Low prices, high stakes in the Caribbean

View Full Transcript

Jeff Mower:

Hello and welcome to the Oil Markets Podcast by S&P Global Commodity Insights. In today's episode, we are going to be looking at how low oil prices are helping the Trump administration ramp up pressure against the Nicolas Maduro regime in Venezuela and what that means for US oil producers. I'm Jeff Mower, director of America's Oil News, and I'm joined today by a Latin America oil markets reporter Jada Johnson, senior reporter Ashok Dutta, and senior reporter Eamonn Brennan. Welcome, everyone. The Trump administration has increased its military presence in the Caribbean in recent days following its attacks on suspected drug boats offshore of Venezuela.

The US has sent one destroyer to the region while the aircraft carrier USS Gerald R. Ford is moving closer to Venezuela. The US carried out several strikes in the region, and on October 27th, attacked four vessels in the Eastern Pacific Ocean. Defense Secretary Pete Hegseth said on X, that 14 "narco-terrorists" were killed during these three strikes. The military action has had so far little impact on oil prices, even though Venezuela produces roughly one million barrels a day of crude. It could be argued that the low oil prices are helping the Trump administration's goals here.

We've talked several times on this podcast about Trump's desire to drill, baby, drill and keep prices low. So, Jada, I want to start with you. What is going on as far as Latin American oil prices? I know looking at oil futures, it's shrugging this off and I realized that these attacks have been very targeted and haven't really hit any or even gotten close to any oil installation or oil infrastructure, but I still find it very curious. Has there been any response in spot markets?

Jada Johnson:

Yeah, absolutely. So, I mean, I think there are so many actions to zero in on here. So, I think an immediate reaction that we're seeing is in competing heavy sours that go to the US Gulf Coast just similarly to the Venezuelan crude. So, just in the last three months since Chevron's resumed operations in Venezuela, about 115,000 barrels per day of Venezuelan crude have made its way to the US Gulf Coast. In comparison for Colombia, that's been about 133,000 barrels per day. In that time, we've seen Colombia's differentials for Vasconia and Castilla crude widened by nearly $1 per barrel against ICE brand.

Market sources have just been expressing this bearish sentiment about what the near future holds for this return of Venezuelan barrels to the Gulf Coast. I think on the flip side of that, the US has limited Chevron's exporting crude out of Venezuela to 50% of the production. So, if the Venezuela's national oil company continues having difficulties in increasing their exports, storage also at its Jose Terminal, it's only leading to the extra crude buildup in Venezuela that can't necessarily find an outlet to the US Gulf Coast or even to China.

Jeff Mower:

Well, I was going to say, it's always a funny thing. It doesn't seem like a lot of crude. What was it, 135,000 barrels a day, right? But it's not a big market, the heavy crude market. I mean, it's big, but it doesn't take that much supply. That's where I'm gathering-

Jada Johnson:

Exactly.

Jeff Mower:

... to really move that price.

Jada Johnson:

Yeah. So, I mean, yeah, the US is getting the majority of its heavy crude from Canada and Mexico. So, when we look further south, beyond Mexico and into South America where we're sourcing this heavy crude from, the biggest impact we're going to see is likely in these Colombian grades that compete directly with the Venezuelan barrels that go to the US Gulf Coast and to the US West Coast, but the majority of the impact we're seeing is on the US Gulf Coast. So, I mean, over the last two months for Vasconia or Colombian crude, I should say, we saw about 133,000 barrels per day coming in from Colombia. In comparison, that's 115,000 barrels for Venezuela.

Jeff Mower:

It's interesting because there's a lot of tension between the Trump administration and Colombia now too, again, other crude supplier. I think one thing is and the impression I'm getting to just overall is there's just so much crude around. I mean, at least for a time being, we do have some refinery now just, and I think that's helping. We do have more Canadian crude coming in by pipeline to the US Gulf, which is helping, but also, I was looking at just North and South American waterborne exports a while ago and roughly 11 million barrels a day in September. That's up about a million barrels a day year on year. Now I know that's not heavy. It's mostly light crude. It's mostly Guyana, for instance. Light crude alone was something like 4.9 million barrels a day in September.

