INDEX

• Price
• Production
• Economy
• Demand
• Storage
• Venezuela

PRICE

Oil market prices continued the gradual recovery trend that began on May 1^st; starting June, they remain in a price band between 40-46 dollars a barrel, and it is estimated that it will continue to recover until the end of 2020.

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After the OPEC+ cuts came into effect¹ on May 1^st, the Brent and WTI references have shown increases of 68% and 112%, respectively, in relation to May.

On Monday² August 31^st, at the close of the European markets, the Brent was quoted at $45.81 a barrel, an increase of 7.5% over its July 31^st value. The European score continues to rise, maintaining stable values above $40 a barrel as of June 4^th.

PRICE OF BRENT
(May-August 2020)

On the other hand, at the close of Monday’s trading in Europe, the WTI traded at $43.06 a barrel, an increase of 7% over its value on July 31^st.

WTI has shown more instability in its price, although it has remained above $40 a barrel as of July 2^nd.

WTI PRICE
(May-August 2020)

Both Brent and WTI markers maintain the recovery of their quotations with a convergent differential that, at the end of August, is located at 3.3 dollars a barrel.

For its part, the OPEC Basket quoted on Friday, September 2^nd, according to its official report³, at $45.03 per barrel, an increase of 145% over that registered on May 4^th, 2020.

PRICE BASKET OPEP
(June-September 2020)

The beginning of September was marked by the instability that has characterized the slow recovery of prices. On September 2^nd, both the Brent and the WTI were quoted at 45.22 and 41.51 dollars a barrel respectively, a fall of 1.6% and 2.6%, respectively, regarding their values at the end of the month (Monday, August 31^st).

PRICE BEHAVIOR OF THE BRENT AND THE WTI AT THE BEGINNING OF SEPTEMBER 2020

Although still marked by market instability, price recovery is mainly due to OPEC+ production cuts that took effect from May 1^st, and to the drop in production in other OECD countries, while oil demand remains unrecovered, marked by uncertainty regarding the performance of the world economy and the second wave of the COVID-19 pandemic.

The price has maintained its upward trend despite the fact that, as of August 1^st, the OPEC+ cut was relaxed by two million barrels, to 7.7 million barrels a day of oil.

In terms of market fundamentals, while supply has been adequately regulated by OPEC+’s action, demand continues to be destabilized by the contraction of the world economy, although it is tending to recover by 2021.

Oil Market Behavior During the 3^rd  and 4^th  Weeks of August.

On Monday, August 24^th, the U.S. National Hurricane Center reported⁴ on the possibility that two storms headed for the Gulf Coast —»Laura» and «Marco»— would become hurricanes. This information generated an unexpected rise in prices on Tuesday⁵ August 25^th, when the references WTI and Brent registered 43.17 and 46 dollars per barrel, respectively, being the highest prices registered since the beginning of March.

This natural phenomenon generated great tension in the oil sector. The U.S. Bureau of Safety and Environmental Enforcement (BSEE) reported on August 25^th that the arrival of the hurricane forced the evacuation of oil installations in the Gulf of Mexico, implying the closing of 84% of the «offshore» production⁶and bringing to a halt a third of the gasoline and diesel production at the refineries.

On Thursday, August 27^th, the hurricane finally made it to the mainland, and, although it did not cause major damage to oil facilities along the Texas coast, it did affect southern Louisiana, causing damage to the CITGO refinery.

WTI PRICES DRIVEN BY THE STORM «LAURA”

Although Hurricane «Laura» was one of the most powerful hurricanes to have ever hit Louisiana —affecting the production of about 30% of the gasoline and diesel in Gulf of Mexico refineries— the impact on the price was relatively low. This moderate behavior in the effect on the WTI price is due to the high levels of oil and oil product inventories currently in the US, which dissipated market tensions regarding oil supplies to refineries, or gasoline and diesel supplies to the market. In a situation like this, prices normally would have skyrocketed.

On the same day⁷, Thursday, August 27^th, there was a fall in oil prices, after the US Secretary of State announced⁸his country’s intentions to unilaterally reestablish all UN sanctions against Iran on September 20^th, if the UN Security Council does not approve a resolution⁹, presented by his country, requesting¹⁰ that the sanctions that had been lifted¹¹in 2015-2016 (as a result of the nuclear agreements signed¹²in 2015) be again imposed against Iran.

