M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA.png)
In other times, the market could count on OPEC to make decisions with some rationality, although it has deviated from that expectation from time to time. This week, the cartel and its partners, OPEC+, which in theory have been working to keep the oil market balanced, once again stirred the oil market by announcing they would add new production, precisely when other countries forecast production increases.
Most actors did not expect OPEC to change from its fundamental policy of ensuring market balance, better described as "price defense," to reconquering markets that have been lost or could be lost due to lack of action.
OPEC+'s flirtation with the possibility of dismantling the second tranche of its voluntary cuts, of 1.65 million barrels per day (1.65 MMbpd), significantly affected oil markets during the week. However, the OPEC+ communiqué after the meeting in Vienna this Sunday, September 7, turned out to be almost a symbolic decision, limiting the new opening to 137 thousand barrels per day (137 Mbpd) in October, and adjusting for overproduction by members since January 2024.
The market's reaction to this discreet announcement will be evident when markets open on Monday. As we mentioned last week, only a little more than half of the barrel volume announced by the cartel since April has materialized.
On the geopolitical side, meetings in China of leaders opposed to the U.S., projecting a new world order, were full of symbolism, challenges, and political positioning, seeking to project military innovation, cooperation, and new alliances. The U.S. was not far behind in seeking to project its strength within the current order, which revolves around the American economy, dollar primacy, and military power, particularly in the Western Hemisphere. Behind the scenes, China and the U.S. have problems to solve in their economies.
While these choreographies developed in China and the Americas, hot spots associated with long-running wars generated little effect on the oil market. Still, unfortunately, no agreements were reached that would lead to potential lights at the end of the tunnel, either in Ukraine or the Middle East conflict—many geopolitical theatrics with little probability of real agreements to support them.
FUNDAMENTALS
During recent weeks, the physical fundamentals of the oil market have not provided evidence that the insistent news and projections of substantial supply increases are materializing as announced. On the other hand, the expectation of demand contraction in response to discouraging economic results also does not seem to be reflected in the balances.
However, this insistent narrative has received weekly support from some event that contributes to undermining oil market confidence. This week, it was OPEC+'s turn to be the messenger of change again. Indeed, the media insistently reported that the organization was considering getting rid of another layer of voluntarily shut-in crude starting in October of this year.
After keeping the market on edge, the eight countries that form OPEC+ announced in a communiqué from Vienna on September 7 that they had agreed to adjust their production. The decision corresponds to a production increase of 137 thousand barrels per day starting from October 2025. These are part of the 1.65 million barrels per day that the group agreed to shut in April 2023.
Source: OPECThis new adjustment looks discreet. The individual numbers are barely a fraction of the production they still haven't opened from previous announcements. Additionally, the communiqué clarifies that "They also confirmed (the eight countries) their intention to compensate for any overproduced volume since January 2024 fully." "The eight OPEC+ countries will maintain monthly meetings to review market conditions, compliance, and compensation."
This new cartel decision adds another layer of difficulty to tracking compliance with all these announcements, past and present. For now, the total volume of crude opened from April to October should be 2.34 MMbpd.
Strategy and Materialization of Announcements
This new position seems more like psychological warfare than commercial strategy. It seeks to dissuade competitors from implementing and/or accelerating their production plans for fear of a greater price drop.
The opening of incremental crude by OPEC+ has been slower than the supposedly shut-in crude levels suggested. Of the 2.2 MMbpd announced to be opened between April and September of this year, only 1.3 MMbpd have materialized (an increase of 300 Mbpd compared to July), and it has really been Saudi Arabia, the UAE, and Iraq that have been the protagonists of that increase. In particular, the first two countries have pressured the rest of the group to approve the new strategy based on their need to recover market share.
Low oil prices and the prospect of additional drops tend to discourage investments for generating new production potential in regions with higher development and production costs, such as the U.S., Canada, and Argentina.
United States Economic Situation
The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor has published discouraging employment figures, indicating that non-farm payroll employment increased by only 22,000 jobs in August. Analysts had forecast that the economy would add 75,000 jobs during the month.
According to the agency, improvements in the health sector were offset by job losses in the federal government, mining, quarrying, and oil and gas extraction.