That I think is interesting. So, we do have the heavy crude side, and that's all very important when it comes to diesel prices right now. Diesel is very tight. It's a big concern in the market. We definitely want more crude supply. The heavier crudes are good for the coking, the refineries, the coking facilities. But yeah, I'm really curious what that means as far as the light crude increase for the US producers. So, I know, Ashok, you were at a conference recently and you've been covering earnings, but most recently you were at a Permian conference. But what were producers there saying about that, about all this extra crude? Because it's interesting that Trump, again, wants low prices, wants to drill, but it doesn't necessarily mean US is drilling, right?

Ashok Dutta:

Yes, Jeff. I just got back from Midland. Permian price setters, if you permit me to say that, now find themselves in a situation of being price takers and there they are particularly mindful of this overhang in supplies and the growing level of inventories in 2026, along with it, a double whammy of crude prices getting lower and dipping more into that $50 to $55 range. But then their response is pretty upbeat. They even came out and said, "If we could handle COVID, we could handle this as well."

Honestly, easier said than done, but then this is what they said. In terms of actions, Jeff, there certainly is a movement of keeping an eye on getting new resources in these days of low oil prices. Keep production on, but go on the hunt for getting more and more quality resources, particularly trying to move or scale up from a tier two resource to a tier one resource so that I have a higher evaluation in an M&A market that will subsequently follow.

Jeff Mower:

How are they able to do that, to scale up to those tier one resources?

Ashok Dutta:

Right, so the traditional two areas, which is the Delaware and the Midland, that's where the bulk of the production is in the Permian. They are now going into new areas, starting off with the CBP, Central Basic Platform. Now, when I say new, I mean in terms of something which they're doing now, but this is a basin with proven capabilities and I'll come back to that in a short while. So, CBP is one, Woodford is the other one, Barnett is the third one. This list is going to go on. Now, just to get back very quickly, CBP was a basin which was in production even before Delaware and Midland. The crude was produced there through the conventional method of drilling.

But then once the hydraulic fracking and all the new technology that was applied for shale came into play, producers were focused more on the Midland and the Delaware basins. So, moving into new place, that is one. Second, the changing nature of the basin overall. It's getting more gaseous. They are getting higher content of liquids, some of them dry gas, some of them wet gas. LNG production, they see a huge option to supply the global market with LNG export facilities going out of the Gulf Coast. Then there is a need for poor power generation for AI and the chip manufacturing. So, they see a new revenue stream coming in.

Jeff Mower:

So would that make crude secondary? Is that the implication there on the LNG front?

Ashok Dutta:

Well, some of the major producers say we have drilled. At one time when you talked about drilling up to four miles, it was considered to be quite an achievement. Now we are looking at drilling up to eight miles. So, they will keep on pushing the barriers there, and it's very difficult to come up with a definitive reply as to how much of movement one will see. But on the surface, there definitely is one thing that's for sure. In a low price environment, if I can do anything to add to my revenue stream, I have a more solid balance sheet. I ensure that no holes are blown in it. I ensure that I give my shareholders the returns that they want and I keep everyone happy.

Jeff Mower:

Yeah, I noticed that one of the stories you wrote for the conference, ExxonMobil was talking about how they could drill eight miles of laterals.

Ashok Dutta:

Yes, please.

Jeff Mower:

And possibly, what did they say, 13 to 15 miles in the Delaware region?

Ashok Dutta:

Correct. That's even targeting to that levels.

Jeff Mower:

So just the idea of being able to drive down those costs, right? I mean that's what's going to make the US crude. But again, when I think of the Trump goal to make the US energy dominance goal, it's really making US crude more competitive, but in order to make it more competitive, you have to drive those costs down. Eamonn, you covered this quite a bit. What has the administration done to help drive those costs lower?

