El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
OPEC+'s announcement on its strategy for managing production cuts, far from fulfilling the intention of giving clear signals to the oil market, ended up having the opposite effect. As we had seen during the week, the market interpreted it as a negative signal about demand and the possibility of oversupply.
Thus, the week began (Tuesday, June 4) with an oil market weakened by the uncertainty of OPEC+ announcements and by an alarming report published by the American Petroleum Institute (API), showing an unexpected increase in crude oil inventories. The next day, the reaction was mitigated by the data published in the weekly report of the Energy Information Administration (EIA) on Wednesdays, which showed crude and product inventory figures closer to those expected. By Thursday, it was obvious that the market reaction had been excessive. The oil markets caught their breath, partly because Saudi Arabia and Russia insisted that the gradual return of crude oil to the markets should be considered a positive signal and not a bearish one.
FUNDAMENTALS
OPEC+ produced about 270 Mbpd more in May than the previous month, which added to the downward perception that the organization's announcements had generated on Sunday night. As expected, the OPEC+ leaders took on the task of repairing the damage caused by their confusing announcement. Speaking at the Russian Economic Forum in St. Petersburg, Saudi Energy Minister Prince Abdulaziz bin Salman said he disagreed with the bearish interpretation that Western analysts had given to announcements about the gradual reversal of voluntary cuts from some OPEC+ members (2.2 MMbpd). The Saudi minister stressed that OPEC+ can pause or reverse oil production increases if the market weakens.
The Chinese economy began to give certain indications of improvements. China's oil imports rebounded last month against expectations that several refineries would complete major maintenance processes. The latest customs data showed that total crude oil imports in May rose to 11.06 MMbpd, an increase of 1.6% compared to the previous month, but still 8% less than in the same month in 2023.
The US crude oil production continues to hover around 13 MMbpd, with a tendency to decline in light of the continued erosion of the drilling rig fleet. This week, Baker Hughes reports a reduction of another 6 units, in the states of Oklahoma (oil) and Pennsylvania (natural gas).
The inventory reporting saga between API and EIA contributed to the market confusion this week. US inventory data showed, according to the EIA, a relatively minor increase in commercial crude oil inventories (+1.2 MMbbls), well below the API estimate of a 4-million-barrel increase. US gasoline inventories also added 2 MMBBLS last week, because of the decline in domestic demand after Memorial Day and an increase in refined volumes, which outpaced the rebound in exports.
According to Energy Secretary Jennifer Granholm, the much-announced replenishment of the Strategic Petroleum Reserve (SPR) could accelerate as maintenance of deposits on the Gulf Coast of Mexico is completed. This year, the Energy Department has been buying about 3 million barrels of oil per month for the SPR, after having sold 180 million barrels in 2022 to try to slow rising prices and bring the reserve to historic lows.
Continuing with the US, the non-farm payrolls, an index closely followed by the markets, showed the creation of 272,000 new jobs in May, well above the forecast of 185,000.
Internationally, the expected interest rate cut by the European Central Bank (ECB) has provided some macroeconomic support to oil prices, raising hopes of a possible interest rate cut by the Federal Reserve in September. The ECB delivered its first interest rate cut since 2019, cutting its deposit rate to 3.75% from a record high of 4.0%.
Meanwhile, business activity on the European continent has begun to recover. The Purchasing Managers' Index (PMI) from the Commercial Bank of Hamburg, considered a reliable indicator of economic development, shows that private sector production expanded in most major eurozone economies, including Germany, Italy, and Spain.
GEOPOLITICS
International discussions surrounding the Middle East crisis have focused on trying to negotiate, or impose on the parties, a lasting ceasefire. The US has been pressuring Israel to offer acceptable terms to Hamas, to the point of making offers on Israel's behalf, which were later denied by Netanyahu. The most sensitive point is the release of all the hostages, since within Israel the relatives, and the country in general, are exerting strong pressure on the military leadership around this issue.