Meanwhile, July figures were revised upward, from 73,000 to 79,000, while June figures were revised downward by 27,000, going from 14,000 to -13,000. The unemployment rate rose slightly, from 4.2% to 4.3%. The August employment report was considerably weaker than expected. Let's remember that President Trump forced the departure of the previous head of this agency, disagreeing with the published figures.
The employment results and unemployment rate in the U.S. can have a dual interpretation. For now, the market, harassed by pessimism, interpreted them as a symptom of an economy headed toward recession due to confusion and confrontations caused by the imposition and negotiation of tariffs. On the other hand, these figures could also be the determining factor for the Federal Reserve (FED) to cut interest rates at its September 17 meeting and begin reducing interest rates. A reduction of 50 basis points at once (0.25%), or 25 points, three times during the rest of the year, is not ruled out.
National Oil Situation
The U.S. oil situation remains unchanged. Reducing drilling rig and fracking crew activity has offset technological well drilling and fracturing improvements. Thus, production remains at approximately 13.2 MMbpd, although the Energy Information Administration (EIA) estimates 13.4 MMbpd, using its calculation model with an adjustment factor.
Commercial crude inventories in the U.S. have increased by 2.4 MMbbls due to a 3 MMbbls increase in imported crude, while gasoline inventories fell by 3.8 MMbbls, with constant refining runs. Overall, the inventory report points to healthy demand.
We estimate that at Brent crude prices below $66/bbl, about 400 thousand barrels of marginal Canadian crude production could exit the market. Growth in Argentina's Vaca Muerta basin could be affected by up to 50%. Additionally, that price level would generate cuts in the investment budgets of smaller companies.
GEOPOLITICS
Although very active during this past week, geopolitics has remained in the background regarding its influence on the oil market. Apart from logistical complications generated by Ukrainian drones at Russian refineries and crude and petroleum product storage yards, the oil business was conducted independently of geopolitical complications.
War Between Russia and Ukraine
The continuation of the war between Russia and Ukraine - the Trump/Putin summit proved ineffective.
The Kremlin's current stance on the Ukraine war can be summarized as: "Yes, we want peace, but only on our terms. Do you reject our terms? Then there will be no peace." In this same vein, the agreement by 26 European Union states to provide security guarantees to Ukraine in the form of troops stationed in Ukraine to prevent another Russian attack, if a ceasefire in the war is achieved, was dismissed by Putin, with a warning to the West: "If troops appear there, especially now that fighting continues, we proceed from the basis that they will be legitimate targets for destruction." Regarding ending the war and achieving peace, it isn’t easy to see when and how two positions as different as those held by the parties will converge.
Shanghai Cooperation Organization Meeting
Chinese President Xi Jinping received 20 international leaders at the Shanghai Cooperation Organization (SCO) meeting. A victory parade was also held in Beijing. Both events were propaganda bets designed to undermine the current world order.
SCO welcomed some 20 international leaders amid negotiations with Donald Trump's administration over the trade war. But also in this meeting, those present at the summit attracted much attention, especially due to the presence of Indian leader Narendra Modi, who made a historic visit that relaxed relations with China just after New Delhi was hit by President Trump's tariff policy.
This event was followed by the celebration of Victory Day in Beijing, marking the 80th anniversary of China's victory over Japan in World War II. A victory that, paradoxically, was led by the nationalists, today reduced to inhabiting the Island of Taiwan. Despite the impressive military parade and sophisticated state-of-the-art weaponry, what attracted most attention was the platform where Xi Jinping and his guests, from 26 countries around the world, sat.
For the first time, Xi has appeared alongside Russian President Vladimir Putin, North Korean Kim Jong-un, and Iranian leader Masoud Pezeshkian. The four form what could be called the vanguard group of the opposition to American hegemony, accompanied by other leaders from 22 countries. Their common denominator is their aversion to the U.S. and the international system it represents.
All these displays of brotherhood, cooperation, and agreements to implement an economic and political order different from the current one are like an empty shell, as the attendees have divergent interests in almost all matters that drive world geopolitics. On one hand, neither China nor India is interested in the Ukrainian conflict. India and China are competitors due to the characteristics of their export-based economies. On the other hand, none of these countries, except a few, can afford not to participate, either as suppliers or consumers of the world's largest economy; the U.S. represents more than a quarter of the global GDP.