Price levels in August have also found support in the weak dollar and in the draining of inventories in the U.S., all of which stimulate future sales, so that cargo prices in October also increased by 1.2%, due to the attractiveness for traders of buying cargo with a weak dollar.

While supply is regulated and stabilized, uncertainty is concentrated on demand.

In spite of the passage of Hurricane «Laura» and the announcement of new U.S. sanctions against Iran in the UN, the oil market remains «contango,» since it perceives that there are sufficient inventories and oil production capacity in the market, so prices already exceed the threshold of $43 per barrel, although still far below their values of December 2019. The price, at the moment, is much more sensitive to concerns about the recovery of market demand than it is to supplies.

OIL PRICE REMAINS «CONTANGO».

The markers are contained in their price range of $43-45 per barrel because of economic tensions, especially those arising from the second wave of the COVID-19 pandemic, the large number of infections that continue to increase in the U.S., India and Brazil, the tensions between the U.S. and China and the difficulties of the large industrialized economies in recovering their activities and restoring pre-pandemic levels of oil demand.

PRODUCTION

OPEC+ JMMC meeting.

At the August 19^th videoconference¹³held by OPEC+ to monitor the market, the Organization asked Member Countries to respect and adhere to the production cutback agreements, which had reached compliance levels¹⁴of 95% by July.

At the JMMC meeting, Mexico’s production¹⁵ (the lowest in 40 years) was taken into account to be included as complying with the OPEC+ countries’ cuts, which would bring¹⁶the group’s compliance level in July to 97%. It is worth noting the inclusion of Mexico’s production drop as part of the compliance with the group’s cuts, since the country, through its President López Obrador and its Secretary of Energy, Norma Rocío Nahle García, stated that starting June it would not accompany¹⁷the OPEC+ cuts.

The inclusion of Mexico in the statistics of the OPEC+ cuts for July seems to be more oriented towards gaining confidence in the market about the cohesion of the OPEC+ group of countries than towards the necessary analytical rigor to look at the situation and all its edges.

The JMMC’s announcements regarding OPEC+ compliance with the cuts are in clear contrast with the percentage published by the International Energy Agency (IEA) in its monthly report¹⁸of August 20^th, in which it estimated compliance with the OPEC+ production cut for July at 89%.

Abdulaziz bin Salman, Saudi Arabia’s Minister of Energy, stated¹⁹that during the fourth quarter of 2020 world oil demand will recover by 97% in relation to pre-pandemic levels.  Because of this, he insisted on maintaining the flexibility of the OPEC+ production cuts for August at 7.7 million barrels per day and then, as of January 2021, at 5.8 million barrels per day, until April 2022.

The Saudi minister’s estimate regarding the recovery of world oil demand looks optimistic, given the existing uncertainty in the oil sector regarding the recovery of the world economy, which has generated more conservative predictions regarding the recovery of oil demand.

OPEC itself, in its last MOMR of July²⁰, projects a recovery in demand of 17% for the fourth quarter of the year, in relation to the level registered in the second quarter, to close the year 2020 with a year-on-year fall of 9% and a projected increase of 7.7% for 2021. The U.S. Energy Information Administration (EIA)²¹ and the International Energy Agency (IEA)²²forecast a 15% and 14% recovery in demand, respectively, by the end of 2020.

For his part, the Russian Minister of Energy, Alexander Novak, stressed that it is essential to maintain full compliance with the OPEC+ agreements, and recognized the «fragility» which the oil market is in today, as well as the «uncertainty» that still exists in this sector. Novak pointed out that, in spite of this, OPEC+ has the capacity to make decisions in the event that «the market will be overheating…”, in order “…to reduce quotas faster”²³.

Ministers Novak and Bin Salman expect that Iraq, Angola and Nigeria will comply in August with the compensation in the cut of oil production, which would be added to the cut of 7.7 million already agreed upon.

Minister Novak said²⁴that «we cannot stop there [at the 95% compliance], we have to ensure the total respect of the OPEC+ accord«, while the Saudi minister said²⁵that everyone “should strive to achieve full adherence to our agreement«.

