At the turn of July and August, geopolitics once again took center stage in the oil market. The political crisis in Venezuela coincided with another round of escalation between Israel and Iran, which raised expectations of a new surge in prices, even though the market had already ended July on a positive note: the average price of Brent rose by 3% over the past month, reaching $85.3 per barrel (compared to $82.6 per barrel in June).

Venezuela: A Halted Renaissance

From a formal standpoint, both cases could lead to a reduction in supply. In Venezuela, the potential decline in production will be linked to the tightening of U.S. sanctions. In April, the U.S. Treasury Department refused to extend License 44, which in October 2023 had lifted restrictions on the export of oil and gas from Venezuela and payments to the state-owned PDVSA. In late May, the transition period granted to PDVSA's counterparties to wind down operations expired.

The tightening of sanctions could halt the growth in oil production that occurred at the turn of 2023-2024. According to the U.S. Energy Information Administration (EIA), oil production in Venezuela increased from 740,000 to 840,000 barrels per day between October 2023 and May 2024, greatly surpassing the most recent low of 340,000 barrels per day in September 2020, when oil production in the country was severely impacted by the pandemic and sanctions. However, even May's production level was more than four times lower than the historical peak of 3.45 million barrels per day reached in 1998.

For further production growth, Venezuela will need to attract investors, who already have ample opportunities in South America. Neighboring Brazil plans to increase oil production from the current 3 million barrels per day to 5 million barrels per day by the early 2030s through the introduction of new floating production, storage, and offloading (FPSO) units on the Atlantic shelf. Argentina, which became the world leader in oil reserve growth in 2023 (according to Rystad Energy), could double its oil production by 2030 by developing the shale formation of Vaca Muerta. Finally, Guyana, another neighboring country, has already become one of the leaders in production growth due to the development of the Stabroek block.

Overall, due to low volumes, a potential reduction in production in Venezuela will not be a serious blow to the oil market. The costs will primarily fall on some U.S. refineries that will lose one of their potential suppliers of high-sulfur oil.

Iran: Through China via Malaysia

The consequences of the escalation of the Iran-Israel conflict will also be limited, despite the increase in oil production in Iran – from 1.96 million barrels per day in the crisis year of 2020 to 3.25 million barrels per day in the first half of 2024, according to EIA data. Iran's current oil production is already quite close to the 2017 level, i.e., the year before the U.S. embargo, when the supply volume reached 3.82 million barrels per day.

The key driver of Iran's oil export recovery has been shipments to China, which are carried out through Malaysia. This is indirectly evidenced by data from the General Administration of Customs of China, which shows that oil imports from Malaysia to China increased from 330,000 barrels per day in the first quarter of 2022 to 1.1 million barrels per day in the first quarter of 2024. For comparison, oil production in Malaysia in the first quarter of 2024 was 370,000 barrels per day, according to EIA data.

De facto, the growth in Iranian exports was a result of U.S. interest in saturating the oil market after 2022, when, following the imposition of an embargo on Russia, Brent oil prices temporarily exceeded $100 per barrel. The response was the effective easing of the embargo on Iran, as well as relaxations concerning Venezuela, which in 2022 gained the ability to attract the services of major oilfield service companies (Weatherford, Schlumberger, Halliburton, Baker Hughes).

Not About Prices, But About Competition

The risks of a decline in production in Iran and Venezuela are largely offset by the upcoming easing of OPEC+ quotas. According to the communiqué of the June OPEC+ ministerial meeting, quotas for Saudi Arabia, Russia, Kazakhstan, Iraq, the UAE, Kuwait, Algeria, and Oman will increase by 540,000 barrels per day by December 2024 (to 30.96 million barrels per day) compared to the current level. By the end of 2025, quotas for Russia and Saudi Arabia alone will increase by a total of another 1.1 million barrels per day.

Additionally, the oil market has almost completely absorbed the "post-COVID" recovery in demand, which is why the dynamics of final consumption are increasingly influenced by long-term factors – a slowdown in demand in land transport due to the spread of electric vehicles, a surge in demand for polymers due to urbanization in South and East Asian countries, and increased competition between petroleum products and liquefied natural gas (LNG) in maritime transport. These factors will ensure a more modest increase in demand for oil in the second half of the 2020s compared to 2021-2023, when global consumption growth reached 4.7 million barrels per day (according to the IEA) following the resolution of the COVID-19 pandemic.

In this context, events in Venezuela and the intensification of the Iran-Israel crisis will affect not so much the oil market as a whole, but the intensity of competition among oil-producing countries, whose interests will increasingly clash amid the risks of a demand slowdown.

Author: Sergey Tereshkin, OPEN OIL MARKET

Translated using ChatGPT

Sourse: https://itek.ru/analytics/upadet-li-dobycha-v-irane-i-venesuele/