THE OIL MARKET CLINGS TO PESSIMISM

El Taladro Azul  Published  Originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

   

Crude oil and product inventories continued to fall in the U.S., but its economy added fewer jobs than expected. OPEC+ failed to surprise markets this week, maintaining its previously announced policy. Worrying news originates from Asia about the Chinese economy and the 5.8% collapse of the Nikkei index in Japan in response to the interest rate hike by the Central Bank.

Given this unfavorable news, global financial markets had a complex and volatile round last Friday. The main Wall Street indices plummeted with the Nasdaq, with its high-tech component, leading the way and in the process, dragging down other markets such as oil.

The particularity of each market was evidenced by the actions taken by the major central banks of the developed world, which moved interest rates in different directions this week, although those decisions may be short-lived. The Bank of Japan initiated the action on Wednesday by raising rates. Then came the Federal Reserve's decision to maintain its rates, but with signals that a cut could occur in September, followed on Thursday by the Bank of England's first reduction since 2020. Most major central bankers are shifting their focus towards preserving economic growth and employment, while Japan once again becomes an atypical case.

On the other hand, Iran and its terrorist arms have not, so far, carried out reprisals for the recent deaths of Hamas and Hezbollah leaders. This has instilled in the market a feeling that the sudden escalation of geopolitical tensions, after Israel's attack in Lebanon and the assassination of Hamas leader Ismail Haniyeh in Iran, might not materialize, which could have triggered oil prices.

This temporary sense of relief, coupled with the ongoing concerns about oil demand, caused prices to collapse during the week. The downward trend continued on Friday with a drop of nearly $2/BBL, another consecutive weekly fall, the fourth.

FUNDAMENTALS Wall Street indices collapsed by up to 2.8% during the week, dragged down by tech stocks, which lost up to 26%, led by giants Intel and Amazon. The U.S. Department of Labor published its statistics for July, reporting that fewer jobs were created than expected. Indeed, U.S. hiring slowed dramatically last month in the face of high-interest rates, adding a mere 114,000 jobs vs. 179,000 in June. The unemployment rate rose to 4.3%. These results led some analysts to opine that the Federal Reserve's (FED) delay in initiating rate cuts could push the U.S. economy into a recession.

On the physical oil market side, crude, and product inventories have been declining recently. Data published by the Energy Information Administration (EIA) showed that U.S. commercial crude oil inventories retreated for the fifth consecutive week; the fall was 3.436 million barrels, exceeding expectations that the drop would be narrower: 1 to 2 million.

Meanwhile, U.S. gasoline inventories also fell to their lowest level of the year. Refinery problems further reduced domestic supply, while demand remained above the important 9 million bpd mark, a healthy summer consumption. According to the EIA, the contraction in gasoline inventories was 3.67 million barrels, 1.6%.

U.S. crude production continues at around 13 million bpd, with no signs that operators have decided to increase their efforts to boost production. This week, according to Baker Hughes, the change in drilling activity in the U.S. was again negative, 3 units went out of service, although two correspond to natural gas activities. At the international level, Baker Hughes reports a fall of 23 units in the week (-27 versus the previous year).

Additionally, the delay in the delivery of two Floating Production, Storage, and Offloading (FPSO) units, one in the Gulf of Mexico and another in Brazil, as well as the forest fires in Canada and the high probability of hurricanes in the Gulf of Mexico, might reduce the available supply during the year.

Otherwise, Thursday's meeting of the OPEC+ monitoring committee made no important policy recommendations, although it left the door open regarding the schedule for undoing rate cuts.

During this storm in financial markets, supply and demand fundamentals, once the most valued indicators in the oil market, have been overshadowed by the market's valuation of economic forecasts and their potential impact on oil demand.

On the other hand, although it involves relatively minor volumes, political instability in Venezuela could cause a reduction in its exports.

GEOPOLITICS 

As with the fundamentals of the oil industry, the market shows indifference to events in the Middle East, which could lead to extended conflict in the region. The market’s reaction seems to arise from Iran’s lack of response, for the moment, to the Israeli incursions; despite threats from Ayatollah Ali Khamenei to act in retaliation for the death that occurred in Tehran.

The most forceful event this week has been the assassination of Ismail Haniyeh in Iran, a day after a high-ranking military figure from Hezbollah also died in an Israeli attack in Beirut. Early indications suggest that Haniyeh and his bodyguards died after a rocket hit the house where he was staying in Tehran. Israel typically does not comment on its operations abroad but this attack seems to have its signature, and, therefore, all eyes inevitably focus on them: it is believed that Israeli planes fired rockets from outside Iranian airspace. The U.S. has ordered the deployment of additional warships and fighter planes to the Middle East, supporting Israel, amid rising tensions in the region.

While the attack is being investigated, the political consequences are in sight. The most obvious is the damage to the fragile efforts to negotiate a ceasefire in Gaza. Ismail Haniyeh was not involved in day-to-day events in Gaza, but as the leader of Hamas, he was a critical interlocutor in negotiations mediated by Qatar, the United States, and Egypt. U.S. officials had recently suggested that ceasefire negotiations could soon succeed, although that same suggestion has been announced several times without any success.

On the front of the war between Russia and Ukraine, drone and missile attacks continue from both armies. The most relevant attack, from an oil perspective, is the night attack on the Russian airfield of Morózovsk and various oil depots and fuel storage facilities in the Russian regions of Belgorod, Kursk, and Rostov. This offensive continues to undermine Russia's ability to export oil and fuels.

Meanwhile, in the U.S., Kamala Harris secured enough votes to become the Democratic presidential candidate and announced that, in the coming days, she will make public her selection for vice president. The current vice president will be closely watched regarding her performance in handling situations that the U.S. must confront with an outgoing president and a vice president with a relatively short political career.

PRICE BEHAVIOR 

The beginning of August has been forceful for oil prices: they saw 6% of their value evaporate in the few days of the new month.