Eamonn Brennan:

Yeah, sure. I mean, it's been a huge focus of the administration's energy policy in the US domestically. It's a reasonably long list. I'll try to be brief, but in addition to the things you saw in the One Big Beautiful Bill on taxation, a lower cash tax basis, things like deductibility on equipment going from 40% to 100% in terms of bonus depreciation, intangible drilling costs. There was also a 10-year delay on the implementation of the methane fee that was an Inflation Reduction Act provision. It required companies in what is the US's largest industrial emitting sector to start tracking and reporting their methane emissions and pay a tax if they exceeded a certain threshold.

I covered this in 2024, companies were scrambling to come into compliance and figure out what they needed to do, what equipment they needed to install. They now have a decade to think about it if it ever is implemented. Anyway, the administration also in the Big Beautiful Bill alongside Republicans in Congress has tried to reduce lead times and costs of permitting new projects. They've done a bunch of exploratory agency work on this as well, though it's hard to do without a congressional mandate. I think a more robust permitting reform bill is still broadly seen as necessary, at least here in Washington DC. The Big Beautiful Bill also restored lower lease royalty rates on federal lands and waters.

It directed interior to approve applications for commingling of multiple sources, which should streamline some processes and reduce redundant equipment. I think we, analysts at S&P Global Commodity Insights, put out an estimate that it'll lower break-evens for US producers around $1 to $2 a barrel. So, probably a bit marginal. I think that was backed up by the most recent Dallas Fed Survey where the most common answer to that prompt from the Dallas Fed in that survey, it was one of the special questions of the quarter, was that they were estimating around $1 to $2 a barrel from "recent policy changes".

Jeff Mower:

But is that enough to compete with, say, Guyana?

Eamonn Brennan:

Right. Well, no, I think break-evens in Guyana are much lower. The breakeven is around $45 a barrel in the US according, again, to Commodity Insights analysts for onshore and then around $57 for offshore in 2025. So, those are lower numbers in Guyana. I think as been discussed before and was once again an animating focus of the Dallas Fed's anonymous executive responses in the most recent survey, those regulatory actions are nice and it's great to have a federal administration on your side in theory.

But when you're also facing tariffs on steel and aluminum that you need to source for the tubular goods and you're facing more broadly a lower-cost environment, essentially since those initials or April Liberation Day tariffs were announced, the cost-benefit overall holistically in terms of lowering costs on the industry and incentivizing drilling, the calculus isn't quite working out maybe as well as the policy ideas when the administration first took power in January.

Jeff Mower:

It does get really tricky on that front, but at the same time, as we were talking about earlier in the podcast, the lower prices are helping the administration. I don't know what you think. For instance, the other day, or I think it was last week, the US issued sanctions against Russian oil companies, Lukoil and Rosneft, which was a pretty big deal. That actually boosted prices a bit, but it seemed like they were able to do that because oil prices are already a bit low. So, it's like, okay, you get a bit of a price boost, but we're running $80. It'd be very different if we were $80 a barrel than if we were at the $50 or $60 a barrel.

Eamonn Brennan:

Right, and you saw this dynamic with the Biden administration when they rolled out the Western price cap on Russian oil as part of the sanctions framework after the 2022 invasion of Ukraine. Obviously, the cost of crude spiked significantly and created multiple political problems for the Biden administration in the immediate wake of the invasion and massaging a sanctions package that is not quite as maybe as raw and effective as just sanctioning Rosneft and Lukoil would've been was something that they had to figure out on the fly. When you have lower prices, you don't have to do that and you put more pressure on Russia just overall, because considering the amount of income Russia generates from exporting crude and gas, lower prices mean less money for Russia.

So, if you can maintain that, you give them a lower ceiling for what Trump himself has called Russia's war machine, financing the war machine. He's been very critical of India, not so much of China, but a little bit here and there. But especially India has raised sanctions on them for importing so much Russian crude. That has been part of what he's really focused on. I think, yeah, you keep those prices low, you can make policy moves like the Rosneft and Lukoil sanctions. You can be more aggressive with Venezuela as you mentioned at the top of the show. It gives you much more latitude to work geopolitically, even if you have US domestic producers leaving anonymous comments on the Dallas Fed Survey saying that you're killing the domestic industry.