The only tangible result of all the Chinese fanfare was the eventual financing of the "Power of Siberia 2" gas pipeline, which could increase gas delivery from Russia to Asian countries. However, besides facing significant uncertainties, this announcement is a project that would materialize in the long term.
Situation in Israel and Gaza
Israel has decided to take Gaza City, eliminate what remains of Hamas, and weaken the Houthis, amid strong international rejection and increasingly widespread accusations of genocide. Israel encouraged residents to leave Gaza City toward the designated coastal zone of Khan Younis, in southern Gaza, assuring those there that they would be able to receive food, medical care, and shelter.
Israeli Prime Minister Netanyahu says Gaza City is a Hamas stronghold and that capturing it is necessary to defeat the Palestinian Islamist militants, whose October 2023 attack on Israel triggered this war. Israeli military officials say they have killed many of Hamas's top leaders and thousands of its fighters, reducing the Palestinian militant group to a guerrilla force. Hamas has ruled Gaza for nearly two decades, but today controls only parts of the enclave.
The Gaza war has left Israel increasingly diplomatically isolated, with some of its closest allies condemning the campaign that has devastated the small territory. According to local authorities, that is, Hamas, some 64,000 Palestinians have died since the beginning of the Gaza war, and much of the enclave has been reduced to rubble, and its residents face a humanitarian crisis.
There are also growing calls within Israel, led by hostage families and their supporters, to end the war through a diplomatic agreement that guarantees the release of the remaining 48 captives, only 20 of whom are believed to be alive.
In any case, what remains curious is that this is perhaps the only Middle East conflict that has not impacted oil prices, as has been the case on several other occasions in the region's troubled history.
United States Military Exercises
The U.S. orchestrates military exercises with a naval and aerial deployment in the Caribbean Sea, Panama, and Mexico, a declared war on narco-terrorism, with French presence.
A significant U.S. military force is deployed in areas associated with maritime and terrestrial routes used by narco-guerrillas and their cartels. Venezuela's Soles cartel is considered by the Trump administration as the most dangerous narco-terrorism in the region, having at its disposal all the power of a state and qualifying it as a threat to U.S. security.
The French presence is no coincidence. There is concern that limiting drug access to the U.S. will activate what has been called the drug "highway 10," which is the route used through French Guiana using the 10th parallel to reach Africa, Cabo Verde, and some former French colonies like Mali, Burkina Faso, Niger, from where they reach Morocco, Algeria, and even Libya to supply the growing drug demand in Europe.
Syria Resumes Oil Exports
News of little specific weight regarding the relationship between geopolitics and the oil market, but with significance that confirms rapid changes in the Middle East, is the confirmation that Syria exported 600,000 barrels of heavy crude from the port of Tartus as part of an agreement with a trading company; this is the first known official export of Syrian oil in 14 years.
Syria exported 380 Mbpd of oil in 2010, a year before protests against Bashar al-Assad's regime became an almost 14-year war that devastated the country's economy and infrastructure, including crude production.
PRICE DYNAMICS
The mere expectation of an OPEC+ announcement injected anxiety into the oil market, which showed strength based on the market's physical fundamentals. The rumor that Saudi Arabia and the UAE would try to convince the remaining OPEC members and other associated countries to continue opening the production capacity of crude shut-in for two years moved the floor out from under prices.
Obviously, this process, if materialized, would affect the finances of major producers. Still, Saudi Arabia and the UAE are better prepared than others for that eventuality due to their sovereign funds and access to international financing. In fact, Aramco is preparing another bond placement to meet its investment budget and dividend payments to shareholders. Market sentiment weakened, and prices fell by more than 4% in the second part of the week.
Thus, at market close on Friday, September 5, the benchmark crudes, Brent and WTI, were trading at $65.5/bbl and $61.87/bbl, respectively, about 3% below the previous week's close.
VENEZUELA
INVASION, AN IMPROBABLE BUT EFFECTIVE SCENARIO
Venezuela's political situation continues deteriorating, driven by international accusations linking the government with drug trafficking and terrorism networks, particularly through the so-called Soles Cartel, and an inflationary and recessionary economy. Although it might seem obvious that this crossroads is reached through democratic erosion, concentration of all powers, questioned elections, and generalized repression, taking the country to levels not experienced in a long time, domestic discourse only seeks external culprits.
