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:
- 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.
- The Russian invasion of Ukraine has no visible end, and its resolution is probably associated with a deep Russian recession.
- 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.
- Hydrocarbon supplies and their transport and delivery to users do not seem likely to have disruptions any time soon. – famous last words.
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
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