As detailed in our analysis of the fundamentals, the oil market has reacted to variables that threaten a fall in demand, mainly due to the deterioration of economic indicators and its interpretation of relative geopolitical calm. The oil market's perception ignored inventory reductions, lower global production forecasts, as well as threats of an escalation of conflicts in the Middle East.

As such, the benchmark crude oils Brent and WTI, at market close on Friday, August 2, were trading at $76.81/bbl and $73.52/bbl, respectively, another week of deterioration in oil prices.

 

VENEZUELA

Venezuela Fights On

As we anticipated in our last issue, the National Electoral Council (CNE) offered the first bulletin with the results of the presidential elections in Venezuela in the early morning of Monday, July 29. Elvis Amoroso, president of the CNE, reported that, with 80% of the votes counted, Nicolás Maduro had been elected as president of the Republic, defeating the opposition candidate, Ambassador González Urrutia. Within a few hours, in a rush and without delay, and without fulfilling the required legal extremes, the CNE proclaimed Maduro as president-elect.

 

The opposition's reaction was immediate, describing the CNE's actions as a gigantic fraud. Serious international observers were quick to reflect their doubts and astonishment regarding the veracity of the announced result. In record time, the opposition, to the regime's surprise, began a process of publishing the electoral records generated at the voting centers, which attest to the opposition's overwhelming victory and evidenced an electoral fraud of historical proportions. The electoral records shared so far (80%) leave no room for changes in the results, due to the abysmal difference between the candidates. The opposition's victory is so overwhelming that several countries, including the U.S., have already recognized Edmundo González Urrutia as the winner of the July 28 election.

The Carter Center, the only international observer authorized by the regime, promptly withdrew from Venezuela due to security concerns, later confirming that the process could not be qualified as democratic. International authorities agree with the opposition in demanding that the CNE must show the original records from each polling station, which to date has not occurred.

Under the pretext of constitutional protection, the regime turned to the Supreme Court of Justice (TSJ) to try to give a legal veneer to the fraud and bypass the CNE's obligation to comply with its duty to publish electoral data. The regime's control over all institutions and powers, including the CNE and TSJ, is widely known, so little can be expected from this instance, which equally has no constitutional powers to address the issue.

Protests in the streets became widespread, and the regime opted to use repression and persecution of opposition leaders. In particular, it dedicated itself to detaining polling station witnesses without any judicial order, probably to extract information from them or to use forced statements to dismantle the case of the opposition's victory. The National Guard and police attacked the gatherings with tear gas and by firing pellets at protesters, with a tragic result of at least 11 murders and 1,101 detainees (according to Foro Penal), including two minors.

The prosecutor's office lashed out at Edmundo González and María Corina Machado, accusing them of participating in the hacking of the CNE's transmission system, a hack that never existed, according to international experts. In any event, María Corina Machado is very active, but in “safekeeping”. This Sunday, the opposition called for marches throughout the country and abroad, which turned out to be massive. It's likely that Machado, who has proven to be a skillful political strategist, will surprise the regime again in the days to come.

The regime looks cornered, having proven the fraud they are trying to establish. However, for now, they have the support of the high military command and non-democratic friendly countries such as Cuba, Nicaragua, Iran, and Russia, and the suspicious ambiguity of Brazil, Mexico, and Colombia.

If they get away with it, the regime will face greater isolation than before the relaxation of U.S. sanctions. The U.S. and Europe could impose new sanctions against those involved in the fraud, and possibly against their sources of funding, from which the oil industry does not escape. Judging by the rumors circulating the oil lobby in the U.S., not even Chevron feels immune to the events.

In principle, the continuation of projects under OFAC licenses, if the electoral fraud is consolidated, will be negatively impacted by the U.S. government decisions. Furthermore, the foreign oil companies may decide not to further expose themselves to the growing country risk. All of the above will shake down oil revenues but would benefit the regime's acolytes who feed off the shadow transactions of crude oil and product sales.

Oil Operations

Regarding production activity, in the Boscán field, in the west of the country, about 12 wells were incorporated into production after improvements in their artificial lift system. In the extended Block of PetroQuiriquire, operated by Repsol, several inactive wells were put online. Drilling activity in the country remains at 4 drilling units.

The week's production averaged 823 Mbpd, geographically distributed as follows:

• West                          186 (Chevron 85)

• East                            141

• Orinoco Belt              496 (Chevron 102)

• TOTAL                      823 (Chevron 187)

 

With this level of production during the last week, the month of July averaged 812 Mbpd, of which 180 Mbpd correspond to Chevron.

The refineries processed 235 Mbpd of crude oil and intermediate products. Gasoline production reached 72 Mbpd, while diesel production remained at 78 Mbpd. Long queues were observed at service stations during the days leading up to the elections. However, after the elections, the streets were desolate with low attendance at service stations.

July closed with crude oil exports of 540 Mbpd, almost 100 Mbpd below what was programmed, possibly the complex situation of the pre-and post-election days have reduced loading operations at the terminals. Only exports to the U.S. maintained a high level of 242 Mbpd: with 90 Mbpd of Boscán, 84 Mbpd of Hamaca crude, and 68 Mbpd of Merey 16 crude.

China received 133 Mbpd, India 114 Mbpd, Spain 34 Mbpd, and Cuba 17 Mbpd. The export of residual fuel was 63 Mbpd.

VENEZUELA: THE DAY AFTER

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco

   

 

This past Sunday, the long-awaited Venezuelan presidential election took place in a framework of optimism, and hope, and, as many feared, plagued with arbitrariness and blatant electoral crimes by the regime and state institutions. The prohibition of entry to the international press and observers not aligned with the regime. The relocation of voting centers in almost all states, coupled with schemes to limit votes outside Venezuela, and countless other electoral tricks, have tainted not only the voting but also the manipulated result.

 

Once the polling stations closed, the CNE began interfering by not allowing the formally designated opposition witnesses into the totalization center in Caracas. While, at polling stations, the work of opposition witnesses was hindered, and the delivery of copies of the vote tallies obstructed. The combination of the two factors revived procedures from other elections in the past.

