M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA
Donald Trump was elected on a platform that some consider isolationist, not only commercially but also geopolitically, at least in rhetoric. Trump's first trip abroad, which occurred this week, is framed within his unorthodox vision of foreign policy. Far from visiting the traditional destinations of European capitals or power centers in Russia and China, the U.S. president chose as his destination the leading oil-producing countries of the Middle East, all governed by family monarchies: Saudi Arabia, the United Arab Emirates (UAE), and Qatar.
Beyond the commercial achievements for American companies like Boeing and the trillion-dollar investment commitments made by the visited countries, the tour of the Gulf countries had a significant geopolitical impact. Surprisingly, Trump announced that his government is close to reaching an agreement with Iran on its nuclear program. The goal, he said, is to avoid a direct military confrontation with Iran. However, the impact of this news was mitigated when Tehran clarified that there were still many gaps to be closed before an agreement could be reached. No less surprising was the shift in U.S. policy regarding the new Syrian regime.
Another high-caliber event, although it only tangentially affects the hydrocarbon business, is Moody's Ratings' decision to downgrade the U.S. government's debt risk rating from Aaa to Aa1, citing the failure of successive governments to halt debt growth. The credit rating downgrade and the Federal Reserve's (FED) decision not to lower interest rates represent a significant obstacle to President Trump's plans to tame government debt growth.
In any case, the oil market placed significantly greater value on the direction that tariff negotiations between the U.S. and China have taken, reinforcing the optimism that had emerged in response to the favorable behavior of oil market fundamentals.
Fundamentals
Once again, the supply and demand balances published by OPEC and the International Energy Agency (IEA) differ and even diverge in their projections for the short term, such as oil supply and demand for the current year. While OPEC maintains its projection of demand growth at 1.3 million barrels per day (1.3 MMbpd) for 2025, the IEA reduces it to 740,000 barrels per day (740 Kbpd). By the end of May, we estimate that global demand is already at 104.2 MMbpd, 0.5 MMbpd higher than at the end of 2024.
On the supply side, the IEA forecasts growth of 1.6 MMbpd, assigning 1.3 MMbpd to non-OPEC+ countries and 0.3 MMbpd to countries included in OPEC+. Meanwhile, OPEC's forecasts indicate supply growth from non-OPEC+ countries of 800 Kbpd "driven by the U.S., Brazil, Canada, and Argentina, and mitigated by a decline in Angola," which, complemented by the volumes announced to be unlocked in OPEC+ countries, 822 Kbpd, would bring the supply increase for 2025 to 1.6 MMbpd. Half of the 822 Kbpd to be "unlocked" corresponds to volumes already being produced by countries that have consistently produced more than their quota.
OPEC's secondary sources confirmed that the combined production of OPEC+ countries in April was about 100 Kbpd lower than in March, even though, according to announcements, 138 Kbpd of shut-in production would be released in April. The programmed increase for May was 411 Kbpd; however, despite not having official figures, preliminary analyses cast doubt on the materialization of an increase of that magnitude. We estimate that OPEC+ production could increase by 250,000 barrels per day (bpd) in May, with the majority of the increase coming from Saudi Arabia and the UAE.
Although the U.S. appears as one of the contributors to the increase in global supply in the projections of both institutions, drilling activity and the number of hydraulic fracturing crews continue to decline. This suggests that, apart from some incremental barrels of natural gas liquids, production remains on a plateau with a tendency to decline slightly. The Energy Information Administration (EIA) in its weekly report showed that commercial crude inventories in the U.S. grew by around 3.4 MMbpd.
Meanwhile, China showed a rebound in economic growth and oil demand, which was interpreted as an increase in productive and export activity, anticipating the scheduled tariff increase between the two countries; however, the high purchases of Russian crude scheduled for May by Sinopec could indicate real growth in Chinese demand. In India, oil demand is estimated to grow by 3.4% in 2025, on its way to reaching 6.0 million barrels per day (MMbpd) in 2026.
This entire picture of supply and demand fundamentals is what keeps global crude inventories below the averages of the last 5 years.
Geopolitics
In Switzerland, the United States, and China announced that they had reached an agreement to temporarily reduce the tariffs on imports that they had previously announced. The escalation in the trade war between the two countries was having a profound impact on the economy. Still, now both have declared a truce that could mark the beginning of a new commercial balance. The trade representative, Jamieson Greer, said that the United States agreed to lower the 145% tax that Trump imposed last month to 30%. China agreed to reduce its tariff rate on U.S. goods from 125% to 10%.
During the week, on May 13, President Trump embarked on his first foreign policy trip to the Middle East with his extensive team and press; a group of top executives representing the most powerful American companies also attended the meetings. The mission had three stops: Saudi Arabia, the United Arab Emirates (UAE), and Qatar. In each of these countries, they were received with a great display of luxury and the unique version of diplomacy of the Persian Gulf countries. A trip that, in one way or another, could represent billions of dollars in investments and significant commercial agreements for the Trump administration.
