SURPRISE AS STRATEGY

    El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA

That the world is controlled by the decisions and interests of great powers, military or economic, should not surprise anyone. What appears novel today is the volatility that seems to have settled in the corridors of the halls where those decisions are made. President Trump's tariff negotiations and his surprising changes of direction in matters of war diplomacy, sanctions, and oil licenses, and international negotiations in general, are a demonstration, perhaps the most important, of that volatility, and keep the markets—including oil—and world leaders, with few exceptions, in distress.

During the week, oil prices exhibited volatility in reaction to the announcement of a trade agreement between the United States and Japan and the potential impact of the possible return of Venezuelan oil to U.S. markets. Shortly before the market closed on Friday, the 25th, it became known that hopes for a trade agreement between the United States and Europe were fading, and prices fell by more than $1/bbl.

The geopolitical environment remained convulsed, mainly in Ukraine and the Middle East. Efforts to achieve ceasefires on both fronts have been fruitless. Intense pressures on Israel to suspend its campaign in Gaza and on Russia regarding Ukraine have also been ineffective. In general, the week's warlike activities did not have a material impact on risk perception.

On Sunday, at the last hour, it was announced that the United States and the European Union had reached a trade agreement, with tariffs of 15% on European exports to the U.S., and 0% on U.S. exports to the European Union. Both parties declared themselves satisfied with the agreement; we must wait for the oil market's reaction.

FUNDAMENTALS

Last week, global oil fundamentals encouraged the market to move upward, responding to inventory movements and OPEC+'s lag in opening new production capacity, which was caused by limitations in the available potential in some member countries. On the other hand, the incremental production projected for countries outside the OPEC+ sphere also shows delays, as we have warned when analyzing forecasts from the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC).

Indeed, the United States is not increasing its production; on the contrary, it is showing a discrete decline. The United States continued with its process of rig deactivation. Baker Hughes reports a net reduction of 2 units, but more detailed analysis indicates that the loss in potential generation capacity is broader since five rigs went out of service in the Permian and Eagle Ford basins.

Regarding Canada and Brazil, the increases achieved to date are lower than projections: they show month-to-month growth of 0.4% and 0.3%, respectively, compared to a projection of 1.2% incremental production for each in June.

In OPEC orbit countries, specifically in some Persian Gulf countries, additional rigs are being added to replace the idle production potential that natural decline erased, which some analysts still account for.

Meanwhile, Ecuador is experiencing one of the worst oil crises in history. The force majeure declaration due to rains, which persists, has reduced production and a lack of exports, is pressuring the State's financial plans, and is affecting the global supply and demand balance.

GEOPOLITICS

Amid the continued conflagration on battlefields, negotiation efforts to achieve ceasefires in Gaza, Syria, and Ukraine are intensifying; meetings in Doha, Washington, and Istanbul have taken place, but none have achieved their objective.

Syria

In Syria, there seems to be an agreement, in principle, between the provisional government presided over by Ahmed al-Charaa, the Sunni Bedouin militias, which seem to be confused with the Syrian army, and the Druze groups. The conflict was initiated by the Bedouin attack against the Druze population, which in turn led Israel to intervene in favor of the Druze. To date, there are more than 1,200 dead, of whom more than 200 correspond to summary executions.

Gaza

The situation in Gaza is what has attracted the most international attention, not because of the exchanges of fire between militant groups and Israel, but because of the communicational battle that has been generated around the humanitarian situation that the population displaced by the conflict is going through. Both sides blame each other for what some humanitarian organizations call famine. While news originating in Gaza says that the Israeli siege does not allow food or humanitarian aid to enter, Israel maintains that food is entering, but that it is either stolen by Hamas or not distributed due to a lack of United Nations (UN) personnel. Another factor that goes unnoticed, and that contributes to the shortage in the region, is Gaza's iron border with Egypt, through which they do not allow the passage of either refugees or aid.

The profound humanitarian crisis, which always results from armed conflicts, but which seems to surprise international agencies, has led Israel to lose part of the support gained after Hamas's bloody attack, and the Netanyahu government is now beginning to be perceived as the aggressor.

French President Emmanuel Macron declared that he will recognize Palestine at the next UN General Assembly, in another symptom of the change in the dynamics of the Gaza conflict. This is an attempt to create momentum for change and break with the passivity of the leading Western powers, in the face of what Macron calls the massive slaughter of Palestinians by Israel in Gaza. Macron's declaration significantly increases pressure on the United Kingdom, Germany, and other G7 powers to recognize the Palestinian state. Germany had already announced that it was not in their plans; their historical memory puts it in the rear guard against any pressure on Israel. In this new dynamic of the conflict, the relevance of the Israeli hostages that Hamas has held since its attack on Israel in 2023 seems to fade, despite their families' efforts.

The United States and Israel decided to step back from the Gaza Strip ceasefire negotiations, which were taking place in Doha, Qatar. Both governments blamed Hamas for the stagnation of the dialogues. Steve Witkoff, the special envoy for the Middle East, announced that he ordered his team's return to the United States: "We have decided to bring our team back from Doha for consultations following Hamas's latest response, which demonstrates their unwillingness to reach a ceasefire in Gaza."

Iran

In this highly convulsed region, Iran, weakened after U.S. and Israeli attacks, also faces domestic problems. There have been strong protests in favor of freedom of expression in several Iranian cities due to the repression of previous demonstrations. Citizens demand political reforms and respect for human rights.

Ukraine

On the Ukrainian-Russian front, amid failed efforts to negotiate a ceasefire, cross attacks between Ukraine and Russia, and intense military confrontations are reported at several hot points of the war front, more than 500 km long, mainly around the cities of Pokrovsk and Kindrativka. On the diplomatic front, Turkish President Erdoğan wants to raise the level of conversations. He said he would speak with Trump and Putin this week to see if an Istanbul leader meeting could discuss a ceasefire in Ukraine.

Kremlin spokesman Dmitri Peskov said that a summit between Putin and Zelensky could only occur as a final step to seal a peace agreement, and added that such a meeting was unlikely to happen by the end of August, as Ukraine has proposed. Washington's threat to impose new sanctions on Moscow is not making much dent in the Kremlin's decisions.

Cambodia-Thailand Conflict

A new border conflict is developing between Cambodia and Thailand in Southeast Asia. At dawn on July 24, tensions accumulated for months and finally exploded: a drone and six Cambodian soldiers were victims of a mine explosion, Cambodian soldiers opened fire against Thai positions, and within hours, the scenario was already one of open armed conflict between Thailand and Cambodia. It is reported that more than one hundred thousand people have already been displaced. President Trump called the leaders of both countries to mediate a cessation of hostilities, which originated from disputes that were already over a century old.

PRICE DYNAMICS

Crude oil prices, as in recent weeks, showed high volatility. In a struggle between events that pushed the market upward and those that, on the contrary, pressured the market downward, the latter ended up convincing the market.