 

Exit polls from recognized companies agreed that Edmundo González Urrutia received around 60% of the votes, compared to a meager 30% obtained by Maduro; the images of citizens in the streets, plus the statements from the opposition leadership, reflected quiet triumphalism. However, during the night, there were signs that the regime was starting to play its cards to reverse the outcome of the votes. The Minister of Defense, General Padrino López, came out on national TV with language that clearly warned of what the high command expected from the CNE. Problems in obtaining the votes tally from polling stations multiplied for the opposition. At the stroke of midnight, after a tense wait, the president of the CNE, Elvis Amoroso, declared that with 80% of the voting tables scrutinized and with a "forceful and irreversible" trend, Nicolás Maduro had won the election with 5,150,092 votes, 51.20% of the vote. Meanwhile, Edmundo González Urrutia had only received 4,445,978 votes, 44.2%, with a very high turnout of 59%.

 

Immediately after, candidate Edmundo González Urrutia, accompanied by leader María Corina Machado, surrounded by a group from the opposition command, gathered the media. Machado stated:

 

"We want to tell all Venezuelans and the entire world that Venezuela has a new president-elect: Edmundo González Urrutia. This has been so overwhelming that we have won in all sectors of the country, in all social groups, and in all states. 

We have more than 40% of the voting minutes. We have 100% of the vote tallies transmitted by the CNE. And all this information confirms that Edmundo González obtained 70% of the votes. It is the presidential election with the largest margin in history. When I say that everyone knows what happened here, I start with the regime itself, and they know what they want to do."

 

In summary, the opposition considers the election a fraud of gigantic proportions and is preparing, although it's unclear how, to defend its victory in Sunday's elections. The opposition called on the armed forces, the international community, and citizens to prepare for the defense of the result. It remains to be seen what resources the opposition will use to handle such a setback.

 

At the close of the press, several presidents in the region have expressed their doubts about the result announced by the CNE, as have the US, several European countries, and the European Union. As expected, the regime's allied governments, Russia, Nicaragua, Bolivia, Cuba, and others, were the first to express their support for Maduro for the result.

 

President Gabriel Boric of Chile was the first to denounce that the results were difficult to believe. The opposition and surely the voters are considering it as electoral fraud, reminiscent of what Venezuela's penultimate dictator, General Marcos Pérez Jiménez, manufactured on December 15, 1957, which led to his overthrow weeks later.

 

An initial reading of these events is that the recovery of the Venezuelan oil industry if the electoral fraud is consolidated, will be very uphill. Bad news for the regime, but good news for OPEC, Russia, shale oil, and others who have benefited from the incompetent handling of oil by Chavismo and its heirs over the last quarter-century.

 

MEANWHILE, DOUBTS ABOUT DEMAND OVERSHADOW THE OIL MARKET

 

The same elements that caused volatility in the oil market last week continued to wreak havoc this week. Concerns about Chinese demand, plus the continued threat of a potential recession, helped create a negative perception that the market digested, along with other fundamentals, pushing prices down.

 

This pessimistic sentiment could not be mitigated by objectively positive elements provided by demand and supply fundamentals in terms of inventory reduction and supply disruptions. Thus, crude oil futures retreated sharply on Friday due to a pre-weekend sell-off.

 

This behavior of oil prices left those who follow and invest in the oil market without a firm direction. However, in our opinion, this is a good time to invest well in the price of oil or in oil companies, which, we believe, are destined to recover their value.

 

FUNDAMENTALS

 

The physical oil market provided evidence indicating a very tight market. First, commercial crude inventories in the US continued to decline, and this week gasoline inventories joined the descent. Indeed, the Energy Information Administration (EIA) revealed a reduction of 3.75 MMBBLS in crude inventories, and a sharp drop in gasoline stocks of 5.5 MMbbl, compared to last week. Crude inventories, often incorrect in the EIA's weekly publication, must be seen in the context of the last few continuous weeks, which reveal a cumulative reduction of about 20 MMbbl.

 

Disruptions in production in Canada, reduction adjustments agreed within OPEP+ for countries that have exceeded their volumetric commitments, and declining production in Russia, Mexico, and the North Sea, for example, point towards an undersupplied market at least until well into 2025.

 

US GDP growth figures, well above expectations at 2.8% for the second quarter, should have lifted positive sentiment in the market, but, as we have already highlighted, these signals went unnoticed amid a generalized sell-off of technology stocks and news from China.

 

 

GEOPOLITICS

 

Traditional geopolitical risks, which have impacted the oil market recently, have come to be considered a backdrop, and their ability to make material changes that could affect the complex oil supply and demand system is being discounted. This perception of pseudo-normality applies, on the one hand, to the prolonged wars between Ukraine and Russia, as well as to the conflict in the Middle East between terrorist groups and Israel.

 

War activities have had their ups and downs. As recently as the last days of the week, Ukraine seems to have carried out two successful attacks, one on the Murmansk airfield, more than 1600 km from its borders, and another in Kursk; where they set fire to oil infrastructure, including a huge fuel depot. Ukrainian cities have been the target of numerous Russian drone attacks.

 

Similarly, in the Middle East, skirmishes between Hamas, Hezbollah, Houthis and Israel have continued. Hezbollah has launched an attack on the Golan Heights that caused several deaths and injuries. Israel will surely carry out a counterattack. Also, the activity of the Houthis, who represent the greatest possibility of causing problems in the distribution of oil products, increased in scale, after Israel attacked Houthi facilities in Yemen, in response to a previous attack by the rebel group on Israeli territory. In any event, regardless of the assessment that the oil market assigns to it, the event caused by Hezbollah has the potential to become a focus of escalation of hostilities.

 

Regarding the U.S. elections, scheduled for November, the scenario has become complicated with President Biden's withdrawal and the passing of the baton to Vice President Kamala Harris. Another process whose implications are too early to envision.

