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.
No comments:
Post a Comment