Tue Dec 5, 2023
Sam Rines, Managing Director of Corbu, has written the finest analysis of the Venezuela-Guyana oil war threat that I have seen.
Sam has given us permission to share it with our readers, and we thank him for that. In ten minutes you will learn a lot about this situation, which is impacting the oil markets and is occurring in our South American back yard. Now here’s Sam’s entire missive.
-David
The Hidden South America Oil War
& The enerGY Spread by Sam Rines
Dec. 4, 2023
Bottom Line: The result of the Venezuela referendum on seizing Guyana territory was a resounding “yes”. Why does it matter? A VZ / GY conflict has the potential to cause a few nuances to emerge global crude markets. It is not about War in the Middle East or OPEC (-) or supply and demand dynamics, it is about the spreads. The enerGY Spreads are where things could get spicy.
After a war in the Middle East and OPEC(-) meeting failed to generate sufficient interest, what are the plays for a VZ / GY conflict catalyst? Probably not headline WTI / Brent. Bet the enerGY spread(s).
A quick level setting –
- In return for sanctions relief, VZ agreed to hold an election and release US citizens from jail.
(not the best start)
- Then there was a VZ vote to takeover around half of Guyana.
(not that kind of vote)
The initial sanctions relief did not lead to a significant uptick in oil output from VZ. Chevron made it rather clear it was going to invest very little unless there was clarity on the duration.
(not much of an uptick)
To be clear, the risk / opportunity is not about VZ crude production. It is all about Guyana.
(Exxon Mobile 3Q earnings call)
and
(Exxon Mobile 3Q earnings call)
Exxon (with its partner - Hess) guided to pumping ~500,000 more barrels per day from GY waters than VZ has output. This is not about VZ and further sanctions. It is about the rampant growth GY is/was poised to undergo.
(territorial waters)
and
(all the drilling oilNOW.com)
This is where the analysis gets a bit wonky. VZ claims virtually all the territorial water surrounding Guyana which is being explored / pumped by a host of companies. According to the drillers, the crude is around 32 API and .58% sulfur a medium sweet crude.
(not all crude is equal)
The above chart is incredibly useful for understanding the reason for betting the spreads. Looking at where the OPEC(-) sits on the chart, the majority of the cuts are in the heavy/medium sour crude grades. Notably, there is little cutting to the medium/light sweet grades.
Bullets –
- VZ gets some sanction relief in exchange for a roadmap to elections and release of U.S. prisoners by end November 2023. Maduro regime fails to deliver.
- Instead, Maduro decides to hold a vote on annexation of Guyanese territory. It passes.
- Significant sanctions exist on the VZ oil and gas sector. Any annexed Guyanese territory can reasonably be assumed to fall under sanctions.
More Bullets -
- The disputed territory encompasses much of the territorial water being explored for oil.
- GY oil is medium/light sweet.
- OPEC(-) oil cuts are tilted heavy/medium sour.
While the OPEC(-) cuts have failed to deliver higher benchmark prices (WTI and Brent), they have delivered an oddity in the spreads of heavy/sour and light/sweet crudes. Different refiners demand differing grades, and a shortage/tightness of heavier crudes has led to differentials inverting.
Usually, lighter/sweeter crudes carry a premium over heavier/sour crudes. That is not currently the case.
(Mars to WTI spread)
Mars is a US crude grade that is heavier / sour than WTI. Therefore, it typically trades at a discount. That has changed with the OPEC(-) cuts, but VZ may change the dynamic.
There are several reasons why the spreads / differentials are intriguing here –
- Given the angst surrounding the global economic / political fundamentals, supply and demand dynamics are at risk of being overpowered by sentiment. Avoid uncompensated risk
- Global crude production growth has been concentrated in regions producing lighter / sweeter crude grades. One of the more interesting regions being Guyana. Lower projected light sweet production
- With OPEC(-) priced into the spreads, a disruption of the other side could result in the spread moving regardless of the recession / economic angst narrative. Reasonable entry point
- If OPEC(-) falls apart or alters course, the dynamic could be even better. More heavy crude/sour crude kicker.
Simply, betting the spread provides exposure to the potential geopolitical issues without taking (direct) demand risk and a few ways to win if Guyana is not invaded.
As always, comments are appreciated, feedback taken to heart, and critiques welcomed. Any questions regarding the CORBU x WT PolyMacro Model Portfolio, happy to answer 1-1.
Samuel Rines | Managing Director, Corbu.
@samuelrines (Twitter-X)
[email protected]
4201 Main Street
Houston, Texas 77002
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