 

As things stand, the oil market seems to consider that the geopolitical risk component in oil prices has been reduced to practically zero. Myopia or reality?

 

PRICE BEHAVIOR

 

The oil market seemed to have found support in the crude and product inventory figures reported by the EIA mid-week, despite poor global macroeconomic performance. China not reaching its GDP targets, stagnant European growth and inflationary concerns in the U.S., partly related to higher-than-expected growth. The market moves in a sea of mixed feelings: on one hand, low Chinese growth will result in reduced demand, and on the other, sustained growth in the U.S. tends to maintain inflationary pressure. Therefore, the start of interest rate reduction could be postponed, which could generate an erosion of demand.

 

According to investment bank Goldman Sachs, investor sentiment leaned towards a bearish assessment of the risks of a new Trump presidency and that there would be a stronger dollar, which ended up fueling concerns about oil demand.

 

In any case, in our analysis, the market remains in a trend of higher demand than supply, so the fundamentals would support an increase in prices. This should be above $85/bbl in terms of Brent Crude and without a political risk premium. But nothing could prevent prices from falling to levels not seen since June of this year, and another consecutive week of losses.

 

As things stand, the benchmark Brent and WTI crudes at market close on July 26 were trading at $81.13/bbl and $77.16/bbl, respectively.

 

VENEZUELA

Oil operations

 

The drilling activity in the country remains at 4 drilling units. Crude production shows a slight increase due to the reduction of deferred production in the joint venture PetroQuiriquire, in the west of the country. Meanwhile, refining retreated due to problems at the Cardón refinery.

 

The week's production averaged 812 Mbpd, geographically distributed as follows:

• West                                     179 (Chevron 72)

• East                                       141

• Orinoco Belt                          492 (Chevron 100)

• TOTAL                                   812 (Chevron 172)

 

Chevron continues its drilling activity in PetroIndependencia: currently completing the ninth well of its planned campaign. A second rig is scheduled to start operations in September.

 

The refineries processed 235 Mbpd of crude and intermediate products. Gasoline production reached 73 Mbpd, while diesel production remained at 78 Mbpd. Long queues at service stations were observed during the days before the elections.

 

Exports scheduled for July indicate a volume similar to that of June, approximately 657 Mbpd of crude and about 64 Mbpd of products."

 

PRICES DROP AFTER AN UNCERTAIN WEEK

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco   

  

In a week influenced by a combination of geopolitical events, economic indicators, and supply and demand factors, oil prices reacted with uncertainty. It all began with a drop in prices in response to the relatively low impact of Hurricane Beryl on oil operations. This erosion in prices was reversed by announcements of additional drains on commercial crude and product inventories in the U.S. and a weaker dollar. In this back-and-forth, perspectives changed again due to high expectations of achieving a ceasefire agreement in the Gaza conflict, and the revelation that U.S. consumer confidence had waned. On Friday, well into the day, it emerged that the agreement between Israel and Hamas was not going well, prices began to rebound, but too little and too late to avoid a week of losses.

As if that weren't enough, the already known counterpoint between the demand projections of the IEA and OPEC has been revived, each organization showing its bias, although OPEC's verses have been more accurate, for now.

FUNDAMENTALS

Hurricane Beryl and other meteorological factors 

At the beginning of the week, Tropical Storm Beryl approached the U.S. Gulf Coast, causing concern in crude markets. Major Texas ports, including Corpus Christi, Freeport, Houston, and Galveston, closed in preparation for the storm's arrival. However, the storm's impact on oil infrastructure was less severe than anticipated and only manifested in the shutdowns of some gas liquefaction plants and petrochemical production facilities; tanker transport was also suspended. The relatively low impact on supply operations diminished the importance of this variable, contributing to downward pressure on prices.

Forest fires in Canada continue to be a threat. Near oil activities in northern Alberta, firefighters managed to contain the advance of flames in the oil sands region. Still, dense smoke on Friday continued to prevent the resumption of most oil production. More than 100,000 residents of Fort McMurray, in northeastern Alberta province, were evacuated; the Athabasca Oil Sands facilities were affected, interrupting the extraction and refining of approximately 1.2 million barrels of oil per day.

In Ecuador, the Oleoducto de Crudos Pesados (OCP) resumed operations on Wednesday after 16 days of shutdown due to the threat of landslides in the mountainous terrain of the Amazon where it passes. According to the pipeline operator, OCP Ecuador S.A., pumping was restored thanks to the construction of two 2.8-kilometer “bypasses” in the erosion zone of the Quijos River. It now proposes to reopen the closed production of about 37 MBPD.

 

U.S. Inventory Data

In its customary Wednesday report, the Energy Information Administration (EIA) announced another weekly drop in commercial crude inventories of 3.4 MMbpd, far exceeding expectations. Gasoline inventories also decreased by 2.0 MMbbls, indicating strong summer fuel demand, which helped stabilize prices after Monday's fall; although as we've warned in previous editions, these weekly figures should be analyzed carefully.

Economic Indicators and Perception

The market is more attentive than ever to U.S. economic data and its interpretation and use by the Federal Reserve (FED). The release of the Consumer Price Index (CPI) on Thursday showed that inflation is moderating, with a rate of 3% over the last 12 months, near the lowest level in more than three years. As expected, hopes returned for possible interest rate cuts later in the year, which in turn could stimulate crude demand.

A monthly survey conducted by the University of Michigan showed that U.S. consumer confidence fell to an eight-month low in May, although inflation expectations improved for the next year and beyond.

Russia, the Unknown Variable

Russia has seen its ability to export crude and products diminished. Before it invaded Ukraine, it produced around 10.5 MMbpd, including the participation of multinational companies. The invasion dramatically changed Russian oil activity: the absence of foreign partners, access to equipment and parts, sanctions and price caps, and more recently constant attacks on its oil infrastructure. All this has taken a toll on the hydrocarbon industry in Russia, visible in the fall in production to 9.0 MMbpd, cleverly disguised as cuts to comply with OPEC+ agreements. Russian shipments of petroleum products fell by 4.2% in June compared to May, largely due to emergency repairs being carried out on refineries and terminals attacked by Ukraine. According to reports, 7.9% of refining capacity is in these conditions.

