WEEKLY OIL REPORT
Week of 7 to 11 September 2020

PRICE

Oil prices have been falling since the beginning of September, and on September 7^th they were below $40 a barrel, a threshold they had been exceeded last June.

The price is falling due to the increase in oil supply from OPEC+ countries and the recovery of production from OECD countries. This behavior seems to confirm the existing fear that the market was not yet in a position to absorb additional volumes of oil due to the deep deterioration of the global economy and the slow recovery of demand.

On Tuesday, September 8^th, the Brent and WTI references¹fell 14% in relation to Monday, August 31^st, to trade at $39.85 and $36.85 a barrel, respectively, once again falling below the $40 range of the last three months.

This Friday, September 11^th, at the close of the European markets², the Brent closed at $40.11 per barrel and the WTI closed at $37.60 per barrel, which is a drop of 13% and 12%, respectively, in relation to their closing values on Monday, August 31^st.

PRICE OF BRENT
(September 2020)

The contango structure of the last six months –which refers to the recording of futures prices below spot prices– changed this week with a fall of $3.00 per barrel for WTI futures prices ($36.76 per barrel). This indicates that the market is expecting excess supply for future months.

WTI PRICE
(September 2020)

The WTI presented³in the first 11 days of September a fall of 5% with respect to the end of August, which coincides with the end of summer travel (the «driving season») in the U.S. and with the aftermath of Hurricane «Laura», which hit the refining infrastructure on the country’s Gulf Coast. On the other hand, fuel inventories in the United States have been draining due to the maintenance shutdown of U.S. refineries.

Everything shows that, despite current events that would normally keep the price up –such as the travel season, the passage of the hurricane and the decrease in fuel inventories– the North American market is reacting more to the increase in oil supply and to the uncertainty that remains regarding the demand recovery.

According to the latest report⁴from the Energy Information Administration (EIA) dated September 10^th, United States’ oil production has recovered by 300,000 barrels a day, following the passage of Hurricane Laura.

In addition, Saudi Arabia announced⁵on August 19^th that it will not make additional production cuts and will follow the agreed cuts for the second period August-December 2020; this had a direct effect on the percentage variation of the WTI reference prices.

VARIATION IN SAUDI ARABIAN PRODUCTION AND ITS EFFECT ON THE PERCENTAGE CHANGE OF THE WTI PRICE REFERENCE

The EIA considers that OPEC (which is responsible for 60% of the world’s oil supply) and Saudi Arabia in particular, have a direct influence on the stabilization of the market, so under the current scenario this U.S. Office adjusts its projections according to the Organization’s production increase.

On the other hand, the OPEC Basket also shows a downward trend; on September 10^th it traded⁶at US$ 39.83 per barrel, which represents a 15% drop regarding the end of August.

PRICE OF THE OPEP BASKET
(June-September 2020)

The downward trend in oil prices casts doubt on the decision made by OPEC+ countries of loosening production cuts since August 1^st, in a market that –as the Russian oil minister Alexander Novak said⁷– is still «very fragile.» The big question for September is whether the market, with a still fragile demand for oil and a recovery marked by uncertainty and by the destabilizing effects of COVID-19 on the world economy, will be able to absorb the additional volumes of oil.

PRODUCTION

August is a key month for evaluating OPEC+’s strategy of making production cuts more flexible, going from 9.7 million barrels per day to 7.7 million barrels per day, which would mean an additional 2 million barrels per day entering the market that month.

However, although the last OPEC+’s Joint Ministerial Monitoring Committee (JMMC) meeting on August 19^th noted⁸a 95% compliance with the cuts by the countries in the group, many doubts remained regarding the production «compensation» volumes of the countries lagging behind in the completion of the cuts, mainly Iraq, Nigeria, Angola and Kazakhstan. If the compensations announced last month by Iraq⁹ and Nigeria¹⁰are fulfilled at 100%, the OPEC+ production cut would ideally be 8.3 million barrels of oil per day in both August and September.

Compliance with these compensations is important, since by July the monarchies of the Persian Gulf –Saudi Arabia, the United Arab Emirates (UAE) and Kuwait– discontinued their voluntary oil production cuts of 1.1 million barrels per day, which were in addition to their already existing quota corresponding to the OPEC+ agreements; this decision was made  on the understanding that all countries would comply with their production cut quotas, and that the lagging countries would compensate for the production volumes not cut from their share.