After successfully negotiating a trade agreement between the United States and Japan, there was confidence that negotiations between Americans and the European Union would materialize in a deal based on relatively innocuous tariffs, which no longer seems imminent. August 1st continues to be a sword of Damocles as it is the date announced by Trump to apply high tariffs to countries that have not managed to negotiate other terms.

On Friday, news of an unexpected change in U.S. policy toward Venezuela influenced market perception, providing relief from oil sanctions. Additionally, the market did not prejudge what OPEC+ might announce in its Ministerial Committee meeting on Monday.

Specifically, at market close on Friday, July 25, 2025, Brent and WTI crude prices fell to $68.44 and $65.16/BBL, a discrete reduction of slightly more than 1.2% compared to the previous week's close.

VENEZUELA

Neither One Thing Nor the Other, But Quite the Opposite

The country had not finished digesting the implications of the hostage and prisoner exchange between Venezuela, El Salvador, and the United States, when, on Friday, social media began to insistently report that the Trump administration had granted, or was considering granting, a license in favor of the U.S. oil company, Chevron.

A Wall Street Journal report and reports from Bloomberg and Reuters agencies announced the news. Our sources confirmed the near certainty of the existence of this new license, granted just three and a half months after the cancellation of general license 41, and two months after the cancellation of all oil licenses granted by OFAC about Venezuelan hydrocarbons.

To date, there is no official confirmation from the U.S. government since, apparently, this time, it is a specific or private license that the U.S. government does not publish, and the company may or may not make it public. Hours later, Nicolás Maduro confirmed Chevron's return, and we should assume it will resume as operator and marketer of crude produced in the joint ventures in which it is a minority partner.

The supposed license details are unknown, but all kinds of speculation have appeared on different internet platforms, trying to guess the reasons and details of this apparent 180° turn by the U.S. government. Some commentators reported that, unlike the previous license, this time, royalties would be paid in kind (permitted by the current Hydrocarbons Law), as if to support the notion that funds would not reach Maduro this time. A not very serious argument, since royalty paid by any means is equivalent to its monetary value, and which, in any case, is a legal obligation of the joint venture that produces the crude.

Many commentators who try to explain this apparent change in U.S. policy focus on repeating arguments put forward for months by the oil lobby, Chevron's CEO, and influencer Laura Loomer, among others. They speak of the supposed need for Venezuelan heavy crude for U.S. refineries, the effect on the humanitarian crisis, the reduction or elimination of emigration, and ultimately preventing China and Russia from appropriating the Venezuelan oil market and assets. Some geopolitical arguments are exaggerated, and others are without much foundation. The humanitarian ones are based on the unfounded belief that the Venezuelan regime would use additional oil income for the population's benefit. And although those arguments did not convince the Trump administration in April, something seems to have changed, which we cannot analyze until we have the details of the supposed license.

Contradictions in U.S. Policy

As the Trump administration's capacity to astonish seems infinite, following news of the existence of a new license, that same Friday, OFAC issued a press release announcing that it was sanctioning the so-called "Cartel of the Suns" as a "Specially Designated Global Terrorist." In the same statement, it described the "Cartel of the Suns" as a criminal group based in Venezuela, led by Nicolás Maduro Moros and other high-ranking Venezuelan officials of his regime, which provides material support to foreign terrorist organizations that threaten the peace and security of the United States, particularly Tren de Aragua and the Sinaloa Cartel.

"Today's action further exposes the illegitimate Maduro regime's facilitation of narcoterrorism through terrorist groups like the Cartel of the Suns," declared Treasury Secretary Scott Bessent. "The Treasury Department will continue to fulfill President Trump's promise to prioritize the United States, taking strong action against violent organizations like Tren de Aragua, the Sinaloa Cartel, and their facilitators, like the Cartel of the Suns," the statement concluded.

This second administration decision does not appear to be coherent with the alleged granting of the license to Chevron. Granting a sanctions relief license to someone you catalog as a "Specially Designated Global Terrorist" is not the first lack of coherence in negotiations and designations since Trump began his second term, nor is it necessarily a signal of what his final policy will be. Dawn will come, and we shall see.

Political Context

These events coincide with the first anniversary of the Maduro regime's non-recognition of the electoral results of July 28, 2024, which could be a simple coincidence but is infrequent in orthodox diplomacy. In any event, the Venezuelan opposition looks as surprised as the general public. María Corina Machado, even having cordial relations with Secretary of State Marco Rubio and with the ambassador in charge of Venezuelan affairs, John McNamara, seems to have been left out of this play.

Economic Situation

Venezuela's most relevant difficulty continues to be economic. To confront this, the country is deliberately kept in recession with the expectation that limited foreign currency income can finance the economy once it is contracted. This would have dramatic effects on private investment and trade, a sort of neoliberal package.

For now, public spending is restricted. There is no bank credit, and the allocation of official foreign currency is partially carried out with USDT, the cryptocurrency backed by Tether Limited, whose value is approximately $1.0. Maduro and his economic officials hope to be able to change this with the return of license relief.

However, if Chevron, and eventually perhaps other companies as well, manage to operate under a scheme similar to what they maintained before March, official economic policies would take a turn and try to put the country on a growth path similar to the first quarter of this year. The devaluation of the bolívar, which in the official market has already crossed the barrier of 120 Bs./$, could surely be stopped by managing the foreign exchange market, as was done when private oil companies went to money tables. What does seem improbable is that the oil industry will recover any sustainable growth path, given the objective conditions of the sector; ultimately, the new license would favor Chevron and the regime, not necessarily Venezuela.

Social and Internal Political Situation

Despite the hostage and prisoner exchange conducted, repression has intensified. A high number of people have been imprisoned or simply kidnapped, maintaining what human rights NGOs have called a "revolving door": maintaining or increasing the number of political prisoners despite having released some.

The municipal elections of July 27 appear to have little popular participation, and the government party, PSUV, anticipates obtaining 91% of the votes.

Binational Agreement with Colombia

Also newsworthy has been the signing of an agreement by President Gustavo Petro and Nicolás Maduro to create a binational zone on the border of the two countries. The zone would cover the departments of Norte de Santander, César, and La Guajira in Colombia and the states of Táchira and Zulia in Venezuela. In Colombia, this agreement was strongly criticized, alleging that Petro is not constitutionally empowered to sign the agreement and that the zone represents a loss of sovereignty to the armed guerrilla that has been operating on the Venezuelan side.

OIL OPERATIONS

All the informational noise did not affect operational activities except for some interruptions due to electrical supply problems.

Crude Production

Crude production during the last week averaged eight hundred forty-eight thousand barrels per day (848 Mbpd), distributed geographically as follows:

Area	Mbpd
West	212
East	120
Orinoco Belt	516
TOTAL	848

Refining

National refineries processed 202 Mbpd of crude and intermediate products, with a yield in terms of gasoline of 67 Mbpd and diesel of 71 Mbpd.