OPEC+ Remains Firm at the Helm.

According to OPEC secondary sources, the OPEC+ cuts are being honored, thanks to the effort of a group of countries that could produce somewhat more, such as Saudi Arabia, Iraq, the UAE, and others that can barely cover their quota. The effect on the market is the same regardless of the motivation for the cut.

China's Economic Challenges

Data from China, the world's largest oil importer, revealed that economic obstacles persist, originating from the mortgage crisis affecting banking, and the lack of effectiveness of government incentives. Despite official stimuli, persistent growth has not been achieved, influencing the demand for crude required by refineries.

On the other hand, due to the stagnation of domestic consumption, China's trade surplus soared to a historic high in June: an increase in exports offset an unexpected fall in imports, which, on the other hand, increases the risk of greater tensions with international partners. The growing imbalance has already led some nations to impose additional tariffs on Chinese imports, including electric vehicles, which could bring economies closer to a trade war.

Where Demand is Heading

As we mentioned in the introduction, the contrasting demand perspectives from the main energy agencies added uncertainty to the market. The International Energy Agency (IEA) reduced its demand growth forecast, predicting global demand growth of 710 MMbpd in the second quarter, mainly due to a contraction in Chinese consumption. The IEA cited factors such as mediocre economic growth, improved energy efficiency, and the growing adoption of electric vehicles.

In contrast, OPEC maintained a more optimistic outlook, maintaining its demand growth forecasts. The organization expects global oil demand to increase by 2.25 MMBPD in 2024, citing persistent economic growth and the increase in summer travel as key drivers of fuel consumption.

GEOPOLITICS

 

The neuralgic points from a geopolitical perspective continue to be the same:

• The Russian invasion of Ukraine and its conversion into a war between the two countries

• The Middle East War between Israel and the different terrorist factions financed by Iran (Hamas, Hezbollah, and Houthis).

• Electoral results in Europe

• The elections in the U.S. and the Biden enigma

Except for the real effects already analyzed in the fundamentals section dedicated to Russia, the effects so far have been limited to the incremental costs of not being able to navigate freely through the Red Sea and the Suez Canal. However, oil prices have not been immune to diplomatic efforts to dissipate tension, as seemed possible during the first days of the week. This turned into the opposite: a possible escalation that increases the perception of risk and, therefore, prices.

Regarding the election results in Great Britain, the Labor victory was expected and has already shown its first effects related to hydrocarbons, with the revocation of drilling permits in Lincolnshire, in northeast England. In France, the results were surprising, with the left coalition taking the best part, but leaving the country in a state of political disarray.

In the case of the U.S. electoral campaign, we find ourselves in an unprecedented situation. After President Biden secured the electoral college votes, which guaranteed his acclamation as a candidate at the Democratic Party Convention, the perception of Biden's cognitive deterioration and his inability to govern for the next 4 years, increased.

The real importance of the situation is that the two parties represent opposed agendas and the winner will define the international agendas in which the U.S. must exercise leadership, without underestimating the domestic agenda. At closing, an assassination attempt against Donald Trump was reported, from which he miraculously escaped. The aftermath of this event will surely affect the remainder of the campaign and the elections.

PRICE BEHAVIOR

A weaker-than-expected hurricane, falling inventories, supply interruptions in various geographical regions, elections with strong political changes, wars debating between diplomacy, bombing and trenches, and uncertainty in US politics, is a menu to disorient any market. This is what's happening to the oil market. The behavior of crude oil prices over the last 12 months resembles an electrocardiogram more than a price curve.

In a period of such uncertainty, our simplistic reading continues to be that we are in the presence of an oil market with growing demand and lagging supply. This is due to the lack of sufficient investment to balance the market and OPEC+ monitoring to prevent abrupt changes. We think oil prices will remain at the same current levels, plus a variable band depending on geopolitical risks that could aggravate the energy crisis that has been lurking in the panorama in one way or another since 2021.

As things stand, the Brent and WTI benchmark crudes were trading at the close of markets on Friday, July 12, at $85.03/bbl and $82.21/bbl, respectively. The market closed the week with a loss of around 2% compared to the previous week.

 

VENEZUELA

In 14 days, the Elections

A well-known saying goes: “Desperation is fury with nowhere to go”, this seems to describe Madurismo's election campaign. Disorientation has led it to use obviously contradictory elements, such as the relationship with the U.S. Sometimes it qualifies it as the imperialist devil, and sometimes as the one that gives legitimacy to the Maduro administration. Likewise, sanctions are either the cause of all the ills afflicting the country or a force that they have overcome.

Regarding international observation of the elections, definitely, the most reliable observer, the EU mission, will not be present. UN groups and the Carter Center are already in Venezuela.

Just as the regime's campaign has been lackluster, unfocused, and full of errors, its economic management has been relatively successful and true to its objectives. Anchoring the exchange rate to control inflation has proven to be increasingly costly. Implementing this has been possible thanks to the increase in prices and the increase in exported crude volumes, particularly due to Chevron's action.

In parallel, the other objective has been to increase public spending, to try to reconquer lost supporters. Despite having increased public spending, mainly due to improvements in tax collection by SENIAT, this does not seem to have been as effective as inflation control. According to analysts on the subject, public spending has not been reflected in domestic consumption.

Hydrocarbons Sector

Announcements of the incorporation of a new "B" partner in The JV, PetroCabimas, were marred by a publication from Suelopetrol. The Venezuelan company (or is, according to their statement) the original national partner in the operating contract, and then a 40% shareholder in the Joint Venture migrated and approved by the National Assembly in 2006. It is unknown how the legal situation of the two conflicting partners is being managed unless Suelopetrol decides to sell its shares to Ricardo Cisneros' group. Due to the legal and operational complexity of this business, we think that this Joint Venture is another that will drag along, while the political panorama is elucidated.