Although the countries lagging behind in meeting OPEC+ production quotas have not, to date, honor their commitments, several of their authorities have reaffirmed that they will comply with the additional cuts. Such is the case of the clarification made by the Ministry of Oil of Iraq, which issued¹¹a communiqué on September 2^nd where it reaffirms its commitment to the Declaration of Cooperation (DoC) signed in April by OPEC+, as well as to the compensation mechanisms, while reiterating its 100% compliance with its August production cut quota.

However, it is noteworthy that at the August meeting of the JMCC, no concrete statement was made regarding the fulfillment of these compensation commitments, and only «exhortations» and general calls to fulfill the commitments were made.

Russian Energy Minister, Alexander Novak, said they are already planning the September 17^th JMMC meeting, where «all issues» will be discussed, including compliance with OPEC+ production cuts and compensations by Iraq, Nigeria, Angola and Kazakhstan.

Furthermore, data published¹²by the Russian Ministry of Energy on September 11^th shows that August production was 9.06 million barrels of oil per day, an increase of 500,000 barrels per day over July. This increase reveals that Russia could not comply with the additional cut of 100 thousand barrels a day that had been announced¹³on August 12^th by the oil minister Novak as compensation for Russia’s failure to comply in May and July. That very same additional cut has been announced for September.

OIL PRODUCTION OPP+
(January-August 2020)

The EIA, in its September 10^th estimations¹⁴, indicates that by August OPEC Members had increased its production by 1.0 million barrels per day, and non-OPEC countries that are signatories to the DoC agreement had done so by 530,000 barrels per day, compared to July.

Until we have the OPEC Market Monitoring Report with information about the month of August, there will be no more reliable production data, from both direct information and secondary sources, to know the amount of real oil that has entered the market during August from the countries that have signed the OPEC+ agreements.

Angola

Sonangol, the Angolan state oil company, has been adapting to the impact of the COVID-19 pandemic on the world economy. Sebastião Gaspar Martins, Sonangol‘s CEO, explained in an interview¹⁵conducted on September 9^th by The Energy Years portal, that the pandemic and the collapse of the oil price hit the global energy industry like a perfect storm that nobody expected.

The crisis has had an effect on the world economy as a whole and Sonangol has not been immune. However, Angola has faced these difficult times by applying a strategy that has allowed it to continue its commercial operations without losing its goal for 2021: to be a different company that fully focuses on the entire oil and gas and energy value chain, achieving participation in production, distribution, refining and storage, and establishing alliances with actors that have proven to be leaders in these areas.

Gaspar Martins assures that, despite the difficult times, the restructuring that Sonangol has been carrying out since 2018, leading it to disinvest in 72 companies  (20 of them being state-owned), which has allowed it to achieve the necessary liquidity to make more efficient investments in the «core areas» of Sonangol‘s activity, such as those related to the oil and gas exploration, production and marketing, as well as investment in new technologies to increase offshore production, and investment in renewable energies; in spite of this new scenario of the so-called «clean energies», Gaspar Martins clarifies that the market is still dominated by hydrocarbons.

For two years now, Angola has been working on a Law for the development of national training programs, where the oil sector, represented by Sonangol, is the structure where the State will support itself in order to maintain the national industry, the employment and the generation of new jobs, and where all interested entities –including the educational system, the entrepreneurs, the national oil company and international organizations– will be working in close collaboration. To achieve this objective, the Angolan government is focusing on monopolizing fiscal control of hydrocarbons and on establishing policies where oil income benefits the people.

Gaspar Martins sees the current situation as an opportunity for Sonangol to implement this restructuring; the current price of oil is not a problem, since the Angola’s highest production cost for its oil is between 20-25 dollars per barrel, and therefore none of the projects planned by this African country –or its oil production– will be affected. So, a door is opened for the country to develop the supply chain in the internal market and thus cover the local demand.

Mexico

The President of Mexico, Andrés Manuel López Obrador, did not acknowledge¹⁶the production data published by neither the state-owned oil company Pemex or the National Commission of Hydrocarbons, which places Mexican production in July¹⁷at 1.6 million barrels of oil per day, its lowest level in more than 40 years.

The Mexican president said that this figure is due to the 100,000 barrels per day cut agreed with OPEC+ in April, although the Secretary of Energy, Rocío Nahle confirmed¹⁸after the group’s meeting in April that Mexico «could not» comply with the production agreement beyond June, and in July they would be «recovering the 100 thousand barrels per day» to leave the reference rate of Mexican production at 1.75 million barrels per day of oil.