Both Iraq²⁶ and Nigeria²⁷ committed to OPEC+ to add, between them, 514 thousand barrels of oil per day to their respective production cut quotas in August. They agreed to 850 thousand barrels per day (Iraq) and 417 thousand barrels per day (Nigeria), as compensation for their failure to comply with the agreement between May and July, which they had committed to comply with 100%.

Out of OPEC’s 13 member countries, only 10 agreed to cuts in production. Libya, Iran and Venezuela (the latter with an 88% drop in production compared to 2013), are exempt from production cuts and will continue to face difficulties in maintaining or increasing their oil production levels.

OPEC

For July, the production of the OPEC Member Countries reached 23.17 million barrels per day, according to information from the last report³¹ of the organization, «Monthly Oil Market Report«, published at the beginning of August.

According to that report, OPEC production in July increased by 980,000 barrels per day compared to June, due to the recovery of 1.03 million barrels per day in oil production by Saudi Arabia, Kuwait and the United Arab Emirates. Those countries made a voluntary cut in June³³of 1.18 million barrels, in addition to their agreed quotas, to cover the breach of the OPEC+ cut agreement by Iraq, Nigeria, Angola and Kazakhstan.

It is estimated that with the relaxation of the OPEC+ cuts, oil supply in August will increase by 2.3 million barrels a day. However, if the compensation commitments of the countries that are lagging behind in the fulfillment of the agreement materialize (including the 100 thousand barrels a day announced³³by the Russian minister, Alexander Novak, to compensate for Russia’s overproduction in June and July), the real amount of additional oil into the market as a result of this relaxation would be 1.4 million barrels a day.

It was expected that the OPEC countries that had failed to meet their production cut-off quotas, such as Iraq, Nigeria, Angola, the Congo and Equatorial Guinea, would make compensations during August.

PRODUCTION COMPENSATION
IN OPEC COUNTRIES

According to secondary sources, the largest volumes to be compensated are those of Iraq (with 283,000 barrels per day) and Nigeria (with 111,000 barrels per day); for the rest of the member countries, a 100% compliance with voluntary production cuts was expected by August.

Iran, which has had a 12% fall regarding the volumes for the same period in 2019, announced³⁴on August 26^th that it would begin the first phase of development of the «West Karun» oil fields. These fields contain approximately 67 billion barrels, which will have a positive impact on the oil exports of the country, which, according to official statements, could increase its production by 500 thousand barrels a day.

However, the pressure of the U.S. on Iran, far from diminishing, is increasing and hardening, hindering the possibilities of the Asian country of maintaining the fall or increasing its already diminished oil production.

As we have already mentioned, on August 27^th the U.S. Secretary of State announced that the White House had activated in the previous week the 30-day process so that by midnight on September 20^th, «all UN sanctions against Iran would be restored«³⁵. They accused the UN Security Council of «not maintaining international peace and security» for rejecting³⁶, on August 25^th, the project presented by the U.S., which aimed to extend the arms embargo and re-impose the sanctions on Iran.

These sanctions were lifted³⁷in July 2015 by the UN and between January 2016 and May 2018 by the U.S.³⁸, based on the nuclear agreements of the P5+1+Iran (U.S., Russia, China, UK, France and Germany), approved³⁹ by the UN Security Council in July 2015.

The intentions of the U.S.A. have been rejected by the signatory countries of the 2015 agreement and the Permanent Members of the UN Security Council, such as the United Kingdom, France, Russia and China, as well as Germany. So the U.S. will probably act unilaterally in imposing sanctions on Iran.

In view of the increase in tension between the U.S. and Iran, the commission responsible for the agreement (called «Joint Comprehensive Action Plan»), held⁴⁰on Tuesday, September 1^st, in Vienna, a «meeting of the joint commission of the action plan on the Iranian nuclear (program)«. The meeting was chaired by Helga Schmid, of the European External Action Service, and was attended by representatives of the signatory countries China, France, Germany, Iran, Russia and the United Kingdom.

At the end of the meeting, Schmid said on Twitter that «the participants are united in resolve to preserve the Iran Deal and find a way to ensure full implementation of the Agreement despite current challenges.»