Operations

From an operational perspective, 4 drilling rigs are active. A 5th unit is scheduled to start activities for Chevron in PetroIndependencia, but it will be in September. With this unit, operating the last 3 months of the year, the drilling of the 17 wells budgeted for this year by the North American company will be completed, to reach almost 200 Mbpd of gross production in its four Mixed Companies.

 

In western Venezuela, deferred production was reduced partly in Boscán and partly in the extended block of PetroQuiriquire, operated by Repsol. Meanwhile, in the east, two other wells in the belt began commercial production. So national production increased to 807 Mbpd, geographically distributed as follows:

 

• West                         174 (Chevron 71)

• East                          141

• Orinoco Belt             492 (Chevron 199)

• TOTAL                      807 (Chevron 170)

 

The refineries, despite the problems at El Palito, processed 245 Mbpd of crude and intermediate products. Gasoline production reached 78 Mbpd, while diesel production remained at 77 Mbpd.

Exports scheduled for July indicate a marginally lower volume than in June, with approximately 650 Mbpd of crude and about 70 Mbpd of products.

OPTIMISTIC VOICES GAIN GROUND, FOR NOW

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo^[1] and Luis A. Pacheco^[2]    

 

In a week when U.S. Independence Day festivities shortened active market days, the announcement of a reduction in crude oil, gasoline, and diesel inventories in the U.S. has generated a well-founded expectation that summer won't be as bad as projected a few weeks ago. In parallel, the geopolitical checkmate on hydrocarbon supply, caused by conflicts in Ukraine and the Middle East, is compounded by meteorological threats, from the effects of Hurricane Beryl to floods in Ecuador and forest fires in Canada, bolstering a bullish market. Thus, with the bulls loose, crude oil futures rose and reached new highs, closing a fourth consecutive week of gains.

 

FUNDAMENTALS

 

Weather phenomena are affecting, and threaten to impact even more, the supply of crude oil and fuels. Hurricanes, torrential rains with landslides, and extreme droughts generating forest fires are some of these phenomena.

 

Indeed, refineries around Corpus Christi, Texas, including one from CITGO Petroleum, could be affected depending on the projected path of Hurricane Beryl in the Gulf of Mexico. It could temporarily reduce U.S. refining operations or crude oil exports. It could also affect oil and refined product trade between the U.S. and Mexico.

 

Most models predict a second impact in the western Gulf of Mexico, as Beryl strengthens in the warm Gulf waters near the Texas-Mexico border; the latest coordinates suggest a more northerly route that could affect Corpus Christi and other oil centers, including Galveston/Houston. Several major operators have conducted preventive evacuations of offshore platforms, including Shell, BP, ExxonMobil, and Chevron, which could disrupt production.

 

In Ecuador, as we reported last week, landslides on the route of its two major pipelines forced the suspension of pumping: up to 100 MBPD stopped being pumped to Pacific Ocean terminals. One of the pipelines resumed pumping, but 37 MBPD of Ecuadorian production is still shut down.

 

Canada is preparing for a forest fire season that puts oil production in Alberta at risk, just as companies plan to expand their production to take advantage of the recently expanded pipeline to the West Coast (TMPL), which allows exports to the U.S. and Asia, eliminating the heavy discounts that affected the economics of Canadian heavy crude.

 

Canadian operator Suncor Energy has closed at least one of its oil sands exploitation platforms in Alberta, where forest fires threaten production in the oil-rich province. According to reports from secondary sources, the company suspended operations at Firebag (215 Mbpd) on Thursday and evacuated all non-essential workers, threatened by fires less than 10 km away.

 

On the other hand, U.S. inventory data, published by the Energy Information Administration (EIA) in its usual Wednesday report, suggests robust hydrocarbon demand in the U.S. Commercial crude inventories fell by 12 MMbbls, the market expected a reduction of only 2.5 MMbbls - although as we have warned, this may be a correction of past figures. Furthermore, gasoline and diesel inventories showed declines. We qualify it as a “correction” because a sudden drop of this magnitude usually has to do with the calculation method used by the EIA, which consists of a balance of numerous figures related to imports, exports, and refining, adjusted by a factor that determines “presumed” production. In any case, the market saw this as positive.

 

U.S. production remains around 13 MMbpd, while drilling activity, reported by Baker Hughes, increased by 4 units, but was mainly oriented to offshore activity.

 

China has maintained a relatively constant import level, slightly above 11 MMbpd, which together with domestic production of 4.2 MMbpd, results in 15.2 MMBPD of crude available for its refineries. However, only 14.3 MMBPD were processed in Chinese refineries, leaving a difference of almost 1.0 MMbpd, which may have been incorporated into strategic reserves or commercial inventories.

 

OPEC+ continues to maintain exemplary discipline, jealously complying with the latest plan agreed at the recent OPEC+ meeting and aided by problems in Russia (see below).

 

Regarding macroeconomic prospects, the published minutes of the Federal Reserve (FED) June meeting show that they still don't have enough confidence to start the rate cut cycle. It's mentioned that additional favorable data was needed to have more confidence that inflation was moving sustainably towards 2%. The most recent trends indicate that inflation in the U.S. is moderating, and the labor market has created fewer jobs than the previous month, it certainly seems that the FED's deliberate attempt to slow down the U.S. economy is finally bearing fruit, which tends to confirm that we are approaching the end of the restrictive policy, although this has been reiterated in the past without final resolution. In Portugal, at the annual meeting of the European Central Bank (ECB), Christine Lagarde expressed carefully guarded optimism about efforts to moderate inflation.

 

GEOPOLITICS

 

It's been almost 900 days since Russia began the invasion of Ukraine and even though the aggression has stalled for long periods, the Russian army is now advancing slowly but surely in the eastern region, bombing Toretsk, a city under Ukrainian control, but very close to Horlivka, controlled by the de facto Donetsk People's Republic, part of a broad Russian advance that Ukraine has not been able to stop. The city of Toretsk is devastated and time is running out for anyone who wants to leave it. On the other hand, pro-Ukraine partisans inside Russia claim to have blown up a railway line inside Russia used to transport North Korean ammunition to the front. Images showing the explosion of a passing train could not be independently confirmed.