Escalation of Tensions
The deployment of U.S. naval and air forces has begun generating dangerous situations for the regime. A vessel manned by 11 people, supposedly carrying a drug shipment nominally valued at more than $100 million, is speculated to have departed from San Juan de Unare on the coasts of Sucre State bound for Trinidad and Tobago, but was destroyed by a U.S. attack during the journey, raising the temperature of confrontation between the two states and provoking international criticism for American use of lethal force.
Subsequently, 2 Venezuelan military aircraft flew over one of the U.S. military vessels, which was classified as a provocation. Following this event, President Trump authorized the renamed Department of War (formerly Department of Defense) to use force at the discretion of fleet commanders. Additionally, 10 F-35 aircraft were sent to Puerto Rico, minutes from the U.S. fleet. Nerves are frayed. In Venezuela, there is a deployment of military and militia with balaclavas at checkpoints, even in cities - a tense and dense atmosphere.
Economic and Exchange Policy
Meanwhile, economic policy has continued its course, oriented toward reducing the exchange gap between the official market and other markets. Apparently, this has had some success, selling foreign currency at a controlled price using the USDT market, which ends up being higher than the official market. The official exchange rate reached 155 Bs/$, and the new limited mechanism averaged 180 Bs./$, narrowing the exchange gap to 38%. Tax collection showed some improvement, giving some support to the government's finances.
Chevron Activity
Economic authorities anxiously await contributions from U.S. oil company Chevron's activity, which is moving less crude than expected for now. Royalties from payment in kind (oil) sold in the Chinese market could be about $80 million in September. Dollars that Chevron sells through domestic banks could reach about $35 million in September.
The volume of Venezuelan crude sent to the U.S. market was unusually low (70 Mbpd vs. 200 Mbpd). Based on the tanker movement chartered by Chevron, it could continue to be less than estimated. Deliveries in August and September could indicate that the new license (which is confidential) could limit crude placed in the U.S. market to Chevron's "equity crude." September's close will shed light on this possibility.
OIL OPERATIONS
The self-elevating drilling rig we mentioned last week passed under the bridge over Lake Maracaibo and continued its journey, supposedly toward the Lagunillas Lake block, where it will soon begin operations.
Crude Production
Crude production during the last week averaged eight hundred fifty-eight thousand barrels per day (858 Mbpd), geographically distributed as follows:
Area | Mbpd | Chevron |
West | 222 | 108 |
East | 120 | - |
Orinoco Belt | 516 | 118 |
TOTAL | 858 | 226 |
Chevron's production has remained level since the company returned to operate in its joint ventures. The increase in Western production comes from the PetroZamora joint venture (not operated by Chevron).
Refining and Petrochemicals
National refineries processed 226 Mbpd of crude and intermediate products, with a gasoline yield of 74 Mbpd and diesel of 75 Mbpd. There have been no changes in the petrochemical sector, with active plants running at limited capacities due to natural gas availability.
Exports
Crude exports in August averaged 640 Mbpd in seventeen tankers: ten to the Far East, six to the U.S., and one to Cuba. As a proxy for shipments destined for China, Malaysia, and without a definitive destination, China received 550 Mbpd of crude; the U.S. received 70 Mbpd, and Cuba received 20 Mbpd. Exported crudes were 60 Mbpd of Boscán, 26 Mbpd of Hamaca, and 554 Mbpd of Merey-16. We estimate that the weighted price of exported crudes is in the order of $31.6/bbl.
CITGO Auction
In other news related to the national oil industry, a new offer in the auction of shares of CITGO's parent company, which is being held in Delaware courts, was announced this Friday. Blue Water Acquisition Corp, a special purpose vehicle, announced that it had submitted an offer valued at 10 billion dollars for the parent company of the Venezuelan-owned refinery, Citgo Petroleum. The offer includes a settlement proposal of 3.2 billion dollars for holders of the so-called PDVSA2020 bond, which remains in dispute in a New York court—a new act in this troubled drama.
In Colombia, Mónica de Greiff, recently appointed president of Ecopetrol's Board of Directors, categorically denied this week’s plans to import gas from Venezuela, despite the Colombian government's manifest interest in reviving that alternative. De Greiff also said that Ecopetrol was attempting to purchase Monómeros, the subsidiary of Venezuelan Pequiven that operates in Barranquilla. This is another developing farce.
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