MEXICO’S OIL PRODUCTION IN 2020 (January-July)

USA

In the EIA’s weekly report¹⁹of September, U.S. production as of September 4^th was 10 million barrels of oil per day, an increase of 300,000 barrels per day (3.1%) from the 9.7 million barrels per day of the previous week, when Hurricane «Laura» struck the Gulf of Mexico.

U.S. production continues its decline for the sixth consecutive month, marking a drop of 3 million barrels per day from this year’s March production²⁰. The EIA adjusts downwards its forecast for average production in 2020 and 2021, with an estimate of 11.4 and 11.1 million barrels a day, respectively.

U.S. OIL PRODUCTION
(2019-2020)

Drilling activity in the United States

Baker Hughes, in its September report North America Rig Count²¹, shows 180 active oil drills; 135 of them –Niobrara (4), Eagle Ford (9) and Permian (122)– are used in the production of shale oil, which reflects the gradual stabilization and slow reactivation of the oil exploration and exploitation activity in that country, with greater emphasis on the shale oil production areas.

DRILLING ACTIVITY IN THE U.S.
(March-September 2020)

These data show that the stabilization trend of this index is consolidated, after the sharp drop of 25% from mid-March –when there were 683 active drills– to mid-August, when there were 172 active drills. By August 21^st, the number of active drills increased by 11 units and has remained stable above 180 drills in recent weeks, which coincides with the stabilization of oil production in the U.S.

Worldwide drilling activity

The global report on oil drilling activity indicates a relative recovery in August 2020, if the figure for that month (556) is compared to that of the previous month (535). However, the numbers are still well below the levels of March 2020 (775) and August 2019 (827).

WORLDWIDE DRILLING ACTIVITY
(March-August 2019 / March-August 2020)

Regarding the number of active drills at present time and in comparison with March 2020, before the pandemic, Latin America continues to be the most affected region, with a drop from 156 to 69 oil drills between March and August, with Argentina, Colombia and Venezuela as the countries with most losses (86 drills); followed by the Middle East, with a reduction in 69 drills (from 304 to 235; with Iraq and Saudi Arabia leading the list), and Africa with 40 drills less, most of them belonging to Algeria and Nigeria. In these last two regions, the fall in active drills reflects the OPEC+ production cut agreements.

DECREASE IN DRILLS PER COUNTRY
(March – August 2020)

ECONOMY

COVID-19

On Friday, August 11^th, the number of contagion cases recorded²² worldwide reached 27.9 million, with 905,000 deaths²³. The most affected country is the USA²⁴, with 6.30 million active cases and 189 thousand deaths currently.

India²⁵ raises to the second place in the ranking of countries with the greatest number of infections, with 4.5 million cases, after registering more than 100,000 cases per day and, to date, 76,000 deaths.
And India is followed by Brazil²⁶, with 4.197 million cases and 128,000 deaths. Considering the number of infections, the other countries leading the group of those most affected by COVID-19 are Russia, Peru, Colombia, Mexico, South Africa, Spain, Argentina and Chile.

COVID-19 Vaccine

The General Director of the World Health Organization (WHO), Tedros Adhanom Ghebreyesus, highlighted²⁷that «some laboratories and institutions around the world are investigating possible vaccines against coronavirus… and that 35 of them are in the phase of clinical trials in humans”.

In that regard, it is worth mentioning the suspension²⁸, on September 8^th, of the final phase trials for the vaccine developed by the pharmaceutical company AstraZeneca and the University of Oxford, after it was known that a participant of the studies and clinical trials in the United Kingdom suffered an adverse reaction to the vaccine prototype. Although the volunteer is expected to recover, now is underway «…a pause in vaccination to allow a review of safety data«.

On the other hand, the Russian Ministry of Health announced²⁹ on September 9^th that «the first batch of the vaccine…Sputnik V against COVID-19…passed the necessary quality tests and was circulated among the population«; it also informed that «in the near future» the first batches of the vaccine, which showed –according to the Gamaleya Research Center–»a very good safety profile» in clinical trials, will be delivered to the regions of the country.

Two days after this announcement, the Russian Direct Investment Fund reported³⁰that they had signed an agreement to provide Mexico with 32 million doses of the Sputnik V vaccine by November of this year, this being «subject to approval by the Mexican regulators«.

