M. Juan Szabo [1] y Luis A. Pacheco [2]
Published Originally in Spanish in LA GRAN ALDEA
The fragile implementation of the ceasefire and the beginning of the hostage exchange between Israel and Hamas, coupled with the promise of a summit between Presidents Trump and Putin in Budapest, which fuels hopes that it will lead to an outcome similar to that of Gaza's in Ukraine, have reduced the perception of geopolitical risk to a minimum.
The reimposition of tariffs by the United States on imports from China has reignited concerns about the strength of the economy and, consequently, oil demand. If we add to this the forecasts of a significant expansion in supply—in line with projections made by the International Energy Agency (IEA)—the perception has begun to consolidate in the markets that they are going through a period of economic slowdown accompanied by abundant oil supply.
The recent report of increased crude oil inventories in the United States has only added to this pessimism, which was reflected in a new decline in oil prices, reaching their lowest levels since the 2020 pandemic.
On the other hand, the potential effect on demand of the stimulus measures that central banks are reconsidering has an impact that is difficult to estimate. If we add to this the difficulties in determining the real capacities of producing countries, particularly the estimation of field declines, a better scenario than what is currently perceived as the base case could well occur.
In any case, we believe that current productions do not support the announced supply levels despite OPEC+'s month-over-month increase in September of approximately five hundred thousand barrels per day (500 kbpd) since production increases from the U.S., Canada, and Brazil could be overestimated.
GEOPOLITICS
Russia-Ukraine
The oil market has interpreted the upcoming meeting between Presidents Trump and Putin in Budapest as a possible starting point for resolving the conflict in Ukraine. The financial pressures from economic sanctions that significantly limit Russia's ability to continue the war continue to increase, making some type of compromise more likely. However, in Russia and Ukraine, the expectation prevails that this meeting will not generate substantial progress. It should be noted that Budapest was chosen as the venue because Hungary is not part of the International Court of Justice, which exempts Putin from concerns regarding possible arrest for charges filed at The Hague.
During a meeting at the White House between Donald Trump and Volodymyr Zelensky, no agreement was reached for the supply of Tomahawk missiles; this decision seeks to preserve these missiles as a negotiating tool in relations with Russia. On the other hand, NATO defense ministers are scheduled to meet on Wednesday to strengthen military support for Ukraine, in response to the significant decline in shipments of weapons and ammunition to that country.
The ministers will also debate a request from the NATO commander to lift restrictions on using their aircraft and other military equipment so they can be used to defend the alliance's eastern border with Russia, Belarus, and Ukraine more effectively.
The British government has included Russia's two main oil companies, Rosneft and Lukoil, in its latest sanctions package, as well as 44 tanker vessels identified as part of the "shadow fleet"; it has also added to the sanctions the Nayara refinery in India, which is majority controlled by Russian capital. However, these measures did not generate a market response.
Simultaneously, President Trump stated that India's Prime Minister, Narendra Modi, agreed to cease purchasing Russian oil. This is part of U.S. efforts to exert economic pressure on Russia and force it to negotiate an end to the conflict in Ukraine.
Middle East
Following the start of the ceasefire between Israel and Hamas, the exchange of hostages was carried out without incident. This was not the case with the bodies of hostages who died in captivity: of the 28 that had been agreed upon, as of October 19, only 9 had been returned. According to Hamas, they had problems recovering the rest of the bodies from the rubble in the strip and were receiving help from other countries to locate them.
Apparently, Hamas intends to maintain security control in Gaza. A senior Hamas official indicated that he could not commit to the group's disarmament. Mohamed Nazzal, a member of Hamas's politburo, also said the group was ready for a ceasefire of up to five years to rebuild devastated Gaza and would provide guarantees for what happens afterward based on Palestinians being given "horizons and hope" of obtaining their own state. Nazzal, from Doha, defended the repression the group is carrying out in Gaza, where it conducted public executions on Monday. "Exceptional measures are always applied during war, and those executed are criminals guilty of homicide," he stated.
While Hamas has expressed these opinions before, they are evidence of the main obstacles obstructing efforts to consolidate a complete end to the war in Gaza. The ceasefire negotiated by the United States in Gaza appears to have survived its first major test this weekend, as Israel and Hamas affirmed their commitment to the agreement after two Israeli soldiers were killed in the enclave on Sunday, triggering waves of airstrikes.
While the ceasefire has held, the other fronts, such as Hezbollah and the Houthis, have not changed their stance toward Israel, and several bombings, mainly in southern Lebanon, have been carried out by Israeli forces in retaliation or prevention.
