M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA
During the last week, what appears to be a recurring pattern in oil market behavior was observed again. Despite the presence of factors typically considered bearish—such as the unexpected increase in U.S. crude inventories, the imposition of new tariffs and uncertainty about existing ones, the Federal Reserve's (FED) decision to maintain interest rates, Chevron's return to Venezuela with access to the U.S. market, and the U.S. employment slowdown—barrel prices showed a slightly bullish trend until the end of the week.
As has occurred in recent weeks, the market corrected on Friday, August 1st. The news that OPEC+ was evaluating the possibility of concluding the remaining voluntary cuts (548 Mbpd) in September of this year functioned as a catalyst, reversing the effect of the bearish news and causing an approximate $2/bbl drop in oil prices.
News in the geopolitical sphere also added uncertainty to the market, starting with the exchange of threats between the U.S. and Russia. On Friday, Trump announced that he was ordering the deployment of two nuclear submarines in regions near Russia, in response to the threats from former Russian president Dmitri Medvedev, the current vice-president of Russia's Security Council. On the other hand, Indian state refineries limit purchases of Russian crude to avoid sanctions from the U.S. government.
FUNDAMENTALS
Economic Situation in the United States
The Trump administration is encountering obstacles in developing its government plan. The employment report for July showed that only 73,000 jobs were created and that 258,000 fewer jobs were created in May and June than previously reported. The report suggested that the economy has weakened during Trump's mandate, a pattern consistent with economic growth deceleration during the first half of the year and an increase in inflation in June, which seemed to reflect price pressure generated by tariffs. The unemployment rate rose slightly to 4.2%, still low, from 4.1%.
President Trump's reaction was immediate. "In my opinion, today's job numbers were rigged to make Republicans, and me, look bad... we need accurate employment figures," Trump wrote and considered that the head of the Bureau of Labor Statistics, Erika McEntarfer, manipulated the statistics for political reasons and ordered her removal from the position, generating protests from the Democratic party and alarm voices about the reliability of official figures, past and future. In any case, the statistics indicate a weakening of the North American economy, in an environment where the FED again chose to maintain interest rates, focusing only on inflationary expectations; another front where Trump's expectations have not been met, despite his continued pressure on Jerome Powell.
U.S. Oil Activity
Oil activity in the U.S., the world's largest crude producer, continues without relevant changes, with production declining asymptotically toward 13 MMbpd, evidence, on one hand, of the robustness of its production base and also the complexity of generating significant growth. Production potential generation activity is directed toward the natural gas sector in response to expectations of growing sales of liquefied natural gas (LNG) to the European Union. Baker Hughes indicates this, showing a reduction (-2) in active rigs; the net number corresponds to an increase of 3 rigs dedicated to gas and a decrease of 5 units in oil activity.
The Energy Information Administration (EIA), in its weekly report, revealed a surprising increase of 7.7 MMbbls in commercial crude inventories, of which 1.2 MMbpd corresponds to higher crude imports; it also reports a reduction of 2.1 MMbbls in gasoline inventories.
Tariffs and International Trade
To this complex panorama, we must add the multiple negotiations and imposition of tariffs that will affect the global economy. Thursday night, Trump ordered new tariffs for 66 countries, effective August 7th. If maintained, this decision's effect will be seen over time.
OPEC+ Situation
Since April of this year, OPEC+ has been dismantling the production cuts that had contributed to balancing the market in critical moments. It announced the cumulative opening of 1.8 million barrels per day by the end of August. Last Sunday's meeting, the cartel agreed to open the remaining production from the 2.2 million barrels per day that it had taken out of the market (547 Mbpd) post-pandemic.
The opening process has not been free of inconveniences. Only in the second month of the process (May) was an increase evident. Since then, some countries—Saudi Arabia, UAE, Oman, and Kazakhstan—have shown they can contribute additional volumes, but not in the programmed quantities. As we have analyzed in previous works, idle production potential had not been entirely preserved due to a lack of investment; on the contrary, it would have been used to compensate for part of the natural decline. Consequently, drilling activity is required to comply with what was announced.
We observe in Baker Hughes reports that Middle Eastern countries would have added rigs in May and June; the trend did not continue in July. Much of the lag has to do with Russian limitations, the third-largest producing country, to control its decline, and with the rivalry of Iraq's central government with its Kurdish population in the north of the country.
