Like an earthquake, the growing tensions between Israel and Iran, deepened by the conflict in Gaza, finally materialized into what appears to be an undeclared war between the two Levantine countries. Israel, claiming that nuclear negotiations between Iran and the U.S. only served to buy Iran time to advance its plans to develop a nuclear weapon, and faced with Iran's repeated threats against Israel's very existence, decided to resort to military action.
On Friday, June 13, Israel deployed a surprise air attack, following what appears to be a long-standing plan, against nuclear facilities and related infrastructure on Iranian territory, also seeking to disable much of Iran's air defense and high military command. Immediately, Ayatollah Ali Khamenei, the supreme leader, promised to avenge the attack, and several waves of drones and missiles were fired toward Israel, an exchange that continued over the weekend.
Although these hostilities have not yet impacted oil and gas supply and distribution, the probability of an event capable of disrupting oil activities increased considerably, especially in the case of an escalation of these confrontations. World leaders called on the parties to sit down and negotiate, which is unlikely at this stage of events.
Market Impact
The stock market fell more than 1.5% on average. Gold and crude oil prices soared, with investors seeking a haven. Brent crude prices reacted with an initial increase of almost 14%, but began to decline as the market digested the details of the unfolding events.
GEOPOLITICAL ANALYSIS
Operation "Am Kalavi" (Rising Lion)
Middle Eastern geopolitics, which despite regional low-scale conflicts had been underestimated by the oil market, took control of the economic and military environment by increasing the probability of an escalation of these conflicts. The event that shook the world this week was Israel's massive attack on nuclear facilities and related infrastructure in Iran.
On the night of June 12-13, Israeli intelligence and air force carried out an unprecedented coordinated operation, dubbed "Am Kalavi" (Rising Lion), in the heart of Iranian territory. After the Israeli attack, the country's Prime Minister, Benjamin Netanyahu, communicated the details of the attack against "dozens of targets" related to Iran's nuclear program and other military points.
He also reported that, as part of this offensive, they had eliminated part of Iran's military leadership and high-ranking nuclear scientists; Iran's army has confirmed the death of at least six high-ranking military officials, including two General Staff generals. The Israeli government also stated that the attacks would continue until the Iranian threat was neutralized.
Iranian Retaliation
Ayatollah Khamenei, Iran's supreme leader, promised to avenge the attack, and Friday was Tehran's turn to respond. The retaliation began to be felt late in the afternoon throughout Israel. Iran has sent up to four waves of missiles, according to the Israeli Defense Forces (IDF), which have left at least three people dead and 80 wounded.
The famous Iron Dome neutralized the vast majority of missiles launched by Iran; however, an undetermined number managed to penetrate Israeli airspace, and one of them hit a large building on the outskirts of Tel Aviv. As of this report's closure, air exchanges between the two countries continue.
Risk of Escalation and the Strait of Hormuz
Under no circumstances can we consider that the back-and-forth has concluded. On the contrary, the probability of escalation is the most likely scenario. Various analysts speak of Iran potentially trying to obstruct the Strait of Hormuz to destabilize the oil and financial markets and thus put pressure on the West. China, the primary customer for its oil, may be the only one capable of dissuading them from such action.
To understand the implications of a Strait of Hormuz obstruction, let's remember that about 20 million barrels of oil and products pass through the strait per day and that alternative routes are scarce and limited in capacity.
Transportation Alternatives
Precisely to reduce the total dependence of regional producers on maritime passage through the Strait of Hormuz, several Persian Gulf countries have built pipelines that avoid the strait entirely:
- Abu Dhabi Pipeline (UAE) transports oil from Abu Dhabi to the port of Fujairah in the Gulf of Oman.
- Petroline (Saudi Arabia): This pipeline, also known as the East-West Pipeline, transports crude from the Persian Gulf to the port of Yanbu, on the Red Sea.
- Iraq-Turkey Pipeline: This pipeline transports oil from northern Iraq to the Turkish port of Ceyhan in the Mediterranean. However, it is a pipeline dedicated to crude produced in Iraqi Kurdistan in the north and is temporarily out of service.
Recently, Iran has developed a new crude export terminal in Jask, in the Gulf of Oman, specifically to bypass the vulnerable Strait of Hormuz. This terminal is part of the Goureh-Jask pipeline, which extends about 1,000 kilometers from the oil fields of southwestern Iran to the port of Jask.