Iran
For unknown reasons, Iranian-flagged tankers have activated their automatic identification systems (AIS), which had been deactivated since the U.S. imposed sanctions on Iranian oil exports in 2018. That decision sought to hide the traffic of tankers that violated sanctions, including frequent ship-to-ship transfers. Groups monitoring tanker movements reported that more than 80% of Iranian vessels have transmitted location signals.
The measure seems counterintuitive, given that sanctions have intensified. The possibility is raised that these actions seek to reaffirm legitimacy and sovereignty; however, considering Iran's current situation, it is more plausible that they respond to warnings issued by the United States. According to these warnings, sailing without activated transponders violates regulations established by the International Maritime Organization, which constitutes a legitimate cause to prohibit the circulation of any vessel on the high seas. The measure could have also responded to demands from China, which imports 90% of Iran's oil exports.
Transporting Iranian crude directly to China again would represent substantial savings for Iran, provided China continues accepting the shipments. In any case, shortly afterward, the tankers deactivated their signals again.
U.S.-China Trade
China and the United States reported on Saturday, October 18, that they will hold another round of trade negotiations next week to avoid imposing new tariffs. Last week, Beijing implemented new restrictions on the export of rare earths, which led the U.S. president to raise the option of establishing 100% tariffs on imports from China. Additionally, the possibility of canceling the meeting between the U.S. president and Chinese President Xi Jinping in South Korea during the Asia-Pacific Economic Cooperation (APEC) summit was mentioned.
Chinese state media reported that Vice Premier He Lifeng and U.S. Treasury Secretary Scott Bessent held "frank, in-depth and constructive exchanges" during a call on Saturday morning and that both parties agreed to hold a new round of trade talks "as soon as possible."
U.S. Government Shutdown
The federal government shutdown extended into its third week on Wednesday, after lawmakers failed to advance in negotiations.
The ninth failed Senate vote occurred when the parties met separately at the Capitol to accuse each other of being inflexible. Meanwhile, military families and federal workers generally face the prospect of having their paychecks interrupted by the end of the month. A new attempt is scheduled for the afternoon of Monday, October 20, but without much hope of finding a compromise.
FUNDAMENTALS
An unusual convergence is observed between physical factors, such as increased production by OPEC+ countries and the rise in crude oil inventories in the United States. Forecasts anticipate weak demand and high supply, generating a dual pessimistic sentiment in market perception.
Our analysis indicates that during September, OPEC+ cartel members increased their production by approximately 500,000 kbpd compared to August. This increase places the total voluntary opening of shut-in crude, since April of this year, at 1.7 MMbpd, compared to the 2.2 MMbpd announced by the group. It should be noted that the primary source of this data is OPEC itself and its secondary sources, except for Russia, whose values we have adjusted according to additional specific observations.
According to the weekly report from the Energy Information Administration (EIA), commercial crude oil inventories increased by 3.5 MMbbls but remained 4% below the five-year average range. Meanwhile, gasoline and distillate inventories decreased by 4.8 MMbbls.
Regarding the supply increase forecast by the International Energy Agency (IEA) and retransmitted by other sources, chronological analysis of information from original sources leads us to conclude that they overestimate the production increase. For the remainder of 2025, we believe there will only be increases in crude production from Guyana, 80 kbpd; Brazil, 25 kbpd; and Argentina, 18 kbpd, a total non-OPEC+ increase of 123 kbpd. During 2026, we anticipate an increase in global production of 1.5 MMbpd.
The IEA suggests more than 2.0 MMbpd increases in 2025 and 2026, reaching production of 108.3 MMbpd, which exceeds our calculations by more than 2.0 MMbpd. The most likely explanation is that the IEA has an agenda to discourage investment in fossil fuels, as its pronouncements often affect the management decisions of small and medium-sized oil companies and financial entities. This would be a curious agenda, to say the least, since the IEA has also spoken about the need to increase investment to avoid a supply crisis.
OPEC and its allies are naturally on the other side of the argument. According to Amin Nasser, CEO of the Saudi state oil giant Aramco, the oil industry must intensify exploration and investment in new supplies; otherwise, the world risks suffering a supply shortage. "If that doesn't happen, there will be a supply crisis," Nasser told the Financial Times.
Saudi oil company Aramco and OPEC have warned for years that the reduction in oil exploration, driven by recent net-zero emissions policies, would harm consumers and world economies with an insufficient oil supply. We estimate that an investment of $800 billion annually is required to avoid an energy crisis over the next 25 years.
Returning to the present, U.S. oil companies plan to maintain a balance between their investments and remuneration of their investors, so that potential-generating activities remain relatively constant in shale basins and there is a slight uptick in offshore developments.
Guyana is increasing production at its fourth floating production, storage, and offloading (FPSO) facility, Guyana 1, from about 112 kbpd today to 250 kbpd in April 2026. The next FPSO will arrive in Guyana at the end of the year, but the production increase will be perceived in 2027.