The ECB is not following the Fed yet

Although the European Central Bank (ECB) was expected to join the change made by the U.S. Federal Reserve (Fed) regarding a more flexible inflation target, on September 10^th the Governing Council of the ECB held³¹its monetary policy meeting in Frankfurt, Germany, and decided to keep the interest rates unchanged (0.00% the prime rate; 0.25% the marginal lending rate, and -0.50% the deposit facility rate).

Christine Lagarde, President of the ECB, did not indicate whether there would be further stimulus, and reiterated that the Council «continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry”. The basis for these decisions would be a strong rebound in economic activity, albeit surrounded by the uncertainty generated by the pandemic.

Pessimistic forecasts

This week, some specialists and institutions pointed out several aspects related to the situation of the world economy destabilized by the COVID-19 pandemic.

Joseph Stiglitz, Nobel Laureate in Economics, said³²during a meeting of the Latin American Development Bank-CAF that «…the pandemic is likely to cause a series of debt crises…» because «…several countries have more debt than they can pay given the magnitude of the recession induced by the pandemic…”, so “…there will be a restructuring of the external debt, the only question is whether it will be well organized or messy«.

Moreover, Deutsche Bank³³in its «Long-Term Asset Return Study (2020)» marks year 2020 as the beginning of a new 10-year «structural super cycle», in which there will be a loosening of globalization, tensions between China and the United States, challenges and difficulties in Europe to move forward, an even higher debt, «inequality worsening before a backlash and reversal takes place«³⁴, among other issues.

Meanwhile, the firm Fitch Ratings, expects a fall in global Gross Domestic Product (GDP) of -4.4% this year, which is a reduction from the -4.6% forecast made in June. Although the September 7^th report³⁵ acknowledges that the recovery has been faster than expected, it also estimates that the pace of that expansion will moderate soon, and that despite the progress made, there are doubts that it will become «the much-lauded V-shaped recovery«, due to the future impact of «…unemployment shocks in Europe, firms…cutting capex [capital spending], and social distancing [continuing] to directly constrain private-sector spending«, while emerging markets now face economic contraction challenges on a scale comparable to or larger than those seen in Europe. A GDP recovery is estimated for the last quarter of 2021 in the U.S. and for the fourth quarter of 2022 in the Eurozone.

The view of the International Monetary Fund

The General Director of the International Monetary Fund (IMF), Kristalina Georgieva, said³⁶on September 9^th in Foreign Policy, along with her chief economist, that the global economy continues to show signs of resurgence, but that a full recovery is «unlikely» without a vaccine, since «the crisis, however, is far from being over» and the recovery «remains very fragile and uneven across regions and sectors”. To address this situation and the future of the economy, Georgieva recommends that governments and central banks should not untimely withdraw «the floor [put] under the world economy» that has allowed for the differentiation between «potential winners and losers«, and that both governments and investors «…must identify the viable businesses of tomorrow that should be supported…and [how] to support workers in those businesses that are no longer viable”.

USA

Analysts³⁷of the U.S. economy continue to debate between the extremes of optimism of those who think that the demand for goods and services from Americans willing to leave their homes to consume and use stimulus resources, along with a vaccine in the coming weeks, could make 2021 «one of the best years for the economy”, and the mistrust of those³⁸who estimate that recovery will take years and that, instead of being “V-shaped”, it may be “K-shaped” ³⁹, where the richest benefit from recovery, while the middle and lower classes –who must go out to work and be exposed to the virus– “continue to suffer”.

The Bureau of Economic Analysis of the Department of Commerce published⁴⁰, at the end of August, data regarding the drop of the United States’ GDP in the second quarter of 2020, confirming that such contraction of the GDP was by 31.7%, the highest in the country’s history, as a consequence of the toughest period of the crisis; pending the figures for the third quarter (to be published at the end of the month), this percentage reflects the strong impact that the COVID-19 has had on the U.S. economy.

Unemployment in the U.S.

The number of applicants⁴¹for unemployment benefits in the U.S. during the week ended September 5^thstood at 884,000, unchanged from the adjusted figure of the previous week (which went from 881,000 to 884,000); this would be the first time since March that the consecutive weekly figures are below one million applications, which is also influenced by the change in the parameter of the Department of Labor (DOL) to measure this data.

APPLICATIONS FOR U.S. UNEMPLOYMENT ASSISTANCE
(January-September 2020)

On the other hand, in general terms, the monthly report⁴²of the DOL for August shows positive signs with respect to July: the unemployment rate fell from 10.2% to 8.4%, with the number of unemployed falling from 17.34 million in July to 13.71 million at the end of August.