Ecuador
In the southern hemisphere, Petroecuador ordered on Wednesday night, July 30th, that the force majeure declaration issued 27 days ago as a consequence of the damage caused to transport infrastructure by the reactivation of regressive erosion of the Coca River, in the Napo area, be lifted. With this decision, the company resumes its contractual commitments and officially resumes Oriente and Napo crude exports starting August 1st. Ecuador's oil production recorded its biggest operational collapse in over two decades in July. On July 22nd, extraction fell to a historic minimum of just 31,831 barrels per day, according to Ecuador's Central Bank (BCE) data. Now comes a process of starting up the production fields and restarting pumping through both trans-Andean pipelines.
Malaysia and Sanctioned Crude Trade
An announcement by Malaysian authorities could affect the transport and arrival in China of sanctioned crude. Malaysia introduced new regulations to avoid illegal oil transfers in its territorial waters. As is widely known, this country's territorial waters are the preferred site for "dark" fleets from Russia, Iran, and Venezuela to make STS (ship-to-ship) transfers, before their "legitimized" access to China.
Global Production Perspectives
The oil market's concern regarding the materialization of crude oversupply before the end of the year is aggravated by predictions of production increases in countries outside the OPEC+ circle. News sources repeatedly speak of increases in the U.S., Canada, Brazil, Guyana, and Argentina, assigning them a rise between six hundred thousand barrels per day and one million barrels per day in 2025. However, recent evidence from these countries' authorities points to a combined increase of five hundred thousand barrels per day by the end of the year.
So the real production increase from Non-OPEC+ countries, combined with the lag in production opening by the eight countries involved in dismantling OPEC+ cuts, and an uncompensated decline in the rest of the producers, reduces or eliminates the possibility of overproduction. On the contrary, the supply/demand balance depends on demand and its capacity to grow in an environment plagued by recession prophecies.
GEOPOLITICS
Current geopolitics continues to be permeated by intense rivalry between powers like the United States, China, and Russia. These powers compete for preeminence in technology, trade, strategic resources, and control over key geographical regions, which in some instances are war scenarios. This struggle between powers has fragmented traditional alliances, such as the Russian relationship with Europe for gas supply, reconfigured trade routes, and elevated the risk of indirect confrontations. At the same time, the world polarizes between blocks seeking to impose their political and economic models.
Russian-Ukrainian Conflict
Under this generalized description falls the Russian-Ukrainian conflict. Putin's stubbornness in not negotiating even a ceasefire, much less conditions to end this prolonged war that has decimated his army and Ukraine's and has disrupted his economy, has led the European Union not only to rearm but also to impose additional trade sanctions on Russia and has made President Trump modify his approach to that conflict. In addition to EU sanctions, Trump threatens to impose sanctions on Russia in the coming days if there are no tangible results toward a cessation of hostilities. The U.S. president has also pressured India and China to stop buying Russian crude.
India and Russian Sanctions
India understood that cheap Russian crude did not merit a conflict with the U.S., so India's state refineries stopped buying Russian oil last week. India, the world's third-largest oil importer, is the largest buyer of Russian crude transported by sea. The four state refineries, representing 60% of Russian crude purchases, have begun turning to spot markets to replace the Russian supply of around eight hundred thousand barrels daily. The sanctions and pressures resulted in less placement of Russian crude in the market, further reducing Russian revenues.
U.S.-Russia Tensions
Relations between Russia and the U.S. deteriorated even further following statements by former Russian president Dimitri Medvedev, which U.S. diplomacy considered provocative and senseless. In response to Medvedev's comments, President Trump ordered two nuclear submarines to "position themselves in appropriate regions", the current vice president of Russia's Security Council. Trump said he acted "just in case these senseless and incendiary statements were something more than that. Words are very important and can often have unforeseen consequences; I hope this is not one of those cases."
Middle East Conflict
In the Middle East conflict, more countries are joining criticism of Israel's campaign in Gaza and its effects on the civilian population, while the fate of those kidnapped by Hamas seems to have taken a back seat. Great Britain appears to have joined the position of France's president, Emmanuel Macron. After a cabinet meeting, Prime Minister Starmer announced that he would recognize the Palestinian state "unless the Israeli government takes substantive measures to end the terrible situation in Gaza, reaches a ceasefire, makes clear there will be no annexation in the West Bank, and commits to a long-term peace process that offers a two-state solution." The conditions on the table for a cessation of conflict also include some that Hamas would have to fulfill, and that doesn’t look easy to achieve for both Israel and Hamas.