In Brazil, production recently began from the FPSO installed in the Bacalhau field in the Brazilian Pre-salt: the most significant offshore project operated by Norway's Equinor and its partners ExxonMobil, PetroGal, and the Brazilian company PPSA. Peak production will not be reached until 2027. Another unit, FPSO P-78, which recently arrived at the Búzios field, is estimated to be commissioned and begin production in 2026. Argentina, for its part, plans to increase output in Vaca Muerta by about 60 kbpd during 2026.
Price Behavior
The almost complete alignment of geopolitical factors, fundamentals, and forecasts of demand and supply behavior caused the market to enter panic mode, and prices fell to their lowest levels in five years and almost 20% lower than at the beginning of the year. All this in a scenario full of short—and medium-term uncertainties.
Thus, at the close of markets on Friday, October 17, the benchmark crudes, Brent and WTI, were trading at $61.29/bbl and $57.54/bbl, respectively, a loss of almost 2% compared to the previous week's close.
VENEZUELA
"The pitcher goes so often to the well that it breaks."
In the last week, Venezuela's political situation has once again revolved around diplomatic tensions with the U.S. and the regime's internal actions to convey security to its allies and fear to its opponents. Meanwhile, in the economic sphere, the substantial currency devaluation stands out.
Nicolás Maduro, alluding to President Trump's recent declaration that CIA actions should be carried out in Venezuela against drug cartels, resorted to the well-worn 20th-century playbook of the northern enemy's "coups d'état" to promote regional solidarity. It is sometimes difficult to understand whether or not there is a coherent strategy or if both sides are just reacting to events. Do financial markets seem to bet on political change, allowing them to negotiate and recover part of the state's enormous debt?
Two days after the CIA announcement, Trump confirmed the attack on a kind of submersible vessel loaded with drugs north of Venezuela, this time with a couple of survivors who were recovered by American helicopters and repatriated to Colombia and Ecuador, their alleged countries of origin. Another surprising news, which appeared in newspapers but was later confirmed by Trump, was that Nicolás Maduro had offered the U.S. preferential access to oil and other resources in exchange for a regime survival agreement. Curiously, the regime has accused the opposition, particularly María Corina Machado, of making the same offers.
On the economic side, the availability of foreign currency has not improved. On the contrary, lower prices for oil exports are hurting that front. The foreign currency deficit generates monetary financing to cover public spending needs, but the bolívars thus generated end up putting pressure on the foreign exchange market, forcing the devaluation of the bolívar and the consequent increase in inflation.
Venezuela's official exchange rate rose 451.8% in one year, a severe depreciation of the bolívar. The shortage of foreign currency has triggered the gap between the official exchange rate and parallel markets, which has only been mitigated by restricting the dollars injected into the market at the official rate and offering the remainder at higher prices using dollar-linked cryptocurrencies, USDT, and others, creating a parallel exchange market controlled by the ruling party. This allows certain companies and officials to obtain foreign currency at a price higher than the official rate.
Naturally, this process has intensified the country's transactional dollarization, particularly in purchasing basic basket products. The Venezuelan Finance Observatory (OVF), a prestigious private reference, has reported significant economic contractions, suggesting an ongoing recession.
Oil Operations
Operations in the hydrocarbon sector have continued their normal course. It is reported that in northern Monagas, approximately 300 million cubic feet per day (300 MMcfd) of natural gas is being collected and injected into the reservoirs, thus reducing the volume of gas flared and vented to below 1,500 MMcfd.
Crude oil production during the last week averaged 863 thousand barrels per day (863 kbpd), distributed geographically as follows:
• West 225 Chevron: 109
• East 119
• Orinoco Belt 519 Chevron: 124
• TOTAL 863 Chevron 233
National refineries processed 230 kbpd of crude and intermediate products, with yields in terms of gasoline of 76 kbpd and diesel of 78 kbpd.
A spill was reported on the western coast of the Paraguaná peninsula, coming from the Cardón refinery, affecting the activities of fishing communities.
In the petrochemical sector, Fertinitro's production train No. 1 was started up, while No. 2 continues in maintenance. In the methanol plants, one of Metor's plants is paralyzed due to a lack of natural gas, while the other two are operating normally. The SuperOctanos plant remains paralyzed.
Mid-week, crude oil exports exceeded 10 MMbbls, again destined for China and the U.S. Six shipments, a total of 2.0 MMbbls, were sent to refineries on the Gulf Coast of America.
We estimate that the weighted price of exported crude is $29.8/bbl.
[1]: International Analyst
[2]: Nonresident Fellow Baker Institute
No comments:
Post a Comment