In the assault on Hamas positions in the Jabaliya refugee camp, Israeli forces found several bodies of Israeli hostages, which increased internal tensions, interpreting that they may have died in IDF bombings. Separately, on Friday, Israel confirmed that 4 hostages were rescued in Gaza during a raid on the Nuseirat camp, in the center of the Gaza Strip, in two different locations, and in “normal medical condition.” The news was received with joy and reinforced the determination of the Israeli side to complete efforts until the recovery of all those kidnapped.
From an oil perspective, what is most relevant is the pressure that the US is putting on the Houthis. The US maintains that the peace plan for the region cannot advance if attacks in the Red Sea persist. The US and its allies, in their fight to stop attacks on ships by Houthi militants, are increasing the risks to the rebels, increasingly blocking their sources of income.
According to a report published on Thursday, Washington is seeking to block important parts of a U.N. peace plan that the warring parties in Yemen adopted in December unless the Houthis cease their attacks on international shipping routes. This latest US initiative comes as the Central Bank of Yemen, which remains under the control of the Saudi-backed Yemeni government, moved to suspend operations at banks in Houthi-controlled areas, including the region of Sana. The move, which was made with the support of the US and its Western allies, is expected to restrict the Houthis' access to foreign currency and deplete the group's liquidity.
Meanwhile, in the conflict in Ukraine, attacks on Russia with M142 Himars missiles, supplied by the US, are having an immediate effect in stopping Putin's advances in the northern region of Ukraine. These high-precision, high-power missiles, which the US eventually gave permission to use against targets on Russian territory, destroyed key missile launch sites and forced the Russians to retreat.
Russian troops are reportedly “stuck” in newly occupied villages north of Kharkiv, where they are trying to force their way into Ukraine's second city.
In Mexico, the presidential elections that we mentioned last week culminated in the clear victory of the official candidate, Claudia Sheinbaum, in what seems like an electoral tsunami. Sheinbaum will have a clear mandate and majority in Congress that allows her to change and approve laws to face the challenges facing the country and perhaps dare to experiment with more radical initiatives than his predecessor, President López Obrador.
In India, Narendra Modi and his party have once again been the most voted force, but the victory of Hindu nationalism is much less forceful than expected by the polls. Modi lost many seats compared to 2019, which forces him to govern with coalitions. The secular and left-wing opposition celebrates its second place as a triumph after a decade of ending very far from the party of the current Indian prime minister.
As we were finishing the article, the results of the elections to the European Parliament (EP) were known. In the first analysis, the growth of the right in the old continent is evident, changing the political landscape of countries such as France, Germany, and Austria. However, the balance of power in the EP does not seem to have been significantly altered. The issues of migration, the economy, and security dominated the campaign speeches.
So, the week was hectic from all points of view, and this was reflected in oil prices, reaching, in the middle of the week, the lowest levels since February of this year. During the last two days of the week, prices recovered, but the recovery lost momentum as a result of the strengthening of the dollar in response to better-than-expected North American labor numbers.
Thus, prices were unable to overcome the losses at the beginning of the week, ending with a loss of around 1.7% compared to the previous week; it is already the third consecutive week with losses. At market close on Friday, June 7, Brent and WTI crude oil markers were trading at $79.63/bbl and $75.53/bbl, respectively.
In the previous installment, we mentioned the change in market sentiment, especially due to the macroeconomic uncertainties that the indexes suggest. This week we saw market players reacting, hastily, to the announcements of the OPEC+ meeting: speculators rushed to get rid of their contracts, and then tried to make amends for the overreaction. Having a clear premise that “markets do not make mistakes” and that “the right price is what the markets determine”, it is also true that markets can overreact to biased or incomplete news, and then correct it; we find ourselves in such a situation. This may be an answer to why prices continue to fall, but it is surely an incomplete one.
We are convinced, given what we know today, that supply will find obstacles to meeting demand, and that OPEC+ will manage closed production according to market needs, and not beyond. We are of the idea that the cartel does not have the levels of spare production that they boast about. Not only that, but we think that prices will remain on average between $80 and $90/bbl, with the volatility imposed by the macroeconomic, political, and operational events that the market has to process daily.
