Price
The week ended with all prices down, despite the expectations created in the market by the meetings of both OPEC+ and the G-20 energy ministers.
Although an unprecedented cut of 10 million barrels a day was pre-agreed as a result of the OPEC+ meeting, some factors such as its conditioning, overproduction of oil, high levels of inventories and the fall in demand, which is estimated to be between 20% and 30%, overshadowed the effect of the announcements, which was reflected in the downward behavior of WTI and BRENT prices.
The fact that the meeting of the G-20 energy ministers ended today, Friday, without a commitment to cut production, has created negative expectations in the market about the effectiveness of the pre-OPEC+ agreement, which expected its 10 million barrel day cut to be accompanied by the G-20 oil countries, with a 5 million barrel day cut.
Thus, at the end of the week, reference prices maintained the downward trend that began on Thursday, April 9, after the OPEC+ pre-agreement, when WTI fell 20% from its Monday increase, as the market reacted negatively to the possible supply reduction agreement between OPEC+, due to the effects of the current market crisis. During this week, the average price of Brent reached $32 per barrel, $6 higher than the previous week’s average price of $26 per barrel. The WTI, although it reached a significant increase on Monday, was quoted at an average of $25 a barrel, $2 more than the average of the previous week.
This downward trend continued today, Friday, April 10, where the Brent has operated at $31.45 per barrel and the WTI at $22.76 per barrel, a loss of 5% and 17% from the beginning of the week and a drop of 40% and 52% respectively, from the close of the day before the OPEC meeting, accumulating a loss of $20 and $24 per barrel respectively in 35 days.
Unprecedented agreement on OPEC+ and the role of the U.S.
On Thursday, April 9th, after nine hours of discussion, the OPEC+ meeting culminated in a pre-agreement to cut production by ten million barrels per day, the largest production cut ever agreed upon, which is interpreted as a clear sign of the alarms being raised in the world economy and the new role of the U.S. in the oil market.
The meeting put an end to the price war unleashed by Saudi Arabia and Russia exactly 35 days ago, which coincided with the collapse of the world economy as a result of the economic impact of COVID-19, causing a 50% drop in the price of the main WTI and Brent markers, and forcing Moscow and Riyadh to seek an agreement.
The Role of the United States.
The catalyst for this rapprochement of countries that promised to flood the oil market until they “saw their adversary fall”, was the United States and, in particular, President D. Trump. He called on both, Russia and Saudi Arabia, to “cease” their price war in favor of market stability.
Mr. Trump’s intervention did not stop at an exhortation, but became more concrete in direct talks with both, Russian President versus Putin, as well as with the Saudi prince, Mohammed bin Salman, and promoted meetings between his Secretaries of State and Energy, with the Saudi and Russian authorities, transmitting in a direct way the desire of the White House to reach an agreement to recover the oil prices.
Trump’s claims were accompanied by his promise to impose tariffs on imported oil, and that he would “do whatever it takes” to protect his own oil production.
When President Trump tweeted last Thursday, April 2nd, about his desire for both Russia and Saudi Arabia to cut their production by 10-15 million barrels a day, he was already setting the volumetric targets he was pursuing. An unprecedented cut that would force the largest oil producers to make a significant reduction in their own production and they have agreed to do so.
It is strange how the American Administration, without recognizing it as a matter of doctrinal principle, asks others to intervene in the market to regulate it. Even the Secretary of Energy, Dan Brouillette, has come to see the possibility that, in addition to the volumes of its own production that are going to leave the market due to its high production costs, that is to say, shale oil, the Federal Government can make use of its available capacity of 77 million barrels of storage in its strategic reserve to acquire and place there barrels of oil from U.S. production without it reaching the market. This is a way of intervening in the market, without accepting it politically.
President Trump’s position reflects a reality that constitutes a strategic change in the international oil market: the United States has become the world’s leading oil producer, with a production that closed in February of this year at 13 million barrels per day, so now his political positions and interests reflect more those of a producing country than those of a consuming one.
