M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA
EXECUTIVE SUMMARY
TARIFF UNCERTAINTIES AND OPEC+ KEEP THE MARKET ON EDGE
The global oil market faces continued pressure from multiple fronts. Tariff negotiations between the U.S. and its trading partners have become increasingly complicated following a judicial decision challenging presidential authority to impose tariffs. Simultaneously, OPEC+ has maintained market uncertainty through surprising production announcements, adding 411,000 barrels per day to previous increases for April, May, and June.
These developments, along with geopolitical tensions in Ukraine and Libya and weather-related disruptions from Canadian forest fires affecting hydrocarbon production, have maintained the negative market sentiment established in previous weeks.
MARKET FUNDAMENTALS
Regulatory and Legal Developments
The U.S. International Trade Court in Manhattan has significantly impacted market dynamics by halting President Trump's global tariffs, including the "Liberation Day" tariffs announced April 2nd, ruling that presidential authority had been exceeded. This decision affects tariffs imposed on China, Mexico, and Canada designed to combat fentanyl trafficking. While the administration's immediate appeal temporarily suspended the ruling's effects, the case is expected to reach the Supreme Court, creating ongoing uncertainty.
The market reaction was immediate, with oil prices rising nearly $2/BBL on the news. However, this support proved temporary as other factors dominated trading sentiment.
Supply and Demand Dynamics
Inventory Movements: The Energy Information Administration (EIA) reported significant inventory drawdowns in its weekly Wednesday report, with commercial crude inventories declining 2.8 million barrels and gasoline stocks falling 2.4 million. These reductions occurred despite crude imports exceeding six million barrels and higher refinery utilization rates, indicating strong demand as the Memorial Day weekend marked the beginning of the peak driving season.
Production Activity: Low oil prices and approaching concerning levels have prompted U.S. oil companies to reassess investment programs. This is evidenced by declining drilling activity reported by Baker Hughes and reduced hydraulic fracturing crew deployment.
Demand Forecasts: Both the EIA and International Energy Agency (IEA) have revised demand growth projections downward for 2025 and 2026, forecasting growth below the historical two-decade average of 1.2 million barrels per day. The EIA projects global demand growth will not exceed one million barrels per day in the coming years, representing a less dramatic outlook than the IEA forecasts.
OPEC+ Strategy
OPEC+ continued its pattern of market intervention, having previously announced production increases exceeding 1.0 million barrels per day for April through June, then surprising markets with an additional 411,000 barrels per day increase for July. However, production increases may fall short of nominal targets as several member countries, including Kazakhstan, UAE, Iraq, and Russia, continue operating at or above capacity limits.
Saudi Arabia's willingness to operate with lower crude prices than budgeted is evidenced by Saudi Aramco's $5.0 billion conventional bond issuance and new sukuk bond program prospectus, which provide the company with flexibility to access debt markets through May 30, 2026.
GEOPOLITICAL ANALYSIS
Russia-Ukraine Conflict
Diplomatic efforts to resolve the Russia-Ukraine conflict face significant obstacles due to Vladimir Putin's negotiating inflexibility. Despite President Trump's apparent disappointment with Russian cooperation, particularly given that proposed terms (allowing Russian annexation of Crimea and eastern Ukrainian territories while preventing Ukrainian NATO membership) seemed favorable to Russian interests, progress remains stalled.
Trump has reportedly established a two-week deadline for Putin, threatening stronger responses to continued delays. Russian escalation of attacks on civilian targets during negotiations has generated adverse reactions from U.S. diplomacy. Putin's recent statements suggesting the USSR's continued legal existence, coupled with the appearance of Stalin statues in Moscow, indicate potential for additional hydrocarbon sanctions and military confrontation escalation.
Significant Development: Ukraine's June 1st drone attack on Russian airports, damaging at least 40 military aircraft from mobile bases within Russia, represents both material and propaganda victories with potential market implications.
Middle East Tensions
Israeli-Palestinian negotiations show mixed progress, with Israel reportedly approving U.S. envoy Steve Witkoff's plan while awaiting a formal Hamas response. Proposed terms include a two-phase hostage exchange (10 living hostages and 18 bodies for a 60-day ceasefire and Palestinian prisoner releases). However, Hamas officials indicate the proposal doesn't meet fundamental demands, including war termination.
Iran Nuclear Program: The International Atomic Energy Agency's comprehensive report confirms Iran conducted secret nuclear activities with undeclared materials at three locations. Saudi Arabia is reportedly pressuring Iran toward a U.S. atomic agreement to prevent facility attacks, emphasizing regional stability concerns.
Libya Political Instability
Eastern Libya's government threatens force majeure declarations for oil fields and ports, citing repeated attacks on the National Oil Corporation (NOC), which Tripoli's central government denies. While the eastern government lacks international recognition, military leader Khalifa Haftar controls most of Libya's critical oil infrastructure.