A surprising change in the region was the request from a group of Arab nations demanding that Hamas lay down arms and hand over control of Gaza. Qatar, Saudi Arabia, and Egypt asked that the terrorist group disarm and dissolve. It is the first time these countries condemn Hamas and demand that it not participate in Palestine's future. Finally, the cessation of hostilities between Israel and Iran is maintained, and Turkish authorities report that a precarious ceasefire has also been reached between Israel and Syria.
Since the Middle East conflict does not seem to influence oil production centers, geopolitics' effects on the market are focused on two areas related to the U.S.: economic sanctions, particularly on Russia, and tariff negotiations worldwide.
PRICE DYNAMICS
Prices showed resilience throughout the week, not reacting to news commonly capable of negatively affecting prices. Still, on Friday, when the possibility that OPEC+ would propitiate another production opening in September (as indeed occurred) was added to the accumulation of bearish news, the price base weakened, generating a "mass sell-off" in the market and a drop in crude prices, without weighing the real probabilities that this opening could be carried out in the stipulated timeframes.
Thus, the quotation of Brent and WTI marker crudes, at market close on Friday, August 1st, stood at $69.67/bbl and $67.33/bbl, respectively. Despite Friday's price collapse, the market closed with a weekly gain of 1.7% for Brent crude and 3.2% for WTI, respectively.
VENEZUELA
The God Janus and Politics
Maximum pressure and pragmatism are the two faces of U.S. policy toward Venezuela. Like the Roman god Janus, the White House policy looks backward at the Biden administration while seeking to design its own policy forward.
This week, it was confirmed that Chevron had obtained a specific license to continue operating in Venezuela through its joint ventures with PDVSA: a modified reissue (due to confidentiality) of General License 41 that the Biden administration granted in 2022. The confirmation came from Chevron's president and CEO, Mike Wirth, without giving details about the characteristics or limitations of the license, assuring that the flow of Venezuelan oil to the U.S. would soon resume.
Meanwhile, President Trump underlines the evils generated by the actions of Nicolás Maduro's administration, whom he has just designated as the leader of the Cartel of the Suns, officially declared as a terrorist organization. Moreover, Secretary of State Marco Rubio declares that Maduro is not Venezuela's legitimate president. Contradictory positions with the granting of a new license, some would say, but evidence of the powerful interests at play. Since General Juan Vicente Gómez, Venezuela has never been subject to international oil interests, as it is today.
Venezuelan Economic Situation
The country is on the brink of an economic recession, a product of a lack of sufficient foreign currency income. This lack of foreign currency income forces continuous financing of the economy with inorganic money, feeding the devaluation of the national currency and catapulting inflation to excessively high levels. The license to Chevron, and probably others will follow, could seem like the prescribed medicine for all ills, not to mention the additional benefit of tacit recognition of Maduro and his administration.
Analysis of the New License (LNCh)
Although analyzing a license with unknown characteristics is challenging, it is helpful to speculate about it educatedly. For this, we have developed a scenario that we consider has sufficient coherence, connecting pieces of unofficial information leaked by some of the interested parties, statements by U.S. authorities, and characteristics of the extinct LG 41.
We will then compare the oil situation under LG 41's validity with the maximum pressure situation without licenses and with a scenario that intends to represent the situation under the new license, which we have called LNCh.
The LNCh scenario would authorize Chevron the de facto management (not necessarily legal) of procurement, investment, and production operations, on behalf of the Joint Ventures (JV). This time, the flow would differ from the situation under license 41, in that the JVs would deliver the royalty to the nation in kind (oil) and the remainder, approximately 70% ownership of what is produced, would be transferred by the JVs to Chevron; as before, Chevron would be allowed to take this crude to the U.S. market.
Chevron would retain an agreed amount from the crude's market value to amortize the debt that PDVSA still maintains with the multinational. From the remaining value, Chevron finances the operating cost (OPEX) and investments (CAPEX) of the JVs. To complete the agreed distribution between the Nation and Chevron, the company would pay the taxes the JV must pay and the profits, if any, corresponding to PDVSA's majority participation in the JV, delivering diluents and fuels equivalent to an agreed equivalent value.