Limitations of Alternatives
These transportation alternatives have limited capacity and cannot completely replace the volume that flows through the Strait of Hormuz. The total capacity of all the mentioned pipelines is barely about 8 million barrels per day.
If a barrel deficit of this magnitude materialized, energy prices would soar to levels equivalent to $100/BBL in oil terms, even for a relatively brief period. In just a few days, oil market perception has shifted from nervousness about a minimal supply excess following recent OPEC+ announcements to concern about a potential shortage, demonstrating the fragility of the oil market balance.
International Reactions
Russian Federation President Vladimir Putin urged de-escalation during separate calls with the leaders of Israel and Iran on Friday morning, while condemning the Israeli attacks and offering condolences for the victims. In his conversation with the Israeli Prime Minister, Putin said that the Iranian nuclear issue must be resolved "exclusively through political and diplomatic means" and urged both parties to return to negotiations, even offering to help mediate. A somewhat paradoxical comment, coming from someone who has ignored the power of negotiation, both when deciding to invade Ukraine and, recently, refusing to agree to a ceasefire mediated by the U.S. However, Putin told his American counterpart, in a 50-minute phone conversation, that Moscow was ready to hold a new round of peace talks with Kiev after June 22, once the parties complete the exchange of prisoners and soldiers' bodies, reported Putin's assistant, Yuri Ushakov.
President Trump made somewhat ambiguous statements about the Israeli attack. First, he distanced himself from the Israeli attack, ensuring that the U.S. had not been part of the attack, then used the attack as a rhetorical lever, calling on Iranians to return to the stalled negotiating table.
Domestic Situation in the United States
As if the American administration didn't have enough with what's happening in its foreign policy, its domestic situation is beginning to heat up. In recent days, protests erupted in Los Angeles after a week of immigration raids in this city. Many people demonstrated against the Government and the U.S. Immigration and Customs Enforcement (ICE), which raided Latino communities and shopping centers to arrest migrants and advance toward their deportation.
The protests turned violent, maybe because California has a large immigrant population and a long history of street protests. If we add that it is a state led by a Democratic governor, Gavin Newsom, who seeks to appear as President Trump's quintessential opponent, we have an explosive equation.
President Trump sent 700 Marines and 4,000 National Guard troops to support the federal response to the riots, which infuriated local authorities, claiming that such a decision was unconstitutional and thus was sued in the courts. Meanwhile, protests are being repeated in other cities and states nationwide.
MARKET FUNDAMENTALS
The fundamentals of the oil industry have taken a back seat in price formation and commercial transactions. Despite projections published by the World Bank on June 10, no indications of reduced oil demand have been perceived. This foresees a deceleration of global growth to 2.3% in 2025, half a percentage point less than the rate forecast at the beginning of the year. The report does not foresee a global recession.
India and China continue to acquire increasing quantities of Russian and Venezuelan crude, respectively.
Supply
On the supply side, the net opening of OPEC+ volumes has not been of the announced magnitude. The only new supply increase is Exxon's announcement that production will begin to flow from its fourth FPSO in Guyana during the third quarter instead of year-end.
According to the EIA, the U.S. continues producing about 13 million barrels per day (13 MMbpd). According to Baker Hughes, drilling activity in the United States fell by another four units. The EIA’s weekly report also reveals another reduction in commercial crude inventories of 3.6 million barrels, while gasoline inventories increased by 1.5 million, directly related to higher refinery crude runs.
Monetary Policy
Economic results in the U.S., with lower inflation levels and labor market results lower than expected, seemed to guarantee that the Federal Reserve (FED) would reduce interest rates at its next meeting. However, in light of geopolitical events in the Middle East and their effect on energy costs, the decision could be postponed until we know how inflation will move.
PRICE DYNAMICS
The geopolitical risk premium is back, substantially elevating crude prices. In theory, OPEC+ continues to reduce its production cuts, and global demand is decelerating due to trade wars, according to the IEA and EIA. Even so, announcements of preliminary tariff agreements between the U.S. and China have reduced market anxiety.
Although Iranian oil infrastructure did not suffer damage in the Israeli attacks, anticipation of Iranian retaliation is already impacting the oil industry, with the Red Sea again as a scenario. Israeli gas fields were shut down preventively before the weekend, and Egypt is substituting diesel for natural gas.
The rise in barrel prices may seem like music to OPEC+'s ears, particularly Saudi Arabia, being able to carry out its production increase policy without suffering the effects of falling prices. Still, a long-duration conflict would not necessarily be in their interest. Incidentally, preliminary indications point to the announced opening of the cartel's production capacity not being immediately available, which is understandable given that investments have been maintained below what is required to counteract field decline.
