A MARKET MARKED BY UNCERTAINTY

 El Taladro Azul

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

Published  Originally in Spanish in  LA GRAN ALDEA

 Photo: Caripito Refinery, 1940. Source: https://retroboomerang.blogspot.com/2010/11/caripito-estado-monagas.html

The hope sown by the Russian-American summit in Alaska and President Trump's subsequent meetings with European leaders was soon frustrated by the realities of the battlefield and the confirmation that Vladimir Putin is unwilling to make concessions in his conflict with Ukraine. Financial markets had one of the least turbulent weeks of the year, with crude oil prices reacting discretely upward following the publication of inventory indicators and real demand and supply balances.

However, on Friday, which lately has become a day of surprises, capital markets changed their mood. The Dow Jones, S&P 500, and Nasdaq all surged nearly 2%, serving as support for the oil market, which remained positive for the week despite the dollar's strength, which usually pushes prices downward.

This relative optimism was due to Jerome Powell, the Federal Reserve Chairman, appearing to have granted the possibility of an interest rate cut. "It may be appropriate to adjust our monetary stance," he said in his anticipated speech at the Jackson Hole meeting.

As we approach the final quarter of 2025, energy industry leaders face a very complex scenario: low investment levels that don't seem able to recover to pre-pandemic levels; geopolitical tensions that are not resolved but rather transformed; new technologies and an energy matrix in metamorphosis; and imprecise and contradictory projections. In the Fundamentals and Geopolitics sections, we will shed light on some of these complexities and imprecisions.

FUNDAMENTALS

Given the political and economic weight of energy, and particularly oil, it is natural that two visions of the international oil market exist. After all, the market is determined by demand and supply, producers and consumers. Conflicting geopolitical positions also influence different interests, leading to other perspectives, at least for the next two years.

The Two Market Visions

Imminent Overproduction Scenario

• It is based on significant production growth from OPEC+ countries and countries outside that framework, such as Canada, Guyana, Brazil, and, supposedly, the U.S.
• On the other hand, a demand contraction is projected due to the effects of the trade war and lack of monetary stimulus for fear of inflation.

Demand Resilience Scenario

• It is based on a scenario of demand resilience, especially in India, China, and South Korea.
• It projects a deceleration in supply growth due to chronic underinvestment since 2019, to which would be added a potential escalation of geopolitical tensions threatening oil supply.

The first vision has been promoted by observers and analysts who, for lack of a better characterization, we'll call those with an "environmentalist tendency" or anti-fossil, whose most active spokesperson is the International Energy Agency (IEA). For some years, the agency has promoted divestment from fossil energy and its accelerated replacement with alternative energy sources. Naturally, the second vision is promoted by those who, while accepting climate change, postulate that discarding fossils is premature. OPEC, and since his election, the Trump administration, are the most important promoters of this vision.

Our Analysis

Within the volatile character of the oil market and its prices, our analysis aligns with the second vision, as we do not foresee changes in year-over-year demand growth, which has moved in recent years in a range of 1.0 to 1.3 million barrels per day. Additionally, we have not identified sufficient net additions to supply, including OPEC+ and non-OPEC+, to balance this demand increase.

The limiting factor on the supply side is the low levels of investment in the "upstream" sector of the oil value chain. This not only limits the growth rate in basins expected to increase production but is also insufficient to compensate for the decline in many regions. This is reflected, for example, in the under-fulfillment of production opening announcements in specific OPEC+ countries.

Our analysis on both the demand and supply sides does not deviate much from the forecasts published by the OPEC secretariat, whose projections many consider biased in favor of oil's permanence over time; undoubtedly a strategy consistent with its nature and objectives.

Obviously, with so many uncertainty-generating elements, scenarios may end up converging as a product of the global oil industry’s feedback mechanisms. After all, that's what the market is about.

Market Forces

The best example is the transformation in the development of North American "shale oil," which went from a stance of unbridled growth to a policy of financial moderation and priority remuneration of investors, putting a ceiling on its production, for now. The reduction of activities in Vaca Muerta, Argentina, in reaction to prevailing crude prices in recent months is less relevant, but in the same direction.

Some of our analyses regarding demand/supply balances are directly linked to regional details of oil fundamentals, which we will analyze below.

United States

The U.S., the world's largest oil producer, and with growing participation in the natural gas market, has had a cautious development with no apparent changes in the near future. The stability in its crude production, around 13.3 million barrels per day, results from slightly declining drilling activity and consumption of the decreasing inventory of so-called DUC wells (drilled but not completed). This buffer would be necessary to be able to react to unforeseen changes.