This strategic change in the U.S. position is accompanied by a weakening of OPEC as an organization, after years of wars, military interventions, destabilization, and sanctions diminished its capacity to influence world oil production, which, without a doubt, is still very important as OPEC, but with a “de facto” redistribution of the quota of each member country. Countries such as Iraq, Iran, Libya, Algeria, and Venezuela are immersed in problems of all kinds that have diminished their own production, their possibilities of action and/or their political influence. The weight of the organization is now on the monarchies of the Persian Gulf, mainly Saudi Arabia, the United Arab Emirates and Kuwait.
As we commented in previous bulletins, the oil market will now be effectively regulated by the interests of the three major producers: the U.S., Russia, and Saudi Arabia. The latter guarantees the support and coverage of OPEC, imposing its criteria with the support of Kuwait and UAE, at least until Iraq, Iran, Algeria, Libya, and Venezuela can recover their production and their possibilities of acting as a counterweight to the Persian Gulf monarchies. Russia, from its side, gives life to OPEC+, as its production levels allow it to impose itself on the rest of the non-OPEC countries. Both instances serve as a “firewall” for these countries in the face of criticism or political pressure from the large industrialized economies to impose their criteria on the international oil market.
The pressure of the North American government for a higher price, expresses its own interest in maintaining or protecting the production of its oil sector, which employs more than 1.1 million workers and is composed of large transnational producers such as Exxon Mobil, Chevron, Conoco, among others, as well as a large number of medium and small companies, in addition to independent producers that constitute key factors for the economy of oil states such as Texas, Oklahoma, Alaska, North Dakota, among others.
It is gone the U.S. Administration’s discourse about its preference of “cheap oil” in order to have fuels at a lower price, at the beginning of the COVID-19 crisis. The weight of the oil economy and the jobs generated by the sector, as well as the strategic nature of being self-sufficient in oil, a goal proclaimed by all U.S. presidents after the crisis of the 1970s, was more than enough.
But, on the other hand, pressure from the U.S. administration, exposes the main weakness of its current strategic advantage: the production of oil from shale, the “Shale Oil”, results in a production of higher production costs than the oil of other producers, requiring prices of at least $46/barrel.
If barrel prices remain below $30/barrel, much of the small and medium sized “Shale Oil” producers will have to exit the market in the face of high production costs and limited financial capacity. In fact, according to the U.S. Department of Energy’s own estimates, U.S. production has begun to decline as a result of the price falling to levels close to $20-25 a barrel, and it is estimated that the U.S. will lose two million barrels of oil production per day by the end of 2021.
The U.S. Energy Information Administration’s (EIA) report of April 7th estimates that the United States will, once again, be a net importer of crude oil and petroleum products in the third quarter of 2020, and will remain in that position until the end of this crisis. This is due, according to the same report, to an increase in net imports of crude oil and a decrease in exports of oil products.
Net oil imports will increase in the U.S., as U.S. oil production will continue to decline and the economy will need fuel for its post-crisis recovery.
OPEC+
An unprecedented but conditional and insufficient agreement.
The agreement.
What was agreed at yesterday’s OPEC+ meeting can be summarized as follows:
- A production cut of 10 million barrels per day, effective for two months: from May 1st to June 30th.
- From July 1th to December 31th of this year, the cut will be 8 million barrels per day.
- From January 1th, 2021, until April 30th, 2020, the cut will be 6 million barrels per day.
- The corresponding cut volumes for both Saudi Arabia and Russia are calculated from a level of 11 million barrels per day each, thus reaching an intermediate agreement, as the Saudis originally hoped that the cut would be calculated from their current production of 12 million barrels per day, while the Russians proposed that the Saudis would calculate their cut from the 9.8 million barrels per day of production at the end of February.
- For the remaining OPEC countries, the cut will be calculated on the basis of their production in October 2018.
- The entry into force of the agreement is subject to the joining of the consensus by Mexico.
Conditioning.