China

China remains at the forefront of the global economic recovery, with a quarterly GDP growth rate of 11% according to the China Bureau of Statistics, as well as a fall⁴³in the Consumer Price Index of 2.4% per month (compared to 2.7% in July) and 2% year-on-year in August; the recovery of the economy is supported by the stabilization of China’s foreign trade, which «…has gradually improved during the first eight months of this year, but still faces a bleak and complicated situation,» according to a spokesperson for the Ministry of Commerce⁴⁴, as well as by the increase in production and purchases of high-tech products for the domestic market, according to Beijing’s «dual circulation» strategy⁴⁵aimed to focus on the domestic market.

India

In the case of India, the indicators are less encouraging; the firm Goldman Sachs⁴⁶estimates the contraction of the country’s GDP for 2020-2021 at 14.8%, while Fitch Ratings⁴⁷places the drop at 10.5% of GDP, and the State Research Bank of India⁴⁸estimates the contraction of the economy for 2021 at 10.9%.

While the Japanese consulting firm Nomura reported on September 7^th that the pace of India’s economic recovery had improved in August and during the first week of September, thanks in part to good employment data. However, the increase in COVID-19 cases, at a rate of 100,000 cases per day, calls into question the sustainability of this employment recovery.

DEMAND

The EIA projections for 2020, published⁴⁹on September 10^th, places the annual drop in demand in August 2020 at 8.3 million barrels of oil per day. According to the EIA, this drop is due to the high degree of uncertainty existing about the evolution of COVID-19 and to the effects of the pandemic that continue to be immeasurable in the economy; that is why the abovementioned government agency reduces the expectations of its previous report and now estimates an average demand of 93 million barrels a day by the end of 2020, to reach 99.6 million barrels a day in 2021, an increase of 7%.

EIA ESTIMATES OF THE SUPPLY/DEMAND BALANCE
(2015-2021)

The EIA estimates that market fundamentals will remain unstable until the last quarter of 2020, while by the second quarter of year 2021 the margin between supply and demand will tend to narrow and could reach a balance that is similar to previous years.

End of the summer travel season

Under normal market conditions, summer represents a season of high fuel consumption for land and air transport. Therefore, observing the behavior of these indexes in times of COVID-19 is interesting.

Bloomberg news agency published⁵⁰on September 10^th navigation data offered by the application of the company Tomtom International BV, which provides information services to vehicle drivers and public transport users worldwide on the traffic behavior in each city. This is certainly a curious and useful indicator to determine the behavior of oil demand.

The navigation data reviewed and published by Bloomberg reflects a decrease in traffic congestion of 80% in the Americas, of 60% in Europe and of 60% in Asia, for the week of March 23^rd this year. The same data indicates that between the weeks of July 27^th and August 10^th traffic increased by nearly 10% in the Americas, 20% in Europe and 15% in Asia; this shows that the «traffic congestion» –which reflects the «relaxation» of mobility restrictions– is currently at an estimated 90% in Europe, 85% in Asia and 50% in the Americas. However, they warn that these figures may fall again, due to the likelihood of further restrictions on mobility.

PEAK HOUR TRAFFIC CONGESTION IN 2020 RELATIVE TO THE LEVEL OF 2019

For its part, air traffic, which normally presents a peak in summer, is an indicator of demand for aviation and transport fuels. This gauge continues to be affected by the massive restrictions on air traffic between countries as a result of the COVID-19 pandemic.

According to the air transport statistics company Cirium⁵¹, daily world arrivals in 2020 fell by 50% compared to 2019, so 32% of the world’s aircraft fleet is not in operation.

AVERAGE DAILY ARRIVALS BY REGION AND PERCENTAGE CHANGE OF AVERAGE 7-DAY FLIGHTS

The average number of days of arrival, recorded on September 9^th, had a 3% drop compared to the previous week, the largest drop since August 27^th, when this data became negative, mainly on flights from Europe and North America.

The three big consumers: USA, China and India

According to the EIA, in its September report⁵², the United Sates increased oil imports by 11%, with 5,423 million barrels as of September 4^th; this happens after the largest drop reported in 20 years, when on August 28^th it stood at 4,900 million barrels, following the closing of operations in the Gulf of Mexico.