Jeff Mower:

I don't know how much we want to get into. It gets very theoretical as far as what's Trump's end game in Venezuela, right? I mean there are people in the administration obviously that would love to see a regime change there. The Trump administration has said that in the past, but we won't get into what it would take. I mean, there's plenty of reporting, plenty of other reporting out there on militarily, what it would take for some regime change. It seems much bigger deal than the Panama invasion back in the... Was it early '90s?

Eamonn Brennan:

Right, yeah. You hear geopolitical analysts make that comparison, but they're quick to note Venezuela is a much larger country, much bigger military. The disruptions geopolitically would be much more significant. The energy side of things is the thing where even if you were able to displace Maduro and do regime change in a relatively clean way, there would still be a lot of strife in the country. So, it'd short-term very disruptive to the Venezuela industry and you may have price increases because of that.

Long-term maybe I think someone like Secretary of State Marco Rubio would make the argument that if you had a friendlier government who was willing to work with the United States and US producers, you don't have the current uncertainty that you've had over the last five, six, seven years and really going back to Hugo Chavez days where you're revoking licenses, reinstating them for political purposes, then revoking them again. You see a Venezuela with a huge proven reserves become a much steadier and more reliable partner on the US in terms of energy.

Jeff Mower:

I think that's worth bringing it up too, because I want to say it's all about oil. It's really easy to say that on this podcast and it's fun to do. It's all about oil. But as I mentioned before about the exports, I mean the Americas, I mean Canada, US, South America, so tons of oil. I know we were talking about this the other day. The US was giving Argentina a package. It was really supporting the Milei administration. Argentina is another country that's just really ramping up its oil production and a lot of that oil production is light sweet crude. Again, light sweet crude is coming on the market. I know the Argentina's YPF, their big oil company there. They're leaving this big project like a $3 billion project.

They want to export 550,000 barrels a day of Medanito. It's that light crude from the vacuum to a field there. I have a question, Jada, on that front. Maybe if you could talk a bit more about Argentina and Guyana. We've seen more Guyana crude going just to a lot of different countries as that production has increased and exports have increased. Again, this factors into the Trump administration goals. India is now going to bring in some Guyana barrels and they're doing it to replace the Russian barrels. But anyway, go ahead.

Jada Johnson:

Yeah, so I think as we see the US pressuring countries like India and China to look for alternatives beyond Russian crude, Guyana and also Brazil I think have popped up in the picture as being this good alternative as providing medium sweet grades. So, I think just in the last week or so, we heard about Petrobras announcing a deal to supply IOC with over six million barrels over the next 12 months. This is just as China is looking at turning away Brazilian barrels with the pressure of no longer receiving Russian barrels. So, as Brazil looks to send its flagship crude grade to China, its typical destination, we're seeing this rerouting of ships to destinations that are willing to take that crude that's just out on the water.

With Guyana as well, the typical destination for those barrels had been Europe, but with this oversupply of sweet crude in the Atlantic Basin, it's having to find other destinations because Europe is just simply oversupplied right now. So, India has become this destination that sources are talking about. So, we saw India taking December loading cargoes of Unity Gold, Liza, as well as Golden Arrowhead before even the November loading program had been sold and just trying to get rid of this crude. It's finding different outlets and India is serving as a good place right now.

Jeff Mower:

Yeah, I've noticed more US crude heading to India as well. I was just looking a lot of US crude going to the Netherlands, which isn't too unusual. But in October, I know there was a big jump so far, and South Korea as well, plenty of crude going there. Part of that could be due to trade deals between the US and South Korea and India that were finalized this year. I should know too, I thought it was interesting when you're talking about Guyana, some of those prices have really dropped as well. Is that due to, like you were saying, the just overall glut, especially in Europe? Some of those differentials like Unity Gold and Golden Arrowhead have really dropped quite a bit lately.