The total number of DUC wells is 5,280, the lowest level since the influence of "shale oil" was established in world markets. With declining drilling activity, it is almost impossible to avoid consuming the DUC well inventory, and it becomes more complex to change from a maintenance scheme to one of sustained growth.

OPEC+

OPEC+, the market's heaviest actor, with almost 40% of global production, continues with a double discourse, announcing reopenings of production that they had voluntarily closed to balance the market. They announced that they would open 2.2 million barrels per day (2.2 MMbpd), effective in September. However, by mid-August, they have only managed to increase about eight hundred thousand barrels per day (800 Mbpd); the only increases verified by OPEC secondary sources belong to Saudi Arabia, the UAE, and Russia. The veracity of what Russia reports has always been difficult to corroborate.

Russia

What we know about Russia is that on August 15, surprisingly, Putin reversed his nationalizing decree of the extensive Sakhalin development, inviting Exxon to resume its participation under certain conditions. What is relevant about this decision is that it confirms that the Russian oil industry does not have the capacity to grow without Western financial and technological participation.

Kazakhstan

Kazakhstan's case also deserves review. The country's authorities have pushed for an international arbitration against major oil companies, such as Shell, ExxonMobil, and TotalEnergies, following the development of the Kashagan oil field. The government claims more than $150 billion in damages. It also alleges corruption and problems with production-sharing agreements, such as excessive cost deductions. It has also imposed a fine of $5.1 billion for environmental violations related to sulfur contamination from the Kashagan field.

The oil companies have had some success in local court rulings on the sulfur dispute, evidencing that environmental issues were only a spearhead to open negotiations on income and resource management in Kazakhstan.

The outcome of this arbitration process could affect all companies operating in the country. In a broader context, the dispute is part of a global change in which resource-rich nations seek more favorable contracts and higher income from large energy corporations—a story we have seen repeated in other latitudes.

Inventories and Monetary Policy

In its weekly report, the Energy Information Administration (EIA) showed a drop in U.S. commercial crude inventories of 6 million barrels and 2.7 million barrels of gasoline, the latter of which was related to unscheduled refinery shutdowns. In any case, the downward trend in crude inventories suggests healthy demand, despite indications of a slight increase in the unemployment rate. But this could change starting in September, if there is an increase in rates.

Indeed, the annual meetings organized by the Federal Reserve Bank of Kansas City took place in Jackson Hole, where economists, financial market participants, academics, and central bankers discuss, for three days, relevant financial policy issues and global events.

The Federal Reserve (FED) Chairman has traditionally used this meeting to give indications about monetary policy, and this time was no exception. Jerome Powell telegraphed that the restrictive policy maintained until now could change to a moderate stimulus. That is, he has officially opened the door to lowering interest rates for the next meeting on September 17, given persistent signs of cooling in the labor market and the GDP slowdown; a position that other FED officials had already taken. Powell declared that: "Inflation risks are biased upward, and employment risks downward: a complex situation, the FED will proceed with caution, but the changing balance of risks could justify an adjustment to our policy stance." Stock markets reacted to the message by rebounding between 1.6 and 1.9%, and oil prices consolidated their weekly strengthening.

Major Consumers

China

Meanwhile, on the major consumers' side, China's economic situation in August 2025 is one of sustained but uneven growth, with an annual GDP expected to be around 5% and a recovery driven by domestic consumption and industry. However, the economy faces significant challenges, including deflationary pressures, an intensified trade war with the U.S. affecting exports, a deceleration in fixed asset investment, and fragility in private domestic demand. In any case, growth in oil purchases of about 180 MBPD is anticipated during 2025.

India

India's case is slightly different. India is the world's fastest-growing economy, surpassing Japan as the fourth-largest, with a projected growth of 6.2% for 2025. This growth and the decline in national oil production will increase foreign crude purchases by more than 230 MBPD in 2025.

The Power of North American Natural Gas

Based on its character as a transition fuel and the boom in the Liquefied Natural Gas (LNG) market for geopolitical reasons, North American natural gas could become the most coveted raw material in the coming years. Henry Hub gas prices remain 70% below the global gas benchmark price and oil in terms of energy equivalent. This discount, inherited from the difficulty of transporting gas between continents or long distances, should have been reduced by technological advances in this area, but strangely has been maintained since the Obama presidency for political, logistical, and resource reasons. But conditions have changed, and the time of discounts has ended. If we are correct, natural gas prices in the U.S. could double, making North American gas a highly profitable bet.