Upgraders

The PetroPiar upgrader is operating, and the crude produced, Hamaca Blend, is used partially as diluent for Belt crude, and the rest is sent to refining. The PetroCedeño upgrader continues to obtain intermediate products that are used as feedstock in refining. The PetroRoraima (PetroZuata) and PetroMonagas upgraders are not operable.

Petrochemical Sector

In the petrochemical sector, plant activity at the José complex has remained unchanged, although natural gas volume has been restricted, and Fertinitro's second train awaits natural gas availability.

Maduro announced that Venezuela is "agreeing on terms" to sell the Monómeros company, a subsidiary of Petroquímica de Venezuela S.A. (Pequiven), to the Colombian State. To this end, they have signed an information exchange agreement. Apparently, Petro wants the business to be managed under Ecopetrol's umbrella, provided an OFAC license is received.

Exports

Through Friday, July 25th, exports showed that all shipments were destined for China, generally through Malaysia. The volume dispatched is 14.2 MMbbls, equivalent to about 568 Mbpd, approaching the month's average once the three tankers scheduled through July 31st are dispatched. We estimate that the weighted price of exported crudes is in the order of $34.21/bbl.

BETWEEN CONFUSION AND HOPE

 El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA

During the week, the market oscillated between concern over possible excess supply and signals of robust demand. Added to this were outbreaks of violence in the Middle East, where ancestral feuds, both ethnic and religious, are never far from the surface.

Likewise, news emerged about events directly affecting the supply/demand balance: the announcement of new economic sanctions against Russia by the European Union; Iraqi drone attacks against Kurdish oil installations, which affected the region's production capacity (250 thousand barrels per day); and force majeure in Ecuador, now in its third week, sowed uncertainty.

Another relevant piece of news, but without material effect on prices, was the arbitral tribunal's decision to favor Chevron in the case against Exxon. This decision gives the green light to Chevron's merger with Hess, a $53 billion transaction that includes assets in Guyana and had been suspended for almost two years. One of the collateral results of the merger is that Chevron moves its Caribbean interests from Caracas to Georgetown, and now becomes an ally of one of the Venezuelan regime's greatest nemeses: ironies of oil.

FUNDAMENTALS

Last week, global oil fundamentals moved to the rhythm of mixed signals. OPEC+'s strategy of continuing to add more volumes to the market, internal problems in Iraq and Ecuador of very diverse natures, and an improved perception of the future of oil demand indicate an uncertain path forward.

Much coverage has also been given to a supposed "boom" in production increases that would materialize across different latitudes. These announcements, some made by producing countries or by specialized companies and analysts, also sow confusion in a world that continues to talk about energy transition. The list of countries includes Saudi Arabia, United Arab Emirates (UAE), Iraq, Canada, Brazil, Guyana, Kazakhstan, Argentina, and even Algeria. It has been announced that, together, these countries would increase production by figures approaching ten million barrels per day (10 MMbpd) over the next 4 years. These production levels place the market in a trembling state of inevitable oversupply.

A preliminary analysis of the feasibility of such growth leads us to think that the mentioned numbers are either publicity exaggeration or represent a generation of incremental potential that would have to discount the natural decline of base production, which generally ranges between 8% and 25%, depending on the basin and type of production under consideration. Additionally, many of the mentioned developments have a control valve: prices. Development will be delayed or canceled if prices indicate that demand is not growing proportionally. Only technology can change this reality, creating new hydrocarbon applications and uses, which appear unlikely in the time horizon being considered.

OPEC+ and Other Producers' Situation

Meanwhile, OPEC+ countries are advancing the dismantling of production cuts they imposed to stabilize the market in the five post-pandemic years. However, in OPEC's monthly report, only growth of around 350 thousand barrels per day is observed, well below the more than 600 thousand barrels per day announced for these dates. In July, despite a projected increase of another 230 thousand barrels per day by the end of the month, this will be neutralized by events in Iraq, which has used drones to attack oil installations in an attempt to resolve its political problems with the Kurds. It is mentioned that the damaged infrastructure has reduced production in that region by around 130 thousand barrels per day on average for this month.

United States

Production is slowly declining in the US, although it remains above thirteen million barrels per day. According to the Energy Information Agency (EIA) report, commercial crude inventories fell again by almost four million barrels (3.9 MMbbls) despite an increase in imports of more than two million barrels (2.0 MMbbls) and without significant changes in refinery utilization percentage.

The rig count figure did show a change in direction, incorporating seven incremental units, according to the Baker Hughes report. But this is not a change with respect to the trend in terms of oil since all the incremental rigs contracted are drilling for natural gas in preparation for increased demand from liquefaction plants. The same report indicates an increase of 37 units outside the US compared to the previous month.

Ecuador

Ecuador's oil production is affected. Less than 100,000 barrels per day of crude are being produced, and the Coca River basin landslide continues, threatening the integrity of the only two oil pipelines that allow oil exports from the eastern basin. According to former state company executives, a relocation plan for the final section of the pipelines has existed since 2021. Still, its execution has been postponed due to the high costs of that project.

GEOPOLITICS

Syria: New Focus in Middle East Conflict

Syria is beginning to become another geopolitical focus in the Middle East. The sudden fall of Bashar al-Assad's regime, although surprising in its speed, was not so unexpected. It is considered a collateral event to the weakening of Iran and its proxies in the region and Russia's military exhaustion from the invasion of Ukraine, both countries being great allies of Assad's regime. The new Syrian government, a coalition of guerrillas united only by anti-Assad sentiment, has managed to control the country except for skirmishes with remnant militias of the fallen regime.

Israel and other Western countries viewed the change in Syria favorably, and the lifting of USA’s economic sanctions fueled talk of a potential Abraham Accord with Syria. After Assad's regime fell on December 8, 2024, Israel invaded Syria to eliminate military installations left by the fallen regime and its Hezbollah allies in the southern region. During its invasion, Israel took control of the UN Disengagement Observer Force buffer zone. Israel's official position in the Syrian civil war has been, until now, one of strict but interested neutrality.

The Druze Question

Syria has a complex ethno-religious distribution. In the country's south, the Druze population is concentrated, mostly residing in the As-Suwayda province. The Druze are an ethno-religious group that differs from Muslims and in Syria were sometimes in favor of and then against Assad's regime. The Druze are not limited to Syria; it is estimated that there are more than one million Druze concentrated mainly in the mountainous regions of Lebanon, Syria, Israel, and Jordan. In Israel, they have official recognition and are integrated into society. The religious leader of the Druze is Hikmat al Hijri, born in Venezuela.

The conflict in Syria has escalated following the start of Israeli bombings against Syrian territory. This development occurs after several months of tensions in the south of the country between the Druze minority and forces aligned with the government established in Damascus. Recently, the confrontations have led to air strikes and the use of tanks and heavy weaponry by Israel against government installations, alleging the protection of the Druze population.