Jada Johnson:

Yeah. They have reached some yearly lows lower than we have seen in quite a while just given that there's WAF crude on the market that's trying to find a home. There's Mediterranean sweet crude that's trying to find a home. Whether that's beyond Europe, in order for these grades to be competitive, that competitive comes with the differentials widening.

Jeff Mower:

Yeah, it's a lot of lighter crude. It was actually on that note, I was going back and I remember we had a story recently that Argentina, again, is producing all of this light crude out of the Vaca Muerta. Their refiners actually need a lot of heavy crude, like the Gulf Coast refiners here. They were predicting that by 2030, they may have to start importing crude, importing heavy crude, which I just thought was interesting. I'm not sure if those refiners would reconfigure at some point, but again, it's something like 30% of their crude runs are heavy crude right now. They have 500 barrels a day of combined capacity.

Jada Johnson:

So Argentina's other crude that they produce, Escalante. They were typically exporting cargoes of about one million barrels. We've seen less and less of those cargoes out on the water, and most of it's being used for domestic consumption. So, when we would've seen one to two cargoes a month, the last cargo that was sold might've been back in August. The next one that we are looking at being sold as a full, so as max of one million barrels, won't be until January.

Jeff Mower:

Yeah. So, now going forward, I know, Eamonn, you've covered quite a bit of this as well. The Trump administration is also opening up more acreage. Again, this is down the road for lease sales and recently opened what, the NPRA in Alaska?

Eamonn Brennan:

Yeah. So, throughout the legislative process with the Big Beautiful Bill, there was a big emphasis on mandating new lease sales. Obviously, a big political pushback to the Biden administration, which heavily restricted new leases both in the Gulf, certainly in Alaska. So, there's 30 new lease sales in the next 10 years in the Gulf of Mexico, four in the Arctic National Wildlife Refuge, which is obviously politically and environmentally controversial area. The NPRA in Alaska, there's five mandated sales and then quarterly sales in Western states. Those sales will have far bigger minimum acreage requirements. So, there's more industry interest there, I think, particularly in the Gulf.

Maybe a little bit less so onshore. I don't know that there's a ton of lingering interest, but there's lower lease rates. So, the possibility space has widened for if the market sends a signal that it's time to start increasing US production again in a long-term sustainable way. There are more desirable areas there. Again, Interior is following through on these policies from the bill. They're reopening in those areas in Alaska, reinstating management plans from 2020 in the first Trump administration that include much larger swaths of the NPRA and ANWR's potential parcels. They're also working on overturning permanent withdrawals of lands from potential oil and gas lease sales under President Biden in the last year of his term. That may be difficult to do legally.

The legal precedent is that if a president permanently withdraws acres from future potential sales that has stuck traditionally, including under the Trump administration the first time around, but the fact that they're attempting to challenge it and potentially even rolling back some... In Alaska, they've said they're challenging those protections, but also there's been reports that they may challenge protections on the Pacific Coast, the Atlantic Coast, and even the Eastern Gulf of Mexico near Florida, which would face likely strong bipartisan opposition.

So, there's a clear emphasis here on opening up as much potential land and water especially and driving a policy in Alaska where if there is a need for a new basin long-term in 20, 30, 40, 50 years as lower 48 basins mature, that has been an argument that again, the API that the largest oil and gas trade group in the US has made is that you may need another basin at some point and you need permanent durable energy policy in Alaska to incentivize companies to explore and develop there.

Jeff Mower:

All right, well, fair enough. We'll be tracking that. We'll be covering it. So, thanks, Eamonn, and thanks, Jada, and thanks, Ashok, for joining me. Thank you to our listeners for tuning in. If you like this episode, please be sure to leave us a rating or review on your favorite podcast player. This Oil Markets episode was produced by Jennifer Pedrick in Houston.