Beyond the choice of destination for his first trip, countries of economic and energy relevance beyond that region, the most outstanding aspect of the tour, from a geopolitical angle, turned out to be a crucial shift in U.S. foreign policy towards Syria: the lifting of all U.S. sanctions on the Damascus regime, a watershed event for a country with more than ten years of conflict and decades of international isolation. Additionally, in Saudi Arabia, he met with the de facto Syrian president, Ahmed al-Sharaa, the first meeting of a U.S. president with a Syrian leader since Bill Clinton, in March 2000, tried to convince then-Syrian president Hafez al-Assad to sit down to negotiate a peace agreement with Israel.
This is an important change by Washington regarding the man who, at the head of Hayat Tahrir al-Sham, a group linked to Al Qaeda and designated as a terrorist organization by the U.S., led the fall of Bashar al-Assad; an example of how geopolitics can give or foster extraordinary turns in short periods. In explaining his motives, Trump emphasized that the relief of sanctions seeks to encourage Syria once again to normalize relations with Israel. He also mentioned the need for Al-Sharaa to expel foreign militant groups, deport radical Palestinian groups, and help keep ISIS under control.
From Doha, Trump opened the possibility of visiting Turkey if what could be the first direct talks between Russia and Ukraine to reach a truce in their already long conflict materialized. In fact, the possibility of direct contact between Putin and Zelensky was initially presented and validated by Putin. However, President Putin, in a display of his customary erratic behavior, decided not to attend and sent a delegation that fell short of meeting expectations. In any case, the meeting in Istanbul was the first time that the parties in the conflict faced each other. Although the meeting was disappointing, the parties at least agreed to exchange about a thousand prisoners of war, but did not achieve any other progress during these first direct peace talks since 2022. Ukraine, under pressure from Trump, had requested a 30-day ceasefire, and Moscow rejected it, sticking to its maximalist demands, unacceptable to the Ukrainian side.
The talks in Istanbul lasted less than two hours. Kyiv wants the West to impose stricter sanctions unless Moscow accepts Trump's proposal for a 30-day ceasefire. As soon as the talks ended, Ukrainian President Volodymyr Zelensky had a telephone conversation with Trump and the leaders of France, Germany, and Poland, his spokesperson said.
Israel, the most significant U.S. ally in the region, was left out of this trip, and Trump's pronouncements on hostilities in the Gaza Strip were brief and short, and he only referred to them when questioned by the press. At the last press conference, when asked about the intensification of Israeli attacks in Gaza, he responded that "many good things are going to happen over the next month, and we are going to have to help the Palestinians too. Many people are starving in Gaza. We have to look at both sides, but we will do a good job." We imagine that one of the objectives of the trip was to seek windows of opportunity for greater stability in the region.
In Asia, India and Pakistan agreed to a ceasefire in their exchange of missile and drone bombardments, following a jihadist attack that killed 26 tourists from India in the Kashmir area under New Delhi's control. Islamabad never accepted responsibility. However, the conflict may not be fully resolved, as India is considering drastically increasing the water it extracts from the Chenab, Jhelum, and Indus rivers, which supply Pakistani farms downstream, as a form of retaliation.
Price Dynamics
President Trump's Middle Eastern tour had an impact on the oil market. The announcement of a possible agreement with Iran, the lifting of sanctions that weighed on Syria, and the cooperative atmosphere of the visited countries left an environment of reduced conflicts, and therefore of lower geopolitical risk. Similarly, the start of direct talks between Ukraine and Russia also allowed a cautious hope to germinate regarding the beginning of the end of the war. However, the market's reaction to the preliminary agreement between the U.S. and China was the most significant catalyst for the market to reduce its fear of structural demand erosion, translating into optimism and rising oil prices.
Thus, in a week of volatility, at the close of the markets on Friday, May 16, the Brent and WTI benchmark crudes were quoted at $65.41/bbl and $62.49/bbl, respectively, a gain of 2% compared to the previous week.
VENEZUELA
The circle tightens, and options are few.
The country continues on a path of economic decline, with an increasingly impoverished population and increasingly authoritarian control. The inevitable, for now, decline in oil revenues marks an economic recession and out-of-control inflation.
The Maduro administration perceives that the only realistic lifeline is to try to reverse, totally or partially, the maximum pressure policy of the Trump administration. The emergency trip to China by Vice President and Oil Minister Delcy Rodríguez does not seem to have had effects beyond cooperation agreements and, perhaps, greater purchase of Venezuelan crude or volumes rebaptized as Malaysian or Brazilian. These imports will have to comply with debt service payments to China and compete with Iranian and Russian crudes in terms of prices and refinery yields. On the other hand, Russia is not in a position to become Venezuela's white knight when it is itself burdened by the cost of the war with Ukraine and is trying to have an approach to the U.S. administration.