Closing Prices (Friday, June 13):
- Brent: $74.23/bbl
- WTI: $72.98/bbl
- Weekly gain: +10%
Note: At the close of this note, June 16, prices had begun to give up gains, as continued attacks between Israel and Iran do not affect key energy infrastructure, for now. Brent futures fell around $3, trading at $71.45 per barrel, while U.S. WTI futures fell around $2.75 per barrel, trading at $70.25.
VENEZUELA
The Venezuelan economy, sick from neglect
While the regime intensifies its efforts to consolidate its social and political control, the economy continues in decline, with no serious or practical attempt to institute a strategy that changes the regressive drift. The contraction of surviving economic activity, the reduction of tax collection and consumption, and the decreasing availability of foreign currency are symptoms that reveal the illness.
The value of the national currency continues its inexorable plunge; the exchange rate has already passed the mark of 100 Bs./$, not taking into account the 14 zeros it has already lost in the different monetary reconversions of the last 25 years. Monetary financing by the Central Bank is also increasing, which pushes inflation to worrying levels.
Political and Economic Crisis
With foreign currency shortages in the official market and the silencing of sources that publish the dollar value in the parallel market, importers who cannot get foreign currency in the official market, limited by the same administration to "basic necessities," have to become creative to avoid falling into shortages.
In the political sphere, which is already difficult to separate from the economic due to its severity, the news that broke through was the arrest or disappearance of well-known economists, including Rodrigo Cabezas, former finance minister in Hugo Chávez's administration, and now a critic of Nicolás Maduro. So far, there is no official information about the reasons for these detentions. However, it is safe to think that the regime seeks to silence the voices that still dare to analyze the critical economic situation.
The arrest of Cabezas and the other economists adds to an already long list of political leaders, civil activists, and journalists who have been taken to prison in the country since the end of 2023, most recently related to the May 25 elections and the publication of exchange rates in the informal foreign currency market.
Oil Operations
June is the first month of the new oil stage in Venezuela. No OFAC licenses and without access to the markets authorized by these licenses. Under these new conditions, almost all hydrocarbon exports are directed to China.
Generally, this is a cumbersome and costly operation, involving a process of origin legitimization in Malaysia or Singapore before final sale to Chinese refiners. Through this process, the weighted price of exports barely exceeds $30/bbl, for what has passed of June. The complexities of managing income, trying to avoid the U.S. financial system, using cash, cryptocurrencies, and barter, make it difficult to audit and maintain transparency of fund flows.
Productive Participation Contracts (CPP)
The operational activities that generated the production increase under the protection of OFAC licenses are being tried to be replaced with Productive Participation Contracts (CPP), a kind of hybrid between service contracts and production sharing contracts, which do not necessarily comply with the terms of the current Hydrocarbons Law; however, these limitations have been "circumvented" under the protection of the Anti-Blockade Law, whose legality is very questionable.
Of the 9 CPPs signed, three have been signed with:
- China Concord Petroleum, to operate the block called Block 5 in Lake Maracaibo
- Kerui Petroleum, to reactivate the joint venture PetroKariñas in the east
- Anhui Erhuan Petroleum Group, for the Ayacucho 2 Block of the Orinoco Belt
The other six contracts were signed with companies of little substance or companies that withdrew for different reasons.
Export Strategy
For now, the goal is to replace the operational activity of multinationals with national service companies and direct exports to China. The export strategy is to dispatch about 8 to 10 supertankers (VLCC) monthly instead of the traditional 20 to 25 dispatches in tankers of varied sizes. Some of these VLCCs, anchored near the Amuay refinery, will be filled with crude and transported from Lake Maracaibo using coastal tankers.
Crude Production (last week):
Area | Mbpd |
West | 210 |
East | 121 |
Orinoco Belt | 514 |
TOTAL | 845 |
Exports
It is too early to estimate June exports, especially under the new tanker profile. By Friday, four tankers had been dispatched, and one was being loaded, for approximately 520 MBPD for the week.
National Refining:
- Processing: 220 Mbpd of crude and intermediate products
- Gasoline yield: 83 Mbpd
- Diesel yield: 71 Mbpd
Petrochemical Sector:
- Methanol plants: 86% of capacity
- Fertinitro: One ammonia and urea train operating
[1]: International Analyst [2]: Nonresident Fellow Baker Institute