The disagreement between the Druze and current authorities stems from the fact that the former support a federal structure for Syria, while the central government seeks to consolidate authority in Damascus; the Kurds in the north maintain a similar position, also rejecting centralization. Currently, there is a ceasefire agreement between Syria and Israel, facilitated by US mediation, although the situation remains in a state of tense calm.

Ukraine and Russia

Regarding the situation in Ukraine, President Trump has said he is disappointed with Vladimir Putin for not getting the Russian president to change his position regarding a ceasefire, but that he has not closed the chapter. When asked if he trusted the Russian leader in a BBC interview, Trump responded: "I don't trust almost anyone." The fact is that his approach to the conflict seems to be changing. The US president announced plans to send weapons to Ukraine and warned that he would impose severe tariffs on Russia if there were no ceasefire agreement within 50 days. Trump also backed NATO and affirmed his support for the organization's common defense principle. This, if firm, represents an essential change from his position over the last six months.

In this same vein, the European Union (EU) agreed, this Friday the 18th, on a new sanctions package against Russia for the invasion of Ukraine—number 18—which includes a reduction in the maximum price of Russian oil that can be exported without transporters being sanctioned, official sources reported. Additionally, sanctions were increased against "ghost ships" transporting Russian crude. The measure limits Russia's oil revenues while maintaining global market supply stability. This measure reflects the EU's intention to strengthen its economic influence in response to Russia's actions in Ukraine. The sanctions also seek to intensify pressure on Russian financial and energy sectors.

China

To the surprise of many analysts, but in a reassuring signal for oil markets, China's economy showed improved GDP figures in the first half of 2025, with year-over-year growth of 5.3%. According to official data, it exceeded expectations despite challenges such as US tariffs and the decline of the real estate market. China's GDP reached $9.24 trillion in the first half of 2025. The growth was attributed to increased production and domestic demand due to stable employment and household income increases. Retail sales increased 5.9% year-over-year in March, driven by government incentives. Deflation and youth unemployment remain concerns.

Despite these results, conjectures and interpretations of Communist Party political events continue to fuel the debate about the certainty of Xi Jinping's permanence over time.

PRICE DYNAMICS

Oil prices have been volatile during the last week, with a slight downward trend. Factors such as geopolitical tensions, economic uncertainty, OPEC+ decisions, production interruptions in Iraq and Ecuador, and inventory movements have influenced market perception in different directions, contributing to an uncertain environment for the short term.

At market close on Friday, July 18, the Brent and WTI benchmark crudes were trading at $69.29/bbl and $67.355/bbl, respectively. Both benchmark crudes lost 1.5% compared to the previous week.

VENEZUELA

Prisoner Exchange, But No Policy Changes

On Friday, July 18, an unprecedented exchange of hostages and prisoners was completed between the governments of Venezuela, the US, and El Salvador, with the intervention of President Nayib Bukele and, according to Nicolás Maduro, former Spanish President Rodríguez Zapatero.

Components of the exchange:

1. Liberation of Venezuelans imprisoned in El Salvador: 252 Venezuelan migrants who had been deported from the US in March of this year and confined in El Salvador's Center for Terrorism Confinement (CECOT) were repatriated to Venezuela. Some of them had been indicted in the US for allegedly being part of the "Tren de Aragua" criminal gang. Maduro's regime called this repatriation a rescue.
2. Liberation of US citizens and Venezuelan political prisoners: In exchange for the deportees' liberation, Nicolás Maduro's regime freed 10 US citizens detained in Venezuela, considered by the US as "hostages." The agreement also included the liberation of 80 Venezuelan political prisoners, although as of this article's closure (July 19), only 48 releases with precautionary measures have been verified.
3. Context: This exchange resulted from months of negotiations, with two previous frustrated attempts. The agreement was reached after President Bukele's intervention, who had already proposed a similar exchange but was dismissed by Nicolás Maduro. The Trump government and Secretary of State Rubio consider the exchange a diplomatic success, while Maduro presented it as a victory against imperialism. It's interesting to note that the oil issue was left out of this negotiation, for now.
4. 
   

Analysis of the Exchange

In any event, analysts conclude that the exchange's corollary is that direct contacts and negotiations exist between Caracas and Washington and that possibly the known elements of the exchange do not necessarily close the episode; additional elements could emerge later. The absence, at least publicly, of Richard Grenell was noteworthy, as he only mentions it on his social media as a Trump victory.

This exchange has filled the news in all media. But beyond the natural happiness of those involved, it reveals that the illegal imprisonment of Venezuelans is a tactic not only of internal repression but also of obtaining bargaining chips vis-à-vis the international community. In any case, this exchange does not affect the country's ongoing crisis.

Political and Economic Situation

The political sphere is suffering from lethargy in all senses, including people's interest in voting in next week's municipal elections. Nicolás Maduro has had to offer rewards to popular sectors to incentivize greater presence at voting stations.

Economically, the country is transitioning through a dead end. The policy of forcing public spending reduction and allocating limited oil foreign exchange to importing basic necessities pressures upward the exchange markets, different from the official one, actively sliding the Bolívar's value; the Central Bank of Venezuela's (BCV) official rate fluctuates around 120 Bs/$, pressuring downward Venezuelan purchasing power.

So the economy drifts toward recession due to lack of foreign exchange and official economic policies, while inflation continues upward. The regime's objective, possibly unattainable, is to reduce the economy to the size that meager foreign exchange can finance, a process that will be difficult to control. The process, especially for private investment, is becoming a "every man for himself."

OIL OPERATIONS

According to OPEC secondary sources, Venezuelan production between April and June fell eighteen thousand barrels per day (18 thousand bpd), a slight decline in line with what was forecast since OFAC license expirations became known. The absolute production value reported by OPEC differs from our figures, probably due to secondary sources' inability to account for field diluent and condensate handling that should not be included in the cartel's published numbers.

Crude Production

Crude production during the last week averaged eight hundred forty-six thousand barrels per day (846 thousand bpd), distributed geographically as follows:

Area	Thousand bpd
West	211
East	120
Orinoco Belt	515
TOTAL	846

Refining

National refineries processed 210 thousand bpd of crude and intermediate products, with a yield in gasoline terms of 69 thousand bpd and diesel of 72 thousand bpd.

Upgraders

The PetroPiar (former Chevron) upgrader in José, in the country's east, is operating, and the resulting Hamaca Blend is used as dilution to blend Merey 16 and as refinery feed. The PetroCedeño upgrader continues to obtain intermediate products used as refinery feed. The PetroRoraima (PetroZuata) and PetroMonagas upgraders, also in José, are not operational.

Petrochemical Sector

In the petrochemical sector, methanol plants are operating at an average of 85%, limited by availability, pressure, and natural gas quality from the system. Similarly, Fertinitro maintains one ammonia and urea train operating, and the second is awaiting natural gas supply. Super-Octanos continues out of service. All these plants are in José, in eastern Venezuela.