Venezuelan authorities, particularly Jorge Rodríguez, the current president of the National Assembly, perceive a crack that could lead to some results, based on the influence over President Trump of his special envoy, Richard Grenell, and his well-oiled lobbying machinery that includes powerful oil interests. They seek to at least maintain the presence of international operators, even if only as passive minority partners in joint ventures, without the operational rights given to them by the agreements protected by the Anti-Blockade Law, as licensed by OFAC. The destination of the crude oil from these companies would be the most difficult variable to solve.
This alternative would prevent an exodus of foreign companies from Venezuela. Still, it could lead to PDVSA accumulating new debt and owing more dividends to companies, since it plans to take charge of operations previously controlled by joint ventures and handle exports by itself. Lawyers and experts have pointed out that greater clarity is needed as to how to complete the closure of these activities. Meanwhile, PDVSA has only delivered oil to customers who prepay or accept barter, and in April, it canceled several crude shipments to Chevron due to uncertainty about payments. There are only 9 days left to achieve its purpose, as on May 27, all OFAC licenses cease, and the discretionary system of secondary tariffs under Marco Rubio's command begins to function.
The case is that contacts between Miraflores and the White House continue, as evidenced by some facts related to illegal immigration cases. On one hand, the return to Caracas of Maikelys Antonella Espinoza Bernal, a 2-year-old Venezuelan girl separated from her parents due to U.S. deportation policies, was used by Maduro as a propaganda tool, and he thanked Richard Grenell and President Trump for their efforts. On the other hand, Marco Rubio, the Secretary of State, hinted, in response to a request from Maduro, that if Venezuela was willing to receive Venezuelan prisoners sent to El Salvador, there was a possibility that the transfer would be authorized.
Related to the handling of illegal Venezuelan immigrants, the U.S. Supreme Court ruled in favor of an appeal filed by a group of Venezuelan migrants who asked the high court to stop their deportation under the Alien Enemies Act. The ruling, similar to others it has issued in the past on the same subject, revolves around the fact that the alleged illegal immigrants did not have sufficient time to present a reasonable legal challenge to their deportations. The court did not rule on the legality of the AEA (Alien Enemies Act), but sent the matter back to the Fifth Circuit Court of Appeals, based in New Orleans, to give effect to its decision, recognizing that detainees are entitled to greater notice than they were given.
While these signals of a presumed negotiation are taking place, the effects of the "wind down" period, or termination of OFAC licenses, are taking a toll on the economy, which is in a vicious circle where mitigating monetary measures adversely affect the exchange market, which in turn pushes inflation upward. Public spending increased in April to finance bonuses for workers announced on May 1 and some extraordinary expenses related to the May 25 elections. Higher public spending, accompanied by lower tax collection in an environment of foreign currency scarcity, has forced the BCV to resort to inorganic monetary financing. The depreciation of the monetary sign, the Bolivar, has intensified. The official exchange rate rose this week to 94.8 bolivars per dollar, and the gap with the parallel market has widened to 26%.
Another element that caused concern to Venezuelan authorities was that Nicolás Maduro was unable to contact President Lula during their stay in Moscow. Even more telling, Maduro was absent from the IV Ministerial Meeting between the Community of Latin American and Caribbean States (CELAC) and the Chinese government, which was held with many heads of state, such as the President of Brazil, Luiz Inácio Lula da Silva, Gabriel Boric of Chile, and Gustavo Petro of Colombia. The dialogue of that meeting revolved "around the future of relations between the Latin American bloc and the Asian giant."
President Xi Jinping announced that China will offer credit lines of nearly $10 billion to Latin American countries to support their development, in addition to visa exemption for several Latin American countries. In said meeting between CELAC and the Chinese government, Xi Jinping did not mention Venezuela when referring to cooperation between China and Latin America and the Caribbean.
Oil Operations
Activities in the hydrocarbon sector have been adapting to the conditions imposed by the cancellation of OFAC licenses, including those of foreign oil services companies, following the expiration of General License 8.
Crude production during the last week averaged eight hundred and fifty-eight thousand barrels per day (858 Kbpd), geographically distributed as follows:
Area Kbpd
• West 214
• East 125
• Orinoco Belt 519
• TOTAL 858
National refineries processed 226 Kbpd of crude and intermediate products. Cardón's fluid catalytic cracking unit (FCC) continues in operation at 38% of its capacity. Gasoline production was 87 Kbpd and 74 Kbpd of diesel.
Exports are primarily destined for the Far East, except for crude shipments through "traders" and in the form of barter to increase diluent inventories to handle Orinoco Belt crude blends after May 27. Approximately 60,000 barrels per day (bpd) of crude oil are being stored in tankers, and it is contemplated to use shipments to Cuba as eventual relief to the limited storage capacity and to avoid having to affect production due to volatility. It is estimated that May exports will be below 600 Kbpd; to date, about 10 MMbbls (580 Kbpd) have already been dispatched.
[1] International Analyst
[2] Nonresident Fellow, Baker Institute
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