This last point, the lack of agreement from Mexico, was what prevented the agreement from entering into full force on the same day, yesterday, Thursday.
Mexico mentioned that it was willing to cut only 100 MBD of oil and not the 400 MBD that was decided as a result of the OPEC+ discussion and agreements. Despite the fact that the group agreed to lower its cut quota to 350 MBD, the Mexican Secretariat of Energy indicated that they did not join the consensus. However, in a decision, which is very strange in these times of coronavirus, the same Mexican president, Manuel López Obrador, declared this morning that he had talked with the American president, Mr. Trump, and the latter offered him that the US would withdraw from the market the 250 MBDs that were bothering Mexico, with which President López Obrador expressed his gratitude and agreement to join the consensus.
This detail shows how Trump is following up on the possibility that this agreement would allow him to build an oil sector leadership on a global level and also to show himself as a “protector” of his country’s interests.
On the other hand, OPEC+ countries declared they expect their 10 million barrel per day cut to be accompanied by the cut of other G-20 oil producers, especially, Canada, USA, Brazil, UK and Mexico of 5 million per day of their own production.
If this expectation is fulfilled, the total cut would be 15 million barrels of oil per day, adding to the 10 million barrels of oil per day of the OPEC+ agreement , plus the 5 million barrels of oil per day expected from the G-20 oil producing countries.
However, today, the energy ministers of the G-20, a group of which Saudi Arabia and Russia are members, ended their meeting with a general statement, but without any commitment to cutting their own oil production, this increases the skepticism about the effectiveness and concreteness of the cut announced by OPEC+, adding to the continued deterioration of the international oil market and the world economy in light of the deep recession caused by the COVID-19.
Insufficient.
The OPEC+ pre-agreement that resolves the dispute between Saudi Arabia and Russia and puts an end to the price war was, however, met with skepticism from the market, which considers that the cut is insufficient. This negative perception explains the fall in prices today, accentuated by the lack of commitment to withdraw 5 million barrels of oil per day by the G-20 oil countries, after the meeting of energy ministers ended without concrete results.
On the other hand, the little impact that the OPEC+ announcements have had is mainly due to the fact that, at the moment, with a world economy in recession and nearly 3 billion people in the world with restrictions on movement, the fall in oil demand is estimated at between 20 and 30 million barrels per day, with an overproduction in the market of 14 million barrels per day and oil inventories at maximum levels.
A month is too long.
COVID-19 and its economic impact is expanding faster than the ability of world leaders to take timely and effective decisions.
In these circumstances, a month of price wars, overproduction, and the collapse of the world economy, has been too long; today, commercial and strategic stocks are full of cheap oil, the deterioration of demand has reached levels never seen before, and the prospects of recovery are not foreseen in the short term, as this depends on the recovery of the world economy and the control of COVID-19. The oil market is impacted by unprecedented constraints and elements of uncertainty.
COVID-19
The COVID-19 pandemic has infected more than 1.6 million people worldwide, mostly in the United States, with more than 467,000 diagnosed cases. Spain, with more than 157,000 cases, is the second most infected country, followed by Italy with more than 147,000. After them, Germany and France, with more than 118,000; while China, the original epicenter of the pandemic, has more than 81,900 cases, but the vast majority have already recovered. The number of deaths worldwide exceeds 100,000 and those recovered 364,000.
Coronacrash
The world economy continues to suffer from the impacts of COVID-19, which is hitting Europe, North America, and continues to expand into Asia and now in Latin America.
COVID-19 will subtract more than $5 trillion from growth in the world economy over the next two years, according to JP Morgan estimates, which put the loss of production at $5.5 trillion or nearly 8% of GDP through the end of next year. The cost to develop economies will be similar to the 2008-2009 and 1974-1975 recessions; despite unprecedented levels of monetary and fiscal stimulus in the US, Europe and Asia, global GDP is unlikely to return to its pre-crisis trend until at least 2022.