Exports

July exports align with those of the previous month; at mid-month, they point to an exported crude volume of 540 thousand bpd, entirely destined for China. The weighted price of exported crudes is $34.56/BBL.

[1] International Analyst [2] Nonresident Fellow, Baker Institute

 

FUNDAMENTALS AND GEOPOLITICAL RISK RETURN TO THE DRIVING SEAT

El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA

During the week, the oil market found reasons to resume an upward path. Both fundamentals and political risk were impacted by events that, while not unexpected, had taken on less importance during recent weeks.

Among the first of these events, we can mention the unexpected increase in crude oil inventories in the U.S., the production increase by the eight OPEC+ members, which began to materialize in June, and the return of Ecuador's exports, although without lifting its force majeure declaration.

On the geopolitical risks side, we can highlight the renewed hostile activity of Yemen's Houthi rebels, who not only launched missiles against Israel but also sank two cargo ships in the Red Sea, which increased the oil market's risk perception and drove up freight rates in the region.

In the world economy, the trade war issue returned to the forefront. The effects of delays in tariff notifications to some countries, combined with the application of 50% tariffs on copper, a vital element for manufacturing all advanced technology, shook the markets. During the weekend, President Donald Trump announced that he is imposing 30% tariffs against the European Union and Mexico starting August 1, a measure that could cause a significant dislocation between the United States and two of its largest trading partners.

On the other hand, the imposition of 50% tariffs on exports to the U.S. from Brazil, theoretically for what Americans call the witch hunt against former President Bolsonaro and Lula's inappropriate comments within the BRICS meeting, caused surprise and concern in international media. As if all of the above weren't enough, one must consider Trump's apparent change of stance regarding Putin and the war in Ukraine.

FUNDAMENTALS

OPEC Perspective

OPEC's most recent report, "World Oil Outlook 2025," outlines an optimistic scenario for global oil demand growth. The report indicates that demand will continue to grow and reach 123.0 million barrels per day (MMbpd) by 2050, almost twenty million barrels per day (19.5 MMbpd) more than current demand.

The study foresees that India, Western Asia, the Middle East, and Africa will be the main sources of long-term oil demand growth. Combined demand in these four regions is expected to increase by 22.4 MMbpd between 2024 and 2050, with India alone adding 8.2 MMbpd, becoming the main demand driver.

Likewise, OPEC maintains that Chinese demand growth will slow considerably due to electrification, while developed economies will continue to decrease their oil consumption during the same period.

OPEC+ Strategy

This long-term vision is probably the basis of what, in our opinion, is the cartel's current strategy, accelerating the reopening of capacity by OPEC+'s major producers, with the notable exception of Russia, which is producing at capacity. OPEC+ wants to reconquer markets lost through its role as "swing producer" and be positioned to respond to the future demand increase they project, in stark contrast to International Energy Agency (IEA) forecasts.

The 8 OPEC+ countries leading the gradual elimination of accumulated production cuts—Saudi Arabia, UAE, Iraq, Kazakhstan, Kuwait, Oman, Algeria, and Russia—increased their production by about 360 Mbpd compared to the previous month. Saudi Arabia, the group's de facto leader, increased its production by 130 Mbpd, followed by UAE with 90 Mbpd, Oman with 50 Mbpd, Iraq with 30 Mbpd, and Kazakhstan with 40 Mbpd.

Capacity Expansion

Part of this new strategy is the boasting that several of these countries have been making about their capacity to respond to market needs. For example, the United Arab Emirates (UAE) aims for 5 MMbpd capacity by 2027, and its Energy Minister, Suhail Mohamed al-Mazrouei, told journalists in Vienna that it could increase further after 2027: "We can reach 6 million if the market requires it." Similar statements have come from Saudi Arabia and Kazakhstan.

United States Situation

The U.S. appears, for now, as the Middle East's logical competition for market share, although India and China are out of its reach. The development scheme of American operators, despite having higher investment and operating costs than Persian Gulf countries, seems stable. They maintain relatively constant domestic production despite reductions in the number of active rigs. This is achieved through technological efficiency improvements and financial discipline that keeps shareholders acceptably compensated.

Ecuador Situation

Moving to the southern hemisphere, in Ecuador, Petroecuador maintains the force majeure declaration in its oil operations, although the company has resumed exports through the Trans-Ecuadorian Pipeline System (SOTE) after a temporary suspension. The declaration is maintained to allow the company to act with flexibility in the face of the emergency due to progressive erosion caused by the Coca River and intense rains affecting oil infrastructure. We believe this is an event in full development and will not be completely resolved until alternative pipeline crossings to the current ones are built.

Argentina Situation

In Argentina, the development of Vaca Muerta shale to produce oil and natural gas has progressed satisfactorily and has contributed valuable foreign currency to the country's economy. However, a federal judge in the U.S. decided that YPF, the Argentine state company, had to hand over 51% of its shares to compensate for damages caused by Repsol's expropriation during the Kirchner era. YPF and the Argentine government appealed the verdict, which has generated nervousness in YPF and its private partners.

OPEC Media Decision

In Vienna, OPEC has rejected accreditation for Reuters, Bloomberg, the New York Times, the Financial Times, and the Wall Street Journal for its Vienna meeting this week. The cartel justifies this decision based on how they report the cartel's meetings, which they consider inappropriate. The media point to this decision as an attack on press freedom.

GEOPOLITICS

Houthi Activity in the Red Sea

On Monday, a Liberian-flagged cargo ship was attacked by Houthi rebels with missiles and drones while sailing in the Red Sea. The attacks reportedly killed, injured, or led to the kidnapping of more than 25 Filipino, Greek, and Russian crew members. The ship was abandoned and sank shortly after the attacks. Four people have been confirmed dead. The attack on the Greek bulk carrier Eternity C in the crucial maritime route occurred after the Houthis on Sunday hijacked another Greek bulk carrier, the Magic Seas. The ship was sunk by the Houthis after the attack.

The two attacks, and a round of Israeli airstrikes early Monday morning against the rebels, increased fears of a renewed Houthi campaign against maritime transport and the intensification of Israeli attacks. Israel reports intercepting at least two missiles that originated in Yemen. Despite the ceasefire between Israel and Iran and negotiations to free Israeli hostages and agree to a halt to hostilities in Gaza, the Houthis appear to be the group that Iran has selected to keep hostilities alive. Freight costs in the region skyrocketed, and again threaten a reduction in navigation through the Suez Canal.

Israel and Gaza Situation

Israel has accepted the peace plan suggested by U.S. diplomacy and negotiated with the parties through Qatar and Egypt, although Israel still does not accept the changes demanded by Hamas.

China Situation

Until now, news related to China was limited to its economic difficulties, which were eroding its growth and, therefore, its oil consumption. However, recently, it became known that President Xi Jinping has intensified his crackdown on public officials; the seriousness of the purge seems to indicate that the president has lost confidence even in officials appointed by himself. Some observers speculate that Xi is losing the iron control with which he has administered the communist party and the country.