 

At the time of writing, a Ukrainian drone attack was reported during the early hours of Sunday, July 7. A fire broke out at a Russian ammunition depot in the Voronezh region, near the border. The local governor declared a state of emergency. According to Ukrainian sources, it's a depot of ammunition and ground-to-ground and ground-to-air missiles. This and other actions continue to put pressure on the Russian energy industry. The Russian authorities speak of a production of 10 MMbpd when real production languishes near 9 MMbpd. Russia has had to resort to dark practices for its exports, using a fleet that violates international navigation laws and rules to circumvent Western sanctions; something similar to what Iran and Venezuela do.

 

On the diplomatic side, Hungarian Prime Minister Viktor Orbán arrived in Moscow on a supposed “peace mission” a few days after visiting Kyiv, which provoked a reaction from European Union leaders who said that Orbán had no mandate to represent the bloc. On Friday, the newly re-elected President of the European Commission, Ursula von der Leyen, warned that “appeasement will not stop Putin”. “Only unity and determination will pave the way for a comprehensive, just and lasting peace in Ukraine.”

 

In the Middle East region, given the ongoing confrontation of Israel with Hamas in Gaza and with Hezbollah on the border with Lebanon, fears of a possible large-scale war in the area are growing. In any case, it's reported that Israel is considering a new proposal from Hamas on a pause in fighting in Gaza and the release of hostages. A senior Hamas source said on Saturday that a revised proposal for an agreement between Hamas and Israel agreed that talks to release Israeli hostages, including remaining soldiers and men, would begin within 16 days after the first phase of the agreement.

 

In this context, it's important to note the result of the presidential elections in Iran, the main sponsor of the armed groups surrounding Israel. Masud Pezeshkian, the reformist candidate, prevailed this Saturday in the second round of the presidential elections and will become the next president of the country, according to the Iranian Electoral Commission. Pezeshkian, a 69-year-old cardiac surgeon, achieved 53.6% of the votes against the ultra-conservative Saeed Jalili with 44.3%, in elections that had a participation of 49.9%, with 30,573,931 votes.

 

The electoral process coincides with a crisis of legitimacy for the Islamic Republic and its supreme ruler, the Supreme Leader, Ayatollah Ali Khamenei. Some observers maintain that the new president could represent a turning point in Iran's relations with the West and as such could affect the course of the war in the Middle East. There's also talk that he could have a less restrictive policy with women and promote a détente in Iranian society. We'll see.

 

In other countries, interesting results have occurred, especially in Europe, which could change the position versus Ukraine and a change in energy transition policies that originated in the Paris Agreement, 2015 (COP 21).

 

In the United Kingdom, as polls predicted, Sir Keir Starmer led the Labour Party to a resounding victory, closing a cycle of 14 years of Conservative government, with results almost as impressive as Tony Blair's victory in 1997. This change could reverse some of the more permissive environmental policies of the outgoing prime minister, although the position of the trade unions is not necessarily aligned with the party.

 

In France, the second round was held on Sunday, July 7. In an unexpected result, early results place the leftist NFP coalition with the majority of seats, but without the absolute majority needed to govern; Macron's centrist coalition, Ensemble, in second place; and the far-right RN, which had won the first round, in third place. Final results are not expected until early Monday, but as no party has reached an absolute majority, the country's future remains uncertain.

 

The November presidential elections in the U.S. continue to be full of uncertainty and possible changes in the alignment of candidates. A growing chorus of voices from the Democratic Party and independents insists, with increasing force, that President Biden step aside after his disastrous performance in the debate with Republican candidate Donald Trump, and the ineffective television interview with George Stephanopoulos, which was supposed to straighten out the mess.

 

It's increasingly clear that the U.S. president, his party, and the country are inexorably sliding towards a political crisis that raises the extraordinary possibility that a presumptive candidate could be pushed aside in the final stretch before his party's national convention and months before an election in which two opposed visions of the future of the U.S. compete.

 

The dilemma seems to have caught the Democratic Party off guard; without a widely accepted replacement, as Vice President Kamala Harris does not have the necessary popularity to run for the presidency of the world's largest economy.

 

Other News

 

• The state of Alaska is suing the U.S. Administration for the Bureau of Land Management (BLM) of the Department of the Interior's decision to restrict access to drilling and mining in a large part of the National Petroleum Reserve-Alaska (NPR-A). “The new rules were approved without adequate participation from affected parties, exceeded Congressional authorization, and were hastily implemented to circumvent Congressional oversight,” the state of Alaska said in a statement announcing the lawsuit it had initiated.

 

• Nigeria's Upstream Petroleum Regulatory Commission (NUPRC) gave the green light to agreements between ENI's local unit, Nigerian Agip Oil Company, with Oando LG, and Equinor with Project Odinmim, clearing the way for the change of hands of two key onshore assets. Major oil companies operating in Nigeria have been abandoning their onshore fields affected by theft, vandalism, and pollution to focus on deep-water explorations.

 

PRICE BEHAVIOR

 

The unusual alignment of the stars: supply interruptions due to weather events, reduction of crude and product inventories in the U.S., and a constant perception that geopolitical elements could extend and affect fuel supply, added to the position of central banks, probably reversing the restrictive monetary policy adopted since the 2021 energy crisis before the end of the year, added to the market's optimistic perception and prices thus proved it.

 

Participants in the oil market have begun to unwind short positions (low future prices) at a rapid pace, while increasing long positions (high future prices). Crude futures could be supported by speculative purchases, as OPEP+'s commitment to production cuts remains firm, which would result in higher prices for longer.

 

Thus, at the close of markets on Friday, July 5, and despite a last-minute adjustment, benchmark Brent Crude and WTI crude were trading at $86.86/bbl and $83.44/bbl, respectively, 2% higher than the previous week, the highest levels since April this year.