The World Trade Organization (WTO) said Wednesday that in an optimistic scenario, GDP could contract by 2.5% in 2020 and grow by 7.4% in 2021. In a pessimistic case, world GDP could fall to 8.8% in 2020 and expand by 5.9% in 2021.
The International Labor Organization also said this week that more than a billion workers are at high risk of having their wages cut or losing their jobs.
The President of the European Central Bank, Christine Lagarde, said on Thursday that each month of blockade costs the Eurozone economy between 2% and 3% of economic output.
The International Monetary Fund sees the world economy suffering its worst recession since the “Great Depression” this year, with low-income economies, Africa and Latin America, at high risk. Managing Director Kristalina Georgieva said that “just three months ago we expected positive per capita income growth in more than 160 of our member countries by 2020. Today, that figure has been turned around: we now project that more than 170 countries will experience negative per capita income growth this year. We estimate that the gross external financing needs of emerging market and developing countries amount to trillions of dollars, and that they can only cover a part of that amount on their own.
The IMF noted that governments around the world have taken fiscal measures amounting to about $8 trillion and that the benchmark outlook is for a partial recovery of the world economy by 2021, if the pandemic fades in the second half of this year, to allow for a gradual lifting of containment measures, said IMF Director Kristalina Georgieva. She stressed that uncertainty about the duration of the coronavirus means that things could end up being even worse.
Europe:
On Thursday, in an emergency teleconference, European Union finance chiefs approved a plan to avoid what is expected to be an unprecedented recession. EU finance ministers agreed on a 540 billion euro ($590 billion) package to combat the economic consequences of the coronavirus pandemic.
The common response includes a joint employment insurance fund worth EUR 100 billion, a European Investment Bank facility to provide EUR 200 billions of liquidity to businesses, as well as credit lines of up to EUR 240 billion from the European Stability Facility, to support states in their spending spree to help economies recover.
Ministers also agreed to work on a temporary fund that will help start recovery and support the most affected countries, while leaving open how it would be financed. French Finance Minister Bruno Le Maire said the fund could be decided in the next six months and could reach 500 billion euros, but all of this needs the approval of government leaders next week.
USA
For three weeks in a row, Americans filed for massive unemployment benefits, bringing the total to about 16.8 million during the economic closure of the coronavirus pandemic. The level of unemployment in the US is approaching the “worst case scenario” of 20% unemployment ruled out by President Trump at the beginning of the crisis.
A total of 6.61 million people filed unemployment claims in the week ending April 4, according to Labor Department figures released Thursday.
The Federal Reserve announced on Thursday another set of sweeping measures to provide up to $2.3 trillion in additional assistance during the coronavirus pandemic, including the start of programs to help small and medium-sized businesses, as well as state and local governments.
The Central Bank used only about 40% of the $454 billion in seed money that Congress provided to extend aid to small and medium-sized businesses, state and local governments and some risky corners of the financial markets on Thursday.
These measures to support the economy are in addition to the more than $2.3 trillion approved last week, following the agreement reached between the White House and the US Congress.
However, despite this massive aid, the American economy in its industrial sectors, manufacturing, services, oil, automotive and transport, continues to be affected by the violent advance of COVID-19 in the country, which has particularly affected large cities like New York.
China:
Bank lending and credit in China reached a record level in March, indicating that government and Central Bank efforts to boost support for the economy are having an effect.
Aggregate funding increased by $732 billion last month, with financial institutions offering $405 billion in new loans in the month, up from a projected $1.8 trillion.
While the Chinese industry largely resumed production in March, resumption in the service sector has been slower.
The strong credit expansion shows the impact of strong political support as the economy began to recover from the blow of the coronavirus.
Venezuela
Gasoline shortages and the collapse of refineries
The shortage of gasoline in the country could dramatically affect the government’s ability to manage the COVID-19 crisis and the quarantine, in addition to becoming a trigger for social conflict due to the abusive and advantageous management of the fuel shortage by the military authorities.
The lack of fuels in the country, gasoline, diesel/gasoline, oils, lubricants and LPG, is a consequence of the operational collapse of the national refining system.