Gasoline and diesel consumption in the U.S. also shows a downward trend, by 5% (gasoline) and 1% (diesel); as well as prices, which had had a sustained recovery until August 31^st. This is happening because the summer’s «driving season» –when there is normally a substantial increase in fuel demand– was affected by the high number of COVID-19 cases in the country, with a drop in consumption for the second consecutive week.

U.S. GASOLINE DEMAND
(2015-2020)

According to the EIA⁵³, gasoline consumption in the U.S. in April 2020 was at levels similar to those of year 1974. By June of this year, at the beginning of the «driving season», it had recovered to 90% of the consumption recorded in 2019; by the end of August 2020 the fuel consumption is still lower than the last 5-year’s average.

In a report cited⁵⁴by Bloomberg, based on the analysis of the Asian market research company ICIS-China, it is estimated that oil imports into China will be reduced by up to 40% in September and October, because they have exhausted the quotas assigned for the import of crude oil from private-operated refineries called «teapots», which have a limit on the volume assigned annually for imports. According to data⁵⁵from the industry consulting firm SCI 99, the activity of independent refineries in Shandong increased in 76% at the end of August, the highest rate recorded since June 2020.

In August, China had congestion in its ports, which forced their closure and brought high storage costs. According to the data company Refinitiv⁵⁶, on Monday, September 7^th, a total of 38 vessels were waiting for unloading in the ports of Qingdao and Shandong.

Meanwhile, in August, India‘s oil imports fell below those recorded in April, due to the sudden increase in contagion in the country, which has considerably reduced mobility and led to a 23% contraction in economic activity⁵⁷. According to data from the Ministry of Petroleum and Natural Gas, fuel sales in August fell by 7.5% compared to July and 16% below the levels recorded in 2019. Also, as per data from the Ministry⁵⁸, fuel demand in the country fell 15.6% year-on-year in August, and fuel consumption totaled to 14.39 million tons. LPG sales were 2.28 million tons (5.1% less year-on-year), and naphtha sales were 1.07 million tons, which is 6.6% down. Only sales of asphalt for road construction rose (in a 21.5% increase) and also, but slightly, those of aviation fuel (0.4% increase in August). India Ratings and Research estimates that in the last quarter of 2020 the country’s economy will fall by 11%.

STORAGE

According to data from the EIA⁵⁹, by September 4^th the commercial inventories of crude corresponding to the block of countries of the Organization for Economic Cooperation and Development (OECD) show a slight reduction of 4% regarding the second quarter of the year, for a total of 3.07 billion barrels per day.

CRUDE OIL STORAGE PROJECTIONS
OECD COUNTRIES

Projections for 2020 amount to 2,939 million barrels per day, 2% higher than the inventory in 2019, with a drop in 2021 to 2,895 million barrels per day.

China

Reductions in crude oil imports into China (up to 40% in September and October), due to the exhaustion of the quotas assigned by the government for imports by private refineries («teapots») that have an annual assigned volume limit, would not affect refining activities, since the storage accumulated in recent months is expected to be drained.

This measure will allow the release of the storage on the mainland, which was saturated at the beginning of August, as well as the floating storage, which has generated delays in operations. The industry consultant SCI99 states⁶⁰that at the end of July «the inventories for gasoline and diesel were reaching the 85% threshold, which is considered the maximum safe level«.

USA

Crude oil inventories in the U.S. rebound this week –according to the September 11^th EIA weekly report⁶¹– by 0.4%, which represents 500.4 million barrels per day. This shows the stabilization of oil production and the drainage of fuel inventories as the refineries enter maintenance activities after the summer season and with a view towards the winter season.

On the other hand, the strategic oil reserves⁶²continue the downward trend that began in August, reaching 647.8 million barrels per day on September 4^th. This is a clear indication that the emergency measures taken by the U.S. administration and its Department of Energy since April (consisting of acquiring oil production to protect their companies from bankruptcy) are relaxing.

Coverage days increased again⁶³, after four weeks of consecutive reductions, to 35.8 days, in order to match coverage levels at the end of July.

However, the gap between current inventory levels and the average of the last five years is narrowing, which is a sign of normalization or adaptation to the new market situation and the North American economy.

U.S. CRUDE OIL STORAGE

The regions that showed an increase in their inventories were the Midwest (PADD 2), mainly in the Cushing Oklahoma area, with 1 million barrels a day more than the previous week; the Gulf Coast (PADD 4) and the East Coast (PADD 5) increased a total of 1.9 million barrels in the last week. This is the result of a 5% reduction in refining activities, mainly on the Gulf Coast, for a use of 71.8% of the activities.