GEOPOLITICS

The change in international tensions on which markets had placed their hopes did not materialize. The war between Russia and Ukraine entered an irrational state, if there is rationality in war. President Putin gave no concessions at the Alaska meeting beyond his initial position, despite being under intense economic pressure from the fall in his hydrocarbon income and President Trump's threats of additional sanctions if progress toward a ceasefire was not achieved.

Russia-Ukraine Conflict

But Trump, in a decision that departs from his initial discourse, decided not to impose the promised sanctions, despite a new Russian attack on Ukraine, the strongest since the beginning of the war. In the Russian advance in eastern Ukraine, bloody confrontations occurred, but they did not end with additional territory capture for Russia. On the contrary, if one analyzes Russian control of Ukrainian territory since the beginning of the invasion, the Russian advance has been successfully repelled by Ukraine. Although Trump's position toward Ukraine and Europe seems to have shifted, at least in terms of tone of discussion, as long as he remains reluctant to impose sanctions, the discourse has no significant importance.

The only oil effects of this war's confusing and undefined situation are the temporary suspension, for the second time, of Russian oil supplies to Hungary and Slovakia and the reduction of Russian refining capacity by 13%.

Middle East

In the Middle East, Prime Minister Benjamin Netanyahu said Thursday that Israel will immediately resume negotiations for the release of all hostages held in Gaza and the end of the nearly two-year war, but on terms acceptable to Israel, this was Netanyahu's first response to a temporary ceasefire proposal presented by Egypt and Qatar, which Hamas accepted on Monday. According to an Israeli official, Israel will send negotiators to the talks once the location is determined.

In conversations with soldiers near Israel's border with Gaza, Netanyahu said he was still determined to approve plans to defeat Hamas and capture Gaza City, the most densely populated center in the heart of Palestinian territory. Thousands of Palestinians have abandoned their homes as Israeli tanks approached Gaza City during the past 10 days, aggravating the humanitarian crisis of hundreds of thousands of Palestinians.

Israel's plan to take Gaza City was approved this month by the security cabinet, which Netanyahu chairs, although many of Israel's closest allies have urged the government to reconsider it. In the short term, these activities have a very low impact on the oil market.

Iran Sanctions

What can affect Iranian crude transit is OFAC's (U.S. Treasury Department) decision to further obstruct Iranian oil exports by imposing sanctions on Greek citizen Antonios Margaritis, his network of companies, and nearly a dozen vessels involved in the Iranian dark fleet. Several other ships and operators are also being designated for their role in facilitating Iranian oil exports, which generate income that contributes to Iran's advanced weapons programs and its terrorist tentacles.

Changes in International Banking

On the other hand, the enthusiasm of the world's largest banks for "Net Zero" emissions initiatives has faded quickly and quietly. Major financiers have backtracked, diluting or abandoning the application of ESG (Environment, Social, and Governance) guidelines.

Goldman Sachs announced, a month after Trump's electoral victory, that it would abandon the Net Zero Banking Alliance (NZBA), convened in 2021 by the financial initiative of the United Nations Environment Programme. Just months later, JP Morgan, Citi, Bank of America, Morgan Stanley, and Wells Fargo sealed their exit from the NZBA. Royal Bank of Canada, Bank of Montreal, and Toronto-Dominion followed the same steps. The domino effect has extended to London, where HSBC and Barclays left the group last month. These changes should facilitate increased investment in necessary oil and gas projects.

PRICE DYNAMICS

On Friday, crude oil futures remained around two-week highs. Benchmark indices appeared to consolidate weekly gains of around 3% in response to the drop in U.S. oil inventories. Much of the price volatility has been due to daily updates on negotiations between Ukraine and Russia, which have oscillated between pessimism and optimism, and their impact on oil's future balance.

Thus, at Friday's market close on August 22, the benchmark crudes, Brent and WTI, were trading at $67.73/bbl and $63.66/bbl, respectively.

VENEZUELA

A Tense Environment

This last week was particularly complex from any point of view, both geopolitical and economic. In fact, in Caracas, where people have learned to remain silent, there was talk of news filling the media. Some are true, others are rumors, speculation, or simple psychological warfare.

For example, the first two tankers with Venezuelan crude, under the new Chevron license, have already unloaded their cargoes in Port Arthur and New Orleans. At the same time, several tankers are arriving at Venezuelan ports, and another group is en route to our coasts.