Venezuela has, through PDVSA, a national refining system with a capacity of 1.303 million barrels per day, and an international one, which until 2014, was made up of Citgo, Hovensa, Nynas, Cienfuegos, Kingston, and Refidonsa, with a capacity of 2,822 MBD.
The supply of gasoline, diesel, and other fuels to the country is the responsibility of the National Refining Circuit, made up of the Paraguaná CRP Refining Complex, comprising the Amuay-Cardón and Bajo Grande refineries; the El Palito refinery and the Puerto La Cruz refinery. There is also the small refinery of San Roque, which we will leave out of the analysis, since it only produces 5 MBD of paraffin bases.
Venezuelan refineries are large industrial complexes, completely automated, where advanced processes and technologies are handled to process our different types of crude. These require management and operational personnel with high technical qualifications and experience. Likewise, they require preventive maintenance, supplies, and permanent adjustments. It is not possible to improvise with its management or operations, and nor can its maintenance, supplies, and operational adjustments be postponed.
The only time our refining system collapsed operationally was during the Oil Sabotage between December and March 2002-2003, when the refining complexes, especially the CRP and El Palito, were sabotaged and their operations abruptly stopped by the management of the company at the time for political reasons, with the intention of overthrowing the government of President Chávez.
Of course, if the refineries are not operating, there is no fuel for the domestic market. That was what happened in the months of the oil sabotage and that is what is happening now, but for completely different reasons.
At present, the Venezuelan refinery system is technically stopped due to the government’s inability to manage PDVSA. This is not an isolated problem of the refineries; it is a problem of dysfunctionality that affects the entire company and its operational areas, motivated, fundamentally, by the process of successive political interventions of the company conducted by the government as of 2015, as well as the militarization of the company as of 2017.
In this political “razzia” against PDVSA, the government has persecuted and imprisoned an important number of managers and trained personnel, as well as displaced the technical-managerial teams that lifted these Refinery Complexes from the collapse caused during the Oil Sabotage in 2002-2003 and successfully operated the system until 2014. The management and operations of the refinery system were irresponsibly handed over to poorly trained personnel without the technical capacity and experience required for such complex operations.
In addition, as of December 2014, the government began to cancel service and supply contracts for inputs, as well as divert the resources required for costs and expenses, operations, maintenance, and investment in the refineries.
It is important to point out that, during the period between 2004-2014, after the Oil Sabotage, our country never had problems with the operation of the national refining system and we were always able to meet the demand of the country’s domestic market, which experienced a 37% increase. In spite of this, in this period 2004-2014, there was never a lack of gasoline, diesel and other fuels, our National Refining System was capable of exporting products to the Caribbean, the United States, and other markets.
The following graph, from PDVSA information, duly audited by KPMG and available to the public, shows a historical relation of the production of our refineries in the country, broken down into the most important products for internal consumption: gasoline, diesel/diesel, liquid petroleum gas, fuel oil, and others, such as oils, lubricants, etc. Domestic production includes 335 thousand barrels per day from the Island of Curacao Refinery (Isla Refinery), which, although it distorts the operational reality in the country, became a practice of statistical management in PDVSA, since the operations and production of the CRP were coordinated so as not to maximize its own production, with the purpose of not affecting the production of the Isla Refinery, under the terms of a lease agreement signed by the country since 1985.
In the year 2014, one million seventy-two thousand barrels per day of products were produced in the country: 278 MBD of gasoline, 248 MBD of diesel/gasoline, 245 MBD of fuel oil and 671 MBD of other products, such as: kerosene, turbo, jet, asphalt, oils and lubricants, among others.
It is also important to note that our refinery system, in addition to meeting the domestic demand for fuel, also had the capacity to export products, as shown in the graph.
It can be seen how the domestic demand for fuel has been growing from 485 MBD in 2004 to 663 MBD in 2014. That year, the National Refining System allocated 62% of its production to the demand of the domestic market and the remaining 38% was sold on the international market.