Since the White House unilaterally resumed⁴¹its sanctions against Iran in November 2018, oil production in that country has fallen by 1.36 million barrels per day, representing a decline of 41.21%, according to secondary sources reporting to OPEC on production last August⁴².

The tightening of U.S. sanctions on Iran, in addition to the establishment of relations⁴³ between the United Arab Emirates (UAE) and Israel last August 13^th, and the recent announcement by the U.S. special envoy for the Middle East, Jared Kushner, that «other Arab countries» will follow in the footsteps of the UAE, indicate the deployment of a new strategy by the U.S. administration in the Middle East, a sensitive area for the international oil market.

THE THREE LARGEST OIL PRODUCERS IN THE WORLD.

USA

According to the weekly report⁴⁴published on September 2^nd by the Energy Information Administration (EIA), U.S. production as of August 28^th was 9.7 million barrels per day, a drop of one million barrels per day from August 14^th, when production⁴⁵was 10.7 million barrels per day of oil; this was reflecting the impact on oil production caused by the passage of Hurricane «Laura» through the Gulf of Mexico, where 299 offshore platforms were evacuated. This is the first time —since U.S. production surpassed the 10 million barrel per day oil barrier— that production is below 8 digits.

Based on the same report, the average U.S. production in August was 10.5 million barrels of oil per day, which was 2.5 million barrels less than the average production of 13 million barrels per day recorded in March⁴⁶of this year (a drop of 19.4%). Taking into account the behavior of U.S. oil production before the passage of hurricane «Laura» off the coast of the Gulf of Mexico⁴⁷, until August 21^st (the week in which production of 10.8 million barrels a day was recorded), U.S. oil production has fallen by 2.2 million barrels a day, a drop of 16.9% with respect to March of this year.

These figures show a 1% increase in production in one week, which, if this trend continues, would be a clear indicator that U.S. production is beginning to react to the increase in WTI prices above $40 a barrel and that the «hedge funds» that are leveraging U.S. producers, especially «shale oil,» are seeing prospects for recovery.

According to data collected⁴⁸by Rystad Energy, the onshore operations of 25 companies (including ExxonMobil, Chevron, and ConocoPhillips) have been reactivating, with a 90% recovery in August in relation to the 965 thousand barrels of oil that they had stopped producing in May; it is expected that by September, this recovery will reach 98%.

ONSHORE» PRODUCTION RECOVERY IN THE U.S. APRIL-AUGUST 2020 (25 COMPANIES)

The passage of hurricanes through the Gulf of Mexico.

On the other hand, as we have already pointed out, in the fourth week of August, U.S. oil production was impacted by the passage of hurricane «Laura» along the coasts of the Gulf of Mexico to the southeast of Texas and Louisiana, causing the eviction, since August 25^th, of the offshore platforms operating in the Gulf, stopping 1.6 million barrels a day of offshore oil production and affecting the operations of the refineries in the area, according to the U.S. Bureau of Safety and Environmental Enforcement (BSEE)⁴⁹.

Despite this extraordinary situation —which affects both offshore production and refining in the zone— this event did not have any impact on fuel supply, due to the high inventory levels that supported the market, while the operations of refineries that had to close before the arrival of the hurricane —such as ExxonMobil, CITGO, Motiva Enterprise (Shell, Saudi Aramco), Total, and Valero Energy— were normalized.

Shale Oil

Although the shale oil production has suffered a drop of more than 1.6 million barrels per day of oil in the last five months as a result of the collapse of oil prices, according to data from the EIA⁵⁰, the recovery of values above $40 per barrel, starting in June, are supporting the reactivation of shale oil production, which is reflected in the new shale well drilling activations and the recovery of production in the mainland areas (Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian).

Shale oil production and fracking (fracturing of wells) have been the decisive factor in the increase of oil production in the U.S. as of 2010, in the so-called «fracking revolution«, production that by March⁵¹of this year was 9.1 million barrels of oil per day, that is, 70% of the total production of the country.