VENEZUELA
The bumpy road to the Election
Within the shortened electoral campaigns, the space is occupied by Maduro and Edmundo González/Maria Corina Machado. The so-called “chiripero” (the plethora of candidates with little or no chance in the election) have made no impression whatsoever. The opposition continued to mobilize large numbers of people around the country, despite the obstacles put in place by the regime. While eyewitnesses tell of the relative lack of mobilization and apathy of Maduro's followers, although photographs of the events are published showing large crowds; According to analysts, they appear to be doctored photos. In this era of post-truth, anything is possible.
Perhaps the regime does not need large political concentrations and believes that their control of the electoral institutions, CNE and TSJ, assures them of victory. As an example, we are already hearing about people who have recently been relocated to a different voting center without their consent and other manipulations that they have in their power as “owners” of the process. Considering the evident lack of popularity of the regime, a series of conjectures have been woven, ranging from the disqualification of González Urrutia's candidacy to the declaration of a state of emergency caused by an armed conflict with Guyana.
Presidents Lula and Petro, have insisted with Maduro on the importance of international observation, especially that of the European Union. As we described last week, the European Union mission had been invited and then uninvited at the request of the president of the national assembly, Jorge Rodríguez, in another example of the absence of separation of powers. As it happened, the EU indicated that it was already too late to be able to integrate an observation team like the one commonly sent. Colombia and Brazil, perhaps taking advantage of the absence of the EU, announced that they would not send electoral observers: a way of looking the other way, revealing their real preferences.
In the economic environment, the regime is making an extraordinary effort to be able to stretch resources until the elections. The regime is keeping public spending high because of its electoral importance and keeping the exchange rate under control by the dollar market. Once the elections are over, we will pay the costs of such actions. On the oil business side, income was reduced due to lower average prices and the return of shipments to Cuba.
Hydrocarbons Sector
Licenses
The OFAC (Office of Foreign Assets Control of the Treasury Department) has so far issued individual licenses for the purchase of oil and its products to Reliance of India and Global Oil Management Group; Other traders, as well as investors in joint ventures, are still waiting for news from OFAC. The companies already licensed are Chevron, Repsol, Maurel & Prom, Shell with the Trinidadian national gas company, BP, and finally Ecopetrol for the import of gas from Venezuela. Forty other requests are awaiting a response from OFAC. The new JV, PetroRoraima, has not received a license yet. PetroCedeño, which now has a new “B” partner, Jindal Power Ltd., is in the same situation.
Operations
This week, average production increased by 4.0 Mbpd compared to the previous week, through a reduction in the volume of deferred production and the entry into production of new wells drilled by the only three active rigs; according to Baker Hughes one in PetroIndependencia, one in PetroMonagas and another in PetroMiranda, in Zuata.
The weekly average production reached 789 Mbpd, distributed geographically as detailed below:
· West 165 (Chevron 67)
· East 141
· Orinoco Belt 483 Chevron 96)
· TOTAL 789 (Chevron 163)
The 163 Mbpd of crude oil produced by Chevron is in line with its forecast of producing 174 Mbpd by the end of 2024.
A survey among oil service companies indicates that another 9 drilling rigs could be conditioned in the short term for use.
In the refining sector, the Amuay catalytic cracking plant was restarted, with an increase in gasoline yield. The refinery run reached 246 Mbpd, processing crude oil and intermediate products. Gasoline production reached 80 Mbpd while diesel production remained at 75 Mbpd.
Concerning exports, an improvement is reported in pumping rates at the Jose terminal in eastern Venezuela. However, the only tankers that enter and leave without delay are those transporting crude oil for Chevron, Repsol, and Maurel & Prom. Monthly export is estimated at 650 Mbpd, destined for China, India, the US, Europe, and Cuba.
CITGO
Regarding the auction of the shares of CITGO's parent company (PDVH), which continues as ordered by Judge Stark, efforts have been made to lobby the Biden administration to extend executive protection, thus avoiding the potential interference of the auction with next month's presidential elections. The voice of a bipartisan group of representatives and senators of the US Congress has been added to the PDVSA ad hoc administrative board, as well as some communications from Venezuelan citizen associations. So far, there has been no reaction from the administration. The deadline to receive offers from interested parties in the court ends on June 11.