Xi has failed to revitalize the Chinese economy, and his confrontations with his American counterpart have not generated a trade relationship that promotes Chinese growth, which could be undermining his political base, which until recently seemed solid. Xi disappeared from public view for more than two weeks in late May and early June, something very unusual for a Chinese leader, especially during a very active diplomatic period. When he reappeared, he was reported to look tired and disconnected, generating speculation about his health or political problems.

BRICS Summit

Xi did not attend the BRICS summit from July 6-7 in Rio de Janeiro, despite China considering and promoting that bloc as an important counterweight to Western-dominated institutions like the G7 and the International Monetary Fund.

With the notable absence of the group's most relevant leaders, Xi Jinping and Vladimir Putin, the 17th BRICS summit in Rio de Janeiro concluded. The Rio Declaration underlines BRICS' intention to go beyond an economic coordination platform to become a significant force in global geopolitics. It reaffirms its commitment to a multipolar world order in the face of global conflicts as new, more protectionist trade policies are established, especially by the U.S.

Trump's Tariffs on Brazil

In that sense, and as ratification of BRICS countries' fears, President Trump sent a letter to Lula notifying him of the imposition of 50% tariffs on Brazilian imports to the U.S. The letter argues that the tariffs are a response to the "witch hunt" against former President Jair Bolsonaro, who faces legal charges for an alleged coup attempt. Brazilian authorities announced that "the letter was returned for being offensive and containing falsehoods about Brazil and factual errors about the bilateral trade relationship." This development marks a change in White House policy, using tariffs beyond commercial purposes.

Trump's Change of Stance Toward Putin

The most significant change coming out of the White House corresponds to President Trump's reevaluation of President Putin. Putin's repeated refusals to negotiate a ceasefire in good faith and the increase in attacks on Ukrainian civilian infrastructure after speaking with Trump seem not to have gone over well in Washington. In fact, Trump instructed sending defensive weapons to Ukraine to repel Russian attacks, leaving his defense secretary, Peter Hegseth, in an awkward position, who had suspended it just days before.

PRICE DYNAMICS

Last week, crude oil prices showed slightly bullish but volatile behavior. Geopolitical elements slightly increased risk perception, almost entirely due to renewed Houthi activity in Yemen and delays in agreeing to a halt to hostilities in the Gaza Strip. Surprisingly high crude inventories in the U.S. and an increase in OPEC+ production served to moderate bullish sentiment.

At market close on Friday, July 11, Brent and WTI benchmark crudes were trading at $70.38/bbl and $68.45/bbl, respectively. The week closed with a 3% gain in Brent crude prices.

VENEZUELA

An Equation Without Apparent Solution

Venezuela's current situation is marked by a deep institutional and political crisis. A government whose legitimacy is questioned in the Western world, and which clings to power through repression and police and military control, while the opposition seeks international support and strategies for a democratic transition.

The symptoms of this pernicious crisis are economic fragility and massive migration. In June, according to some sources, about forty thousand Venezuelans crossed the borders of Colombia and Brazil. An extrapolation of this trend indicates that another 700,000 Venezuelans will join the more than 8 million who already make up the migration during this year. This is the largest exodus in Latin America's recent history and one of the world's largest displacement crises.

Economic Crisis and Migration

Economic collapse and migration are not independent phenomena. On the contrary, the second is a product of the first. As Venezuelans' purchasing power drops to levels where they cannot support their families or offer them a future, the attractiveness of emigrating increases, which, far from being a panacea, is sometimes the only way out that Venezuelans see as inevitable.

The reality is that the current political-economic situation has deteriorated considerably with the cancellation of OFAC licenses. The Maduro administration is facing it, under the coordination of Vice President Delcy Rodríguez, with ineffective economic tools. People's remuneration does not increase, and with the collapse of the bolívar's value, their consumption capacity continues to deteriorate.

Restrictive Economic Policies

The reality is that the policies being applied only manage, perhaps by design, to shrink the economy until it becomes compatible with the foreign currency income generated by the battered hydrocarbon production and commercialization activities. Something like not allowing a child's feet to grow to avoid having to buy new shoes.

The partial recovery of 2024, due to the growth of oil activity, is on track to reverse quickly, if there is no political change and country risk remains at current levels. A 5% contraction is estimated for 2025, despite the first quarter having similar growth to 2024.

Fiscal and Exchange Situation

It is clear that public spending is diminishing, dragging consumption down. The foreign exchange market has fewer and fewer available foreign currencies, which impacts replacement costs and imports of goods. To narrow the exchange gap between the official rate and other markets, the Central Bank of Venezuela (BCV) has allowed the official exchange rate to slide rapidly. At the week's close, the rate was approaching 115 Bs./$ pressuring prices and inflation.

Oil Operations

Crude production during the last week averaged 841 Mbpd, distributed geographically as follows:

Production by Area (Mbpd):

• West: 209
• East: 120
• Orinoco Belt: 512
• Total: 841

National refineries processed 206 Mbpd of crude and intermediate products, with a yield in terms of gasoline of 69 Mbpd and diesel of 71 Mbpd.

In the petrochemical sector, methanol plants are operating at an average of 85%, limited by natural gas availability and system pressure. Similarly, Fertinitro operates one ammonia and urea train; the second is awaiting a natural gas supply. Superoctanos continues out of service.

Exports and Prices

Under the oil scheme that will apply for the second half of the year, post-OFAC licenses, the only destination for shipments will be China, with a minor and sporadic exception of a limited-size tanker, monthly, to Cuba. According to our calculations, the weighted price of the week's export basket was $34.0/bbl. Exports in July are in line with those of the previous month, somewhat lagging, but generally recover in the second half of the month.

THE MARKET SEEKS A NEW BALANCE

 El Taladro Azul

M. Juan Szabo [1] y Luis A. Pacheco [2]

Published  Originally in Spanish in  LA GRAN ALDEA

In a week not lacking in events, oil prices initially gained ground in response to Iran's attitude, which, despite having emerged battered from the brief military episode with Israel, maintained its belligerent discourse. The Iranian regime announced the suspension of cooperation with the International Atomic Energy Agency (IAEA) and doubled down on repression against its population to mitigate its current political weakness.

Meanwhile, although it was taken for granted that the advanced OPEC+ meeting during the weekend would approve a new production increase of 411 MBPD, a subgroup of eight cartel countries agreed to the rise of 548 MBPD starting in August. Concern about the feasibility of returning crude oil from the eight OPEC+ countries to the market is partially based on increases of no more than 300 MBPD observed in June, versus the announcements (see attached chart).