REGIONAL FOCUS: VENEZUELA
Political and Economic Landscape
Electoral Outcomes: Nicolás Maduro's PSUV achieved regional election objectives, securing governorship and National Assembly control while marginalizing opposition factions. However, low voter turnout and empty streets during elections demonstrate the disappearance of the once-vibrant "red tide," indicating democratic deterioration.
Constitutional reform postponement until next year suggests the regime's preference to avoid new conflicts during ongoing Washington-Miraflores negotiations.
Economic Implications: Continued Venezuelan repatriation flights and rumors of specific licenses for Chevron and other international operators indicate ongoing White House negotiations. The interpretation of "preserving" assets in potential licenses focuses on security and personnel maintenance rather than new investment to counteract field decline or mitigate falling international prices and export restrictions.
Limited license arrangements would restore pre-2022 conditions before General License 41 (GL-41), when passive international partner presence coincided with payment collection irregularities and reduced activity due to PDVSA's insufficient investment contributions.
Reduced foreign currency availability from hydrocarbon sales represents the economy's Gordian knot, with less transparent revenue channels than during the expired May licenses. Post-electoral public spending reductions and persecution of parallel market dollar rate publishers promote shortages and inflation acceleration.
Oil Operations
License Expiration Impact: All OFAC-granted licenses terminated at midnight May 27th, with final U.S.-bound crude shipments departing mid-May. Chevron concluded all General License 41 contracts for production, U.S. oil transportation, and Venezuelan diluent imports.
Operational Transition: Joint ventures now operate under PDVSA management per Organic Hydrocarbons Law requirements, with Chevron reverting to passive minority participation. Similar arrangements apply to Repsol and Maurel & Prom operations.
Pre-deadline crude sales utilized barter arrangements, importing substantial diluent volumes estimated to be sufficient for several months of upgrading and blending operations. However, based on experiences with three other Jose upgraders, analysts question PDVSA's ability to maintain PetroPiar upgrader operations.
Current Production Data:
- Total Production: 844,000 barrels per day (Kbpd)
- Western Region: 210 Kbpd
- Eastern Region: 121 Kbpd
- Orinoco Belt: 513 Kbpd
Refining Operations: National refineries processed 227 Kbpd of crude and intermediate products, with Cardón's catalytic cracking unit (FCC) maintaining operation. Production included 86 Kbpd of gasoline and 74 Kbpd of diesel.
Petrochemical Sector: Methanol plants operate at 88% capacity, while Fertinitro's ammonia and urea train has commenced operations in Jose.
Export Performance: May exports totaled 560 Kbpd (two days before month-end):
- China (direct and via Malaysia): 400 Kbpd
- Cuba: 90 Kbpd
- United States: 70 Kbpd
- Product exports (mainly residual fuel to Singapore, asphalt to the U.S.): 55 Kbpd
OTHER SIGNIFICANT DEVELOPMENTS
Corporate Actions
- ExxonMobil-Chevron-Hess Arbitration: The International Chamber of Commerce arbitration concluded regarding Chevron's Hess acquisition, with ExxonMobil claiming first refusal rights over Hess's 30% Stabroek block stake in Guyana. The final decision is expected in July-August, and it could significantly impact Chevron's production projections following Venezuelan asset losses.
Regional Disruptions
- Ecuador: Petroecuador declared 60-day emergency at largest refinery following fire damage, marking second force majeure declaration in one month after April earthquake damage to Esmeraldas refinery.
Credit Rating Changes
- Brazil: Moody's downgraded outlook from positive to stable, citing deteriorating debt affordability and slower fiscal policy progress, while maintaining Ba1 sovereign rating.
PRICE ANALYSIS
Market Performance
Simultaneous uncertainties from tariff conflicts, oil demand concerns, and OPEC+ production planning proved excessively disruptive, eliminating market optimism and maintaining the previous week's pessimistic outlook.
Closing Prices (Friday, May 30):
- Brent crude: $62.78/barrel
- WTI crude: $60.79/barrel
- Weekly decline: 3%
Market Note: Ukraine's weekend air attack on Russia appears to have shifted trends, with Monday's opening showing price increases.
Supporting Factors Ignored
Despite potentially supportive developments, including dollar weakness (the fifth consecutive monthly decline), positive stock market performance (the S&P 500's best monthly performance since 2023), and inventory drawdowns, the market prioritized negative factors in price determination.
OUTLOOK AND IMPLICATIONS
The convergence of regulatory uncertainty, geopolitical tensions, and production policy changes continues to dominate oil market sentiment. Key monitoring points include Supreme Court proceedings on tariff authority, OPEC+ production compliance, Russia-Ukraine diplomatic developments, and Venezuelan operational capacity under restricted licensing arrangements.
Market participants remain focused on fundamental supply-demand balances amid evolving political and regulatory landscapes, with geopolitical risk premiums likely to persist given current global tensions.
¹ International Analyst
² Nonresident Fellow, Baker Institute
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