STORAGE OF GASOLINE AND DISTILLATES
(2015-2021)

Fuel inventories, which were at historically high levels in the first half of the year, drained because of the effects of Hurricane «Laura» in the Gulf of Mexico, thus preventing interruptions in the supply to the domestic market, and supporting the typically high seasonal consumption of the «driving season» in the U.S., so the price, as we pointed out in our Oil Report last week, did not suffer the alterations that were expected due to the magnitude of the weather event.

VENEZUELA

Gasoline: deep crisis

Venezuela is suffering, as never before, a severe crisis in the production and supply of gasoline and diesel for the domestic market, due to the paralysis of the national refinery park, which is operating at barely 10% of its installed capacity. As a result, it cannot even supply the reduced domestic demand of a paralyzed country with any economic activity whatsoever.

Neither the last Intervention Commission nor the Board of Directors of PDVSA has been able to put any of the country’s refineries into operation; therefore, they are operating sporadically, at a very low capacity and with successive accidents and spills, which reveals the low reliability of the facilities.

Successive oil spills from the El Palito Refinery and the Paraguaná Refining Complex, as well as unit failures, lack of supplies and toxic gas leaks that have affected the operators, are the most evident signs of the failure of the successive attempts to operate what was once a robust national refining complex that until 2014 operated and processed 1.2 million barrels of oil per day to supply the internal demand of 660 thousand barrels of fuel per day and to export 400 thousand barrels of products per day.

In reality the volumes of fuel available to the government, which arrived in the country from Iran, have been exhausted, so that the country is returning to a situation of fuel shortage throughout the country.

The effect of the internal market’s fuel supply collapse can be clearly seen in the capital city, where the government has traditionally avoided affecting public services and fuel supply due to the high political and social sensitivity of the Capital. In Caracas⁶⁴, queues at gas stations are immense and endless, even altering the “sanitary flexibility week” imposed by the government to deal with the coronavirus. This is something that cannot be hidden; in fact, the government has opted to force vehicle drivers who are waiting to fill up with gasoline to return to their homes and resign themselves to not having the fuel.

The situation of chronic fuel shortages in the country and the fact that the distribution of the little available fuel is in the hands of military components, local authorities or government party leaders, have set off several corruption schemes in the sale of fuel and in the supply management. So blatant are the corruption and scams by this government’s authorities that there are protests and popular complaints throughout the country, barely contained by the state security agencies.

In Venezuela a liter of subsidized gasoline has a price of 5,000 Sovereign Bolivars (Bs. S.); being that amount calculated at an exchange rate of 350,000 Bs. S./1 USD, the price of this liter of gas is equivalent to 0.014 USD. That said, the current price corrupt government officers sell the gas can vary between 2 and 4 dollars per liter, a much higher price than that paid in Europe or the U.S. In a situation of such anguish and despair, a humble citizen could pay up to 40 dollars for only 10 liters of fuel, and the minimum wage is 2.7 dollars per month.

In the country’s interior the fuel shortage has gotten to a dramatic magnitude. Cities like Maturín and Puerto la Cruz (eastern Venezuela), both in oil areas, barely receive gas⁶⁵once a month. The cities located in the west, the Zulia region, the Andes, the central zone and the south of the country, none of them have escaped from this calamity⁶⁶.

With Liquid Petroleum Gas (LPG), used in 86% of households for domestic consumption, the current situation is similar⁶⁷. Ninety percent of the gas used in the country is oil-associated, so the collapse of oil production –which stood at only 339 thousand barrels per day as of August – collapses also gas production for the domestic market. On the other hand, the main cryogenic plants for LPG extraction are paralyzed: Santa Barbara and Jose in the east, Ule in the west of the country. Likewise, the paralysis of the refineries in Cardón, Amuay, El Palito and Puerto La Cruz has contributed to the cease of LPG production.

Venezuelans must wait at least 4 months to have access to LPG cylinders, so they have been forced to look for alternatives for cooking, such as the use of firewood, going back at least 80 years in their living conditions, returning to the time when the country had no access to hydrocarbons for domestic consumption.

Legislative reform or privatization?

For some time now, the current National Assembly has been working on a bill to change the existing Organic Law on Hydrocarbons⁶⁸ –approved in 2001 during the government of President Hugo Chávez– with the aim of reissuing the «Apertura Petrolera«, the «Oil Opening» of the 1990s, in order to end the oil fiscal regime and strip the State of control over this resource. In our article dated February 2^nd, we previously denounced the main unconstitutional aspects of such a proposal and how damaging and contrary to the public interest is.