Other important events occurred after the early market closure due to the July 4th celebration in the United States. We highlight Ecuador's declaration of "force majeure," which is a strong blow to the Ecuadorian economy and global supply. Also, the approval in the U.S. Congress of the Budget Law, Big Beautiful Bill (BBB), and its subsequent signing by President Trump, with great fanfare, coinciding with Independence Day celebrations, will be a factor to consider. This law empowers the U.S. administration to advance much of its economic/political agenda. The reaction to these events will be reflected in prices during the week. However, many analysts are already starting to warn about the impacts of the growing budget deficit of the northern giant, while others dismiss them as alarmist.

FUNDAMENTALS

OPEC+ Agreement and Production Increase

Although predictable in its trend, the event that captured the oil market's interest had its element of surprise and, if you will, much bluffing. Eight oil-producing countries, OPEC+ members, agreed on Saturday to increase their joint crude production by five hundred forty-eight thousand barrels per day (548 MBPD) starting in August, on their path to dismantling their voluntary supply cuts, or what remains of them.

This cartel subgroup—Saudi Arabia, UAE, Iraq, Kazakhstan, Kuwait, Oman, Algeria, and Russia—agreed, according to a statement from the OPEC Secretariat, to increase their production by one hundred thirty-seven thousand barrels per day (137 MBPD) more than expected from previous announcements (411 MBPD). The statement from Vienna justifies the decision based on: "a stable global economic outlook and the current solid market fundamentals, as reflected in low oil inventories." As we have argued, dismantling cuts will take longer than the organization has indicated. It will require increased investments and opex observed so far only in Kazakhstan, Oman, and the UAE.

Global Strategic Reserves

Part of OPEC+'s view of strong market fundamentals comes from the status of strategic reserves in various countries. While China seems comfortable with its current strategic inventories, India, the world's third-largest crude oil importer, which depends on imports for about 85% of its daily needs, is considering building three new sites to boost its strategic oil reserves. India's underground storage currently holds a total capacity of 39 million barrels, enough for eight days of India's oil consumption, which is still much lower than the figures for the U.S. and China.

Additionally, the North American Strategic Petroleum Reserve (SPR) is uncomfortably low, after the Biden administration used it to try to prevent fuel price increases ahead of the elections. The Trump administration has stated that it is necessary to raise the current stored volume, 402 million barrels, which would only cover about 19 days of consumption.

Situation in Ecuador

On Thursday, Ecuador's state oil company, Petroecuador, declared force majeure over all its operations, including crude exports. This occurred after the suspension of pumping through the two trans-Andean pipelines and a drop in the Andean country's oil production. The state pipelines SOTE (Trans-Ecuadorian Pipeline System) and OCP (Heavy Crude Pipeline) suspended pumping operations preventively to protect their infrastructure from the effects of intense rains, which have accelerated erosion in the Amazonian province of Napo. River flooding has caused damage on numerous occasions since 2020.

Ecuador's crude production dropped to 332,128 barrels per day (331 MBPD) from the 464,634 bpd it recorded on Monday before the incident, according to a report from the Hydrocarbon Regulation and Control Agency. However, during the weekend, production had to be reduced even further, to about 268 MBPD, corresponding to an export reduction of about 200 MBPD.

U.S. Production

Meanwhile, the world's largest producer, the U.S., with its just over 13 MMBPD of crude production, does not tip the balance in any way. Drilling activity continues to fall this week; the Baker Hughes Report shows a drop of eight units, of which five correspond to lower activity in the Permian Basin.

Inventories and Refining

Regarding commercial crude inventories, the EIA reports an increase of 3.8 million barrels; however, this had no effect on oil market perception when it was realized that the increase was due to an import of 7 million additional barrels in the same week. Gasoline inventories increased, and distillate inventories decreased, in a typical seasonal balance and due to higher refining runs that approached 95% utilization of the refining fleet.

Trump's Energy Policy

It's important to mention that Trump's recently approved budget law opens federal lands and waters to oil and gas exploration, ordering 30 public auctions in the Gulf of America (formerly Mexico) in 15 years, and more than 30 each year on federal lands in nine states, giving the industry new access to Alaska. Given the maturation times of these activities, effects could be seen in the medium term, provided there are no changes by new administrations.

The law also lowers the royalties that producers are required to pay the government for extracting oil and gas on federal lands, which should encourage higher production. It remains to be seen whether these incentives, at current prices, can actually change the economic approach of oil companies.

Discovery in Norway

Equinor, the Norwegian state company, announced the discovery of a considerably sized deposit with its exploratory well Drivis Tubåen in the Barents Sea, in the Arctic region. The new discovery is located near the developing Johan Castberg field, facilitating joint development and possibly being a turning point for Norway's oil and gas future. The company states it expects to be able to add 250-550 million barrels of oil reserves.

GEOPOLITICS

Tensions with Iran

Iranian media reported that President Masoud Pezeshkian signed a law allowing him to suspend the country's cooperation with the International Atomic Energy Agency (IAEA). The measure comes amid growing tensions between Tehran and the UN nuclear watchdog agency and follows recent Israeli and American attacks against Iranian nuclear facilities. This position, perhaps inconsistent with the weakening of the country's defensive and offensive capacity, seems to be more oriented toward domestic politics and the military audience, seeking to close ranks against the "common" enemy.

BRICS Summit

The meeting of BRICS countries, composed of ten "emerging" economy countries, is beginning in Rio de Janeiro, but will no longer be the economic "carnival" that Brazilian President Lula da Silva expected. Expectations about the meeting's impact diminished upon learning that neither Xi Jinping nor Vladimir Putin would be present. President Putin limits his travels for obvious reasons: there is an international warrant against him for war crimes. However, the case of Xi Jinping, absent for the first time in 12 years, lends itself to various interpretations. The simplest is that rumors about his health are accurate or that Xi doesn't want to be eclipsed by Indian Prime Minister Narendra Modi, who will be the summit's guest of honor. It's also possible that the Chinese president wants to avoid irritating the volatile U.S. president, who is in the middle of complex trade negotiations with that country. The same applies to several countries that, according to President Trump, will receive letters starting this week indicating the tariffs imposed on their U.S exports.

Other leaders, such as Colombia's Gustavo Petro and Iran's Masoud Pezeshkian, chose not to attend, presumably due to domestic problems. The lack of diplomatic brilliance is a blow to President Lula da Silva, who wants Brazil to play a more important role on the world stage and is thinking about his future candidacy for a fourth term.

Middle East Conflicts

In the Middle East, Israel has continued its anti-Hamas and anti-Hezbollah campaign, finding Hamas enclaves in the south of the Gaza Strip and destroying a Hezbollah missile warehouse in southern Lebanon, around 3,000 devices. White House diplomacy and mediators from Qatar and Egypt say they are close to a ceasefire agreement that would include the release of kidnapped individuals who are still alive in the Gaza Strip.

War in Ukraine

On Russia's part, nothing has changed regarding the invasion of Ukraine, except that its income from hydrocarbon sales is falling sharply, and Putin feels the urgency to gain ground while he can finance it.