This flow of oil, products, and money complies with the premise that is said to exist in the Trump administration, which is that there would be no cash transfer from Chevron to Maduro's administration. The licensed transactions we describe would comply with the letter we understand from the announcements, but violate the spirit of Venezuelan laws.
Scenario Comparison
Let's see then the comparison of the three cases (assuming Brent at $70/bbl):
[Chart showing comparison of three scenarios: Maximum Pressure, LG41, and LNCh, displaying various metrics like crude export to China, crude export to US, barter amounts, forex supply, and net income]
- The graph shows that for the LNCh case, crude exported to China is greater than in LG41 because of the volumes received by the Nation as royalty payment, which would no longer go to the U.S., but to the Far East.
- The volume handled as barter increases considerably in relation to LG41, due to the inclusion of equivalent amounts of tax and dividend payments—hence it appears as positive income.
- The foreign currency that Chevron supplies to the exchange market would be considerably reduced since it would only include the bolivar component of OPEX and CAPEX.
- Net income in the LNCh scenario would be 87% higher than the sanctioned case and only 13% less than in the LG41 case (assuming the same export).
- The graph does not show that debt recovery will be somewhat slower if the estimated concepts per barrel from license 41 are maintained. Remember that only 70% of crude produced by the JVs, with some diluent, would enter the U.S. market under this new license.
These conclusions must be taken as an approximation due to the nature and origin of the premises.
License Impact
In any event, the license conferred to Chevron, under this analysis, represents a temporary lifeline for the Venezuelan economy, which was shipwrecking in turbulent waters. However, it would only provide symptom relief, not the cure for the structural disease of the economy, or the oil industry in particular.
The policy of adaptation to sanctions, which has brought public spending to minimum levels, the official exchange rate to almost 126 Bs./$, and galloping inflation, can now be managed with the economic strategies used before April 2025.
Political Situation
On the political side, the municipal elections at the end of July were announced as a resounding victory for the ruling party, and they have already begun to consider the transition to the communal scheme. The ruling party says the electoral cycle is closed, and Maduro and Cabello call on the new opposition to begin new times. Meanwhile, Edmundo González and María Corina Machado indicated that the low voter turnout is another demonstration that the current political scheme lacks popular support and highlighted the qualification of the Cartel of the Suns as a terrorist organization.
OIL OPERATIONS
Transition to the New License
The transition to the new license will not be instantaneous, since only barrels produced from the entry into force of the new instrument are counted for the new licensing regime. Suppose we assume that the new license entered into force on July 20th, and based on the fact that the production capacity of the JVs has only declined slightly to date. In that case, between Bajo Grande and Jose, an inventory of less than 1.5 MMbbls of crude is available. Hence, Chevron's crude purchase and its transport to Gulf of America refineries (formerly Mexico) could begin in the second week of August: first from Bajo Grande, in Lake Maracaibo, due to the size of tankers used on that route, and then from Jose. The financial effect of the new license will not be felt until early September.
Crude Production
Crude production during the last week averaged eight hundred forty-five thousand barrels per day (845 Mbpd), geographically distributed as follows:
Area | Mbpd |
West | 211 |
East | 120 |
Orinoco Belt | 514 |
TOTAL | 845 |
Refining
National refineries processed 212 Mbpd of crude and intermediate products, with a yield of 70 Mbpd for gasoline and 73 Mbpd for diesel.
Upgraders
The crude produced in the PetroPiar upgrader, Hamaca Blend, is used partially as diluent for belt crude, and the rest is sent to refining. This latter use will necessarily change under Chevron's new license. The PetroCedeño upgrader continues to obtain intermediate products that are used as feedstock in refining. The PetroRoraima (PetroZuata) and PetroMonagas upgraders remain non-operational.
Petrochemical Sector
There have been no changes in plant activity in the petrochemical sector at the José complex.
Exports
Crude exports in July averaged 575 Mbpd. All tankers were destined for China. 106 Mbpd of Boscán and 469 Mbpd of Merey 16 were the only segregations dispatched in July. 62 Mbpd of residual was exported to the Far East, and a smaller quantity to Cuba. The weighted price of exported crudes is estimated at $33.61/bbl.
¹ International Analyst
² Nonresident Fellow Baker Institute