In any case, the amounts of foreign currency that could reach Venezuela in the second half of September due to this new license could not mitigate this week's exchange crisis. The insufficient dollars pursued by a large quantity of bolívars forced the regime to try a mechanism of foreign currency offering above the value in the official market, as the only way to limit the runaway gap in alternative markets.

Exchange Crisis

The bolívar continued depreciating, exceeding 140 Bs./$ in the official market, with a gap against the parallel market approaching 50%. The Central Bank of Venezuela team is experimenting with ad hoc measures, hoping that Chevron's dollars can rebalance the accounts. Inflation figures have not been published, but the exchange market points to very high values.

Military Tensions

On the other hand, it is reported that a considerable U.S. military force will be positioned north of Venezuelan territorial waters by this Sunday. The declared objective of the military deployment is to prevent drug trafficking by cartels and gangs declared as narcoterrorists.

Reactions to this movement were swift. The UN urged parties to resolve their conflicts peacefully. China, Russia, and Iran advocated for non-foreign intervention, while Brazil and Colombia used the concept of Latin American integrity. However, President Petro had his give-and-take with the Venezuelan regime around the presence of Colombian guerrillas in Venezuela.

Chinese Investment

With great fanfare, details of the first Chinese private investment in the Venezuelan oil business appeared in various sources. Three months ago, this business was mentioned in the context of production participation contracts (CPP) that PDVSA had signed with a dozen companies to fill the void left by the cancellation of OFAC licenses.

It involves China Concord Resources Corp (CCRC), a company registered in Hong Kong with unknown shareholders but supposedly from the UAE. The company has no experience in oil production. Still, it is not new to PDVSA, as it is one of the intermediaries and owners of some tankers of the so-called "ghost fleet," which transports sanctioned crude to China's private refineries.

Under the protection of the Anti-Blockade Law, the company signed CPP contracts to operate two blocks in Lake Maracaibo: the Lake Five block and a block called Lagunillas Lake. The operator's remuneration will be in oil, which it can sell internationally. According to CCRC, the objective is to develop 500 wells and increase production to 60,000 bpd by the end of 2026. This involves the production of light and heavy crude. The light oil would be delivered to PDVSA, and the heavier crude would be exported to China. An initial analysis of the numbers indicates that this is yet another projection that cannot be fulfilled.

Miraflores Meeting

Finally, the week culminated with Maduro's call to the "Living Forces" to attend a meeting at the Miraflores Palace. The expectation was for economic announcements to try to control the pernicious effects of the lack of foreign currency. However, the meeting only resulted in a nationalist harangue, calling all forces to unite against the common enemy.

OIL OPERATIONS

Oil activities developed normally, except on Friday, when a major blackout, apparently caused by inclement weather, affected the center and west of the country.

Crude Production

Crude production during the last week averaged eight hundred fifty-one thousand barrels per day (851 Mbpd), distributed geographically as follows:

• West: 215 Mbpd (Chevron: 108 Mbpd)
• East: 120 Mbpd
• Orinoco Belt: 516 Mbpd (Chevron: 118 Mbpd)
• TOTAL: 851 Mbpd (Chevron: 226 Mbpd)
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Chevron's production is almost at the same level as it was at the beginning of the year. Still, from the total produced (226 Mbpd), approximately 30% will be deducted for royalty payments in kind, leaving 158 Mbpd to be improved and diluted for sale to Chevron. How the income is distributed, apart from royalties, is a well-kept secret.

Refining and Petrochemicals

National refineries processed 220 Mbpd of crude and intermediate products, with a gasoline yield of 74 Mbpd and a diesel yield of 78 Mbpd.

In the petrochemical sector, methanol plants continue operating at 82% of their capacity, limited by gas availability. Fertinitro maintained both trains operating. The SuperOctanos plant has not been able to start due to natural gas limitations in the Jose complex. A propane shipment was sent from Jose to Tablazo to start the Olefins plant.

Exports

Crude exports in August are averaging about 552 Mbpd, and eight tankers have been dispatched: 6 to the Far East and two to the U.S. for 11.6 MMbbls. Our calculations indicate that about 4 MMbbls of crude destined for the U.S. in August could be dispatched, equivalent to about 135 Mbpd.

The weighted price of exported crude is at $32.2/BBL.

[1]: International Analyst

[2]: Nonresident Fellow Baker Institute