident Fellow Baker Institute
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