U.S. OIL PRODUCTION FROM SHALE OIL ENTRY

The development of fracking (or «well fracturing»), added to the large installed capacity and existing infrastructure in the shale oil areas,  the lack of environmental regulation and the massive financial support of «hedge funds», made possible the dizzying increase of shale production in the country. However, this business —supported by a large number of independent, small and medium sized companies, in addition to the big ones like ExxonMobil, Chevron or ConocoPhillips— has proven to be very sensitive to the price of oil, with a threshold of $40 a barrel.

As soon as the price collapsed in March of this year, drilling activity in the shale oil areas dropped sharply⁵²from 683 active drills as of March 13^th, 2020, to only 180 active drills as of August 28^th. In addition, according to the law firm Haynes & Boone, more than 200 shale oil producers filed for Chapter 11 of the U.S. Bankruptcy Code, filing for bankruptcy⁵³. This explains the efforts of the U.S. administration to grant financial aid to the operators and to acquire oil production from shale oil to be stored in the strategic reserves of the country, which increased by 75 million barrels since the beginning of the crisis.

For the United States, maintaining the production of shale is strategic, not only to sustain the economy of important states such as Texas, Louisiana, North Dakota, Montana and New Mexico, but also to remain the world’s leading oil producer and achieve «Energy Independence«⁵⁴, an objective looked-for by the United States since 1973, after the oil embargo by the Arab countries against the countries that supported Israel in the Yom Kippur war.

In the strictly commercial framework, Russian and Saudi oil producer companies have complained to the governments of their countries that the policies of price defense promoted by OPEC+ have provided economic support to the production of U.S. shale oil, based on the sacrifice of production and markets implied in the agreements of cuts in defense of price. This contradiction between the interests of the companies and the foundations of oil policies of the countries has caused, not infrequently, important disagreements in the strategy of production among the big producers, especially Russia and Saudi Arabia.

Drilling activity in the United States

Baker Hughes’ North America Rig Count report⁵⁵showed a growth in the number of active oil drills in the United States, which stood at 183 in the week of August 21^st (11 more than the previous count) and 180 in the week ending August 28^th (3 less), slowing the downward trend of this indicator and marking the first double-digit increase in the number of drills since January 2020.

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

The double-digit increase in the number of U.S. drills in the third week of August was driven by shale oil exploration activity in the Permian Basin (western Texas and southeastern New Mexico). In this regard, an executive officer from Halliburton, the largest supplier of fracking equipment, estimates⁵⁶that after the falls in the second and third quarters of the year, there will be a «recovery in drilling activity» in the last quarter.

The Norwegian consulting firm Rystad Energy had pointed out that the fracking operations started in July⁵⁷had an inter-monthly increase, with nearly 400 platforms active and operating in shale wells, although still far from the 1,270 wells started in January.

Environmental deregulation in the U.S.

For the U.S. administration of President Trump —who has committed himself to increase the production of fossil fuels and to keep to his promise of «energy independence» for his country— the fall of oil production in the U.S. is one of the biggest setbacks, both from the economic and political point of view, especially in view of the coming elections.

In this context, the United States government presented⁵⁸on August 17^th the environmental deregulation plan, which will allow, as of December 2021, oil and gas drilling activities in the National Wildlife Refuge located in the Arctic zone in Alaska, an area intended to the protection of the environment and of the animal life. This decision expands the area of exploration and production by oil operators in the Prudhoe Bay Basin in northern Alaska, on the Arctic coast of the Beaufort Sea, which has been active since 1968.

The United States and Russia consider the Arctic region to be an area of enormous strategic interest, not only because of the oil and gas the reserves they may have (an estimated 90 billion barrels of oil)⁵⁹, but also because of the commercial path that may be traced in the future along the Northern Sea Route⁶⁰.

The White House’s environmental deregulation policies have been reinforced by the decision last July to make changes to the 1970 National Environmental Protection Act, with the stated purpose of reducing bureaucracy, but which in practice «…limits, reduces, and in some cases even eliminates public reviews of environmental impact of infrastructure projects to accelerate construction of, for example, highways, power plants, or oil and gas pipelines”.⁶¹

In particular, these changes release federal agencies from any obligation to take into account the effect on climate change that any project may have, or to conduct environmental impact studies, by stating that «…effects should not be considered significant if they are remote in time or geographically or the product of a long chain of causes». This has been described by environmentalists as possibly «the greatest gift to polluters in the last 40 