 

However, some analysts said that gains were limited during the week by concerns about China and Europe's performance during the second half of the year.

 

VENEZUELA

The false security of a military parade

 

During the traditional military parade on July 5, the official candidate, Nicolás Maduro, addressed representatives of the armed forces in a warning voice: “I swear to you, that this commander-in-chief's baton will remain in good hands in the years to come. It will never fall into the hands of any oligarch or puppet” (as he defines opposition candidate Edmundo González Urrutia, who doubles him in polls). A clear demonstration of how the regime consistently disrespects the constitution in complicity with the military high command.

 

What we don't know is whether this was a message from Maduro to the military or, on the contrary, it was a script chosen by the military high command, concerned about the loyalty of the armed forces.

 

The National Electoral Council carried out an electoral simulation that the PSUV used to “oil the machinery”. They made a great effort, but the result was, like the consultation on Guyana, little interest and much abstention, so the event was little publicized.

 

The official electoral campaign, which officially began on July 4, has continued with its abuses of power, arresting political adversaries, intimidating the opposition voters, and making excessive and illegal use of public money and assets for the campaign in their favor. These tactics are expected to intensify as the elections approach and their message fails to resonate with the population. They were also handing out gasoline tickets so that supporters could transport themselves to official gatherings.

 

The regime held a virtual meeting with representatives of the Biden administration, which was unknown to the opposition. Neither the PU, Edmundo González, nor María Corina Machado were aware of the meeting, much less its agenda. Republican Senator Marco Rubio described the meeting as inconvenient and a political error by the White House. In his opinion, these conversations only give the regime legitimacy it does not have and undermine the opposition's crusade.

 

A few weeks before the election, a decision in which the regime disqualifies the MUD card or candidate Edmundo González Urrutia himself, or even suspends the elections for some extravagant reason, is not ruled out. The same U.S. representatives, Brian Nichols and Francisco Palmieri advocate maintaining the path without obstacles until reaching elections in which “the people have the opportunity to express themselves”, in a clear allusion to potential desperate acts by the official party.

 

In the economic aspect, the increase in oil prices and the normalization of the oil export process, under the extremes of General License 44-A, has generated incremental income for the regime. However, the exchange rate anchoring policy is proving very costly, the gap between the official exchange rate and the parallel one has increased considerably, to 10% compared to 5% at the beginning of the year. After a surprising fall in public spending in June, July is beginning with a strong rebound, but it could be late for electoral effects.

 

Hydrocarbons Sector

 

PDVSA signed a Joint Venture agreement, pending approval by the Assembly, with Globalable Holding SL, a company owned by Venezuelan businessman Ricardo Cisneros. Through this agreement, Globalable becomes PDVSA's “B” partner with a 40% shareholding in the joint venture, PetroCabimas, on the eastern shore of Lake Maracaibo. After the signing, it was announced that the plans were to bring production to 50 MBPD (without mentioning the required levels of investments and expenses), a level never reached since the block was granted as an operating agreement in the third Round, in 1997. Most of the wells are marginal producers that will have to be replaced by new wells with modern architectures and prepared for alternate steam injection—with a significant investment.

 

During the week, PDVSA also reported having put into operation part of one of the natural gas compression plants in northern Monagas, which reduced the volume of gas flaring and venting and, according to the statement, allowed additional production to be opened in the Furrial Field. We believe it's a small operation, but the only information available is that from PDVSA. This news and others of little materiality seem to be part of a campaign to project activity in the oil industry in the face of the electoral process.

 

From an operational perspective, 4 drilling rigs are active in the country, and a fifth unit is about to enter operation for Chevron, in PetroIndependencia.

 

Three new wells from the belt entered production this week, raising national production to 798 Mbpd, geographically distributed as follows:

• West                                      170 (Chevron 68)

• East                                       142

• Orinoco Belt                          486 (Chevron 100)

• TOTAL                                  798 (Chevron 168)

 

Refineries maintained their processing level at 230 Mbpd of crude and intermediate products. Gasoline production reached 75 Mbpd, while diesel production remained at 72 Mbpd, insufficient to supply the national market.

 

The different sources that report on export levels differed in their reports on the volumes exported and their distribution among customers. Elements are as striking as one of the companies reporting no crude exports to Cuba, while the other indicates that up to 30 Mbpd of Venezuelan crude ended up in Cuba in June. The difference in information seems to be related to the fact that the shipments were made in tankers different from those traditionally used by Cuba and that the cargoes did not leave Venezuelan terminals but were transferred from tanker to tanker on the high seas.

 

 

CITGO

 

An appeals court in the state of New York ruled that PDVSA was right in maintaining that the Venezuelan Constitution does govern the validity of the 2020 Bonds.

 

The best way to present this judicial success is to reproduce the explanation of lawyer Jose Ignacio Hernández, who was intimately involved, along with the PDVSA ad hoc Administrative Board, in the decision to take the case to court. Lawyer Hernández says:

 

“On July 3, 2024, the Court of Appeals for the Second Circuit granted the appeal filed by PDVSA against the judgment of the Southern District Court of New York, which almost four years ago had dismissed the lawsuit for nullity of the PDVSA 2020 Bonds.

 

In practice, this means that the lawsuit will have to start over, but this time considering that, as PDVSA argued, the Venezuelan Constitution does govern the validity of the 2020 Bonds.

 

From many points of view, this is a historic ruling, not only for the case of the 2020 Bonds but, in general, to advance in strengthening transparency in public debt operations.”

 

Meanwhile, in Delaware, Judge Leonard Stark moved the hearing to consider bids in the PDV Holding auction to September 19. This was in response to the motion of the special trustee in charge of the process, Robert Pincus, requesting additional time to analyze the offers and ensure that the winning bid maximizes the value of the company; the hearing had originally been set for July 15. The decision of the Appeals Court in New York adds a new complexity to the auction process in Delaware.