In 2014, 663 MBD were destined to the internal market: 283 MBD of gasoline, 239 MBD of diesel and gas oils, 90 MBD of LPG, and 51 MBD of other products for the aviation, electric and other sectors (“specialties”). Likewise, that same year, 406 MBD of products were exported: gasoline, diesel, and fuel oil.
However, today, at the end of March of 2020, only six years later, the production of the refineries is as follows: 29 MBD of gasoline, 46 MBD of diesel/diesel, 70 fuel oil and 7 MBD of other products. With the refineries operating at minimum levels: CRP 119 MBD, El Palito Refinery 28 MBD and Puerto La Cruz Refinery 5 MBD.
As can be seen, the collapse of the National Refining System is total, with a drop of 848,072 barrels per day; 84% compared to the production of 2014. This is why the government cannot attend to the internal market and resorts to fuel imports; added to this, the demand for fuels has fallen dramatically, from 663 MBD for the year 2014, to only 120 MBD today, which means a drop of 81% due mainly to the collapse of the Venezuelan economy with a cumulative decrease of 63% of the GDP from 2015 to the present.
This graph shows how the production of the Venezuelan refineries has been falling steadily between 2015-2020, to the same extent that the government imprisoned the managers, that oil production fell, that the company was militarized and, very importantly, resources began to be diverted for costs and expenses, operations, maintenance, and investments. This coincides with the appointment of the Treasurer of the Nation, Erick Malpica, in 2014 as Vice President of Finance of PDVSA, and then Finance Minister Simón Zerpa.
Resources for the refining sector are critical to maintaining the operational capacity of refineries, not only for operations and supplies, but also for carrying out scheduled maintenance activities, including “plant shutdowns”, i.e., when one or more units are completely shut down for repairs, major maintenance, and equipment changes. If this is not done, the various units of the refineries begin to go out of operation due to problems of reliability and mechanical integrity.
The following graph shows how, each year between 2004-2014, billions of dollars were invested to keep our refineries operating. In the period 2004-2014, a total of $28,088 MM was invested between operating costs and expenses, maintenance, and investments in the National Refining System.
In 2014 alone, $1.364 billion was invested in the domestic refining sector. The big question is what did the government do with the resources needed to maintain and operate the National Refining System between 2015-2020? Where is the management and workers who guaranteed the operation of the National Refining System from 2004 to 2014?
PDVSA’s Intervention Commission announces that it is making efforts to activate the Catalytic Cracking Unit at the El Palito refinery, taking equipment from the Paraguaná Refining Complex. All the experience and the difference in technology of both Complexes indicates that this effort will be fruitless and dangerous, but in any case, it will not provide sufficient fuel to meet internal demand.
If all national refineries were to be built at least at 50% of their capacity, the reality is that the country’s small oil exports are being used to pay off loans, credits and debts. The creditors want oil to sell on the international market, so they are not going to send their volumes to the National Refining Circuit, in the hypothetical case that they were in capacity to process them. The reality is that PDVSA ceded or lost its capacity to sell our oil. This activity is now in the hands of traders, the international partners of the Mixed Companies or PDVSA’s or the country’s creditor companies.
On the other hand, the government now argues that due to the US sanctions, it is not possible to purchase inputs for fuel production when imported inputs, especially for the production of unleaded and high-octane gasoline, are available in both Russia and China.
The same Commission now plans to hand over the refining sector, the import and distribution of fuels to the private sector, which means that they will hand over the ruins of our oil industry, after an absurd process of destruction of PDVSA.
The lack of fuel, as we can see from the company’s own figures, has its origin in the process of dismantling the technical and managerial capacities of the National Refinery System, as well as in the diversion of the resources necessary for its operation, maintenance, inputs and technological adaptations needed to guarantee its operation and safety.
The government cannot serve the domestic market for gasoline, diesel/gasoline, oils, lubricants and LPG because, in the absence of fuel production in the country, it must resort to imports, which is unsustainable for a country in our political and economic situation.