Furthermore, the president of the Energy Commission of the National Assembly assures that «the destruction of the capacities of the oil industry in Venezuela» is a product «of the failure of the socialist model implemented [in the country]», resorting to a terminology and to political categories that do not exist in the oil sector, wherein the act of extracting and processing oil does not have ideological connotations.

However, the numbers certify the sustained growth of national oil production –and of PDVSA’s strengths, after the company recovered from the effects of the 2002-2003 Oil Sabotage– since 2004 until 2014, when the disastrous management of the Maduro government at the head of PDVSA (2014-2020) began.

The current National Assembly intends to repeal such an important law to the country, and by doing so would affect our chances of getting out of the economic crisis. All this is intended to be done with neither discussion nor debate and before the next parliamentary elections on December 6^th, 2020.

Additionally, the current government has undertaken a de facto privatization of PDVSA, with the delivery of the oil to private operators through a set of decrees and judicial decisions, such as the⁶⁹Decree 3068, the «Petroleum Services Contracts»⁷⁰ and Ruling 156 of the Supreme Court of Justice⁷¹, through which the Constitutional reserves on oil activity have been reversed and the letter and spirit of the current Organic Law on Hydrocarbons have been violated. All of these are unconstitutional actions that we have denounced at the time and that will necessarily be reviewed when constitutional order is restored in the country.

Likewise, as we denounced at the time, the current government’s Intervention Commission on PDVSA is really acting on the basis of a plan to privatize PDVSA and hand over the oil to private interests.

This is important to emphasize because –as we have denounced and as it has happened on previous occasions in so many oil-producing countries– in times of deep political and economic crisis such as these, and in the face of the institutional weakness of the Venezuelan State, economic and political interest groups see the opportunity to impose reforms or modifications on the oil sector, a strategic sector for our country. Such a thing happened during the interim presidency of Ramón J. Velazquez in 1995, when, in the midst of profound political and economic troubles, the projects of the Oil Opening were signed⁷²; in the end, those projects turned out to be unsustainable for the country and were later reversed during the government of President Hugo Chávez.

The only possibility Venezuela has to overcome the great challenges and the current deep crises and to recover the political, economic and social governance of the country, lies in maintaining the validity of the “Plena Soberanía Petrolera”, Venezuela’s Full Oil Sovereignty.

Oil Spills

The deteriorated situation in which the Venezuelan oil industry finds itself is evidenced by the large number of oil spills that continue to occur in several areas of the country.

The state of Falcón, in the northwest of the country, is once again hit by a crude oil leak, this time from an underwater polyduct of the Paraguaná Refining Complex⁷³, with an oil stain that extends for more than 13 kilometers in the town of Río Seco, where the leakage of gas emerging from water towards the surface can be observed and heard.
More than 200 fishermen have been negatively impacted by this incident, as this limits their possibilities of carrying out fishing activities in the area.

Last August, an oil spill that considerably affected areas of Morrocoy National Park occurred⁷⁴; approximately 25 thousand barrels of crude oil were spilled there, according to data obtained through satellite images.

In the face of these massive spills and their environmental effects, neither PDVSA nor any other authority has responded or explained the causes, nor acted to contain and remedy such devastations, as established in the protocol for these types of incidents; the current government shows absolute indolence toward events that should be sanctioned by the Environmental Criminal Law.

It is possible to recover PDVSA

On September 8^th, 2020, we held a conversation⁷⁵with the oil market consulting firm Argus Media, to take stock of the current situation of the Venezuelan oil industry and its possibilities of recovery.

Although it is true that the national oil infrastructure is in severe conditions of deterioration, it is possible to work on the recovery of the industry’s capacities, since the problem does not have a technical origin; the problem in Venezuela is political.

When we had to exit the Ministry of Petroleum’s, as well as PDVSA’s management, the national oil company was valued at 284 billion dollars, with a production of 3 million barrels per day and a refining capacity of 1.2 million barrels. But these numbers for 2014 are really far from the current reality: in 2020, PDVSA is a company that barely produces 339 thousand barrels of oil, according to OPEC data, and scarcely produces 30 thousand barrels of fuel per day, submerging the population in one of the worst economic, political and social crisis in its history.

The interview with Argus Media aims to contribute to a necessary discussion about the most important and strategic sector of our country, and I invite you to read it through the following link.

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