Kyiv was, this week, the target of the most significant Russian attack since the invasion began. Russia fired a record 539 drones and 11 missiles. Perhaps it was no coincidence that the attack occurred hours after a call between Trump and Putin, after which Trump said he was "disappointed" that the Russian president was not ready to end the war against Ukraine.

Moscow claims the war will continue as long as necessary to achieve its objectives. For his part, Zelensky urged international allies, particularly the U.S., to increase pressure on Moscow and impose greater sanctions. Later, on Friday, Zelensky and Trump held a phone conversation about the supply of American weapons: in an unusual development, the defense department had paralyzed weapons deliveries to Ukraine.

In the Russian capital, the surprising death of Andrey Badalov, 62, vice president of state-owned Transneft, the company that manages pipeline systems in the country, was announced; it was reported that he fell from the balcony of the apartment where he resided. Badalov's death adds to other deaths of oil executives under mysterious conditions, which is speculated to be an extreme way of maintaining discipline in the government apparatus.

Summary of the Geopolitical Situation

We could summarize the geopolitical situation as follows:

1. The relative pacification of the Middle East is moving in the right direction, and we think it could be used to pressure for more Abraham Accords, especially with Saudi Arabia and Syria.
2. The Russian invasion of Ukraine has no visible end, and its resolution is probably associated with a deep Russian recession.
3. The approval of the "BBB" Law and trade/tariff agreements with China and other countries like Vietnam and India may reduce the unease in capital and energy markets, mitigating the possibility of a global recession, although that remains uncertain.
4. Hydrocarbon supplies and their transport and delivery to users do not seem likely to have disruptions any time soon. – famous last words.
5. 
   

PRICE DYNAMICS

After the oil price dropped in the last week of June, losing the support generated by the geopolitical risk premium, the market began to recover upon observing a defiant Iran. The market also weighed signs indicative of solid fundamentals, particularly relatively low crude inventories.

However, mid-week, the media began to forecast that OPEC+ would approve a substantial increase of at least 411 MBPD starting in August, and that this, added to previous announcements totaling an opening of about 2.0 million barrels per day in just 5 months, would unbalance the market. Thus, prices eroded until the short commercial week stopped the process.

After a 2% gain mid-week, crude prices ended the week with a minimal gain of less than 1%: the Brent and WTI benchmark crudes were trading at $68.3/bbl and $66.5/bbl, respectively.

VENEZUELA

Venezuelan Economy: Recession à la carte

The Maduro administration's economic team, under the leadership of Vice President Delcy Rodríguez, apparently has a clear strategy, which is not so difficult when options become increasingly scarce.

The recipe is the same as in recent weeks: reduce public spending, preserve foreign currency for basic necessities, reduce consumption, keep the banking system cooperating, and let the exchange rate slide to try to reduce the gap with the alternative market. The only new thing is introducing cryptocurrency use, specifically USDT or Tether, a cryptocurrency backed mainly by dollars in a 1:1 ratio, which would facilitate obtaining and allocating foreign currency. The official exchange rate has surpassed 111 Bs./$, but has not ostensibly stopped the exchange gap.

The strategy seems to aim to provoke a recession by shrinking the economy to the level that oil-generated foreign currency and other sources can handle with minimal monetary financing, trying to prevent inflation from getting out of control, as it is at this moment. Despite no official publications, private sources calculate that annualized inflation is already approaching 200%.

Diplomatic Relations with the United States

As we reported last week, the Maduro administration appears to continue conversing with White House representatives, probably Richard Grenell. It is mentioned that Venezuela asked the U.S. to return 18 children separated from their families in deportation processes, who have become a propaganda weapon. In parallel, a group of American congressmen requested that Secretary of State Marco Rubio secure the release of 10 U.S. citizens unjustly detained in Venezuela. With the backdrop of continuous flights of deported Venezuelans arriving weekly at Maiquetía, it would seem that a bargaining between both parties, or perhaps something more, could occur, which would undoubtedly favor the regime.

However, the diplomatic waters separating the parties have become murky due to a series of unrelated factors: the declaration as "persona non grata" of the UN High Commissioner for Human Rights, Volker Türk, demanding his withdrawal from Venezuela, in response to the publishing of a devastating report on the deterioration of human rights in Venezuela, documenting torture, forced disappearances, and political repression; the political support given by the regime to Iran after the American bombing; the inauguration, perhaps only symbolic, of the Russian factory for Kalashnikov rifle ammunition; and the capture at sea of several drug shipments originating in Venezuela.

Political Situation

Politically, it is striking that several members of UNT, the party of former governor Rosales, and of Union y Cambio, the party of former governor Capriles, left that "opposition" tent and appeared as candidates for the official party, PSUV, in municipal elections, confirming the opportunism of that opposition of convenience.

Oil Operations

In oil matters, things are simplified, which does not necessarily mean improvement. Practically, there is only one export destination: "all shipping leads to China", and one price: $31.7/bbl - based on our internal calculations. Crude production was slightly affected, but the Cardón refinery and the PetroPiar upgrader were started, although the latter could not be fully stabilized.

As we have been announcing, June is a crucial month for oil operations in the year’s second half.

Production by Regions

Crude production during the last week averaged eight hundred thirty-nine thousand barrels per day (839 MBPD), geographically distributed as follows:

Area	MBPD
West	209
East	120
Orinoco Belt	510
TOTAL	839

Refining and Petrochemicals

National refineries processed 193 MBPD of crude and intermediate products, with a yield of 65 MBPD in gasoline and 68 MBPD in diesel. There was talk of a fire at the Amuay refinery, but the characteristics and seriousness of the event could not be verified.

Methanol plants are operating in the petrochemical sector. At Fertinitro, one ammonia and urea train is operating, and the second is in startup preparations, while the Superoctanos plant is out of service. The pressure of gas supplied to the José complex remains low, partially affecting plant performance.

Exports

June exports closed with crude exports of 590 MBPD sent entirely to China through the traditional mechanisms for transporting crude sanctioned by OFAC: 483 MBPD correspond to Merey-16 shipments, 90 MBPD to Boscán crude, and 17 MBPD from Corocoro segregation.

Also exported were 76 MBPD of products, mainly residual fuel, all sent to the Far East, except for a minor shipment to Cuba.

CITGO

In the state of Delaware, the special master supervising the auction of shares of PDV Holdings, indirect parent company of CITGO Petroleum, recommended the $7.38 billion offer from a unit of Gold Reserve (GRZ.V), a mining company listed in Toronto, as the preliminary winner of the auction organized to pay creditors for debt defaults and expropriations by the Hugo Chávez and Nicolás Maduro administrations.

If the offer is approved, the proceeds from the PDV Holding auction would be sufficient to compensate 11 of the 15 creditors on the court-approved list. In any case, some experts expect the process to encounter new arguments to resolve, including those that CITGO and PDVH lawyers continue to raise. New offers or appeals from creditors who would not benefit from the special master's recommendation are not ruled out.

 

[1] International Analyst [2] Nonresident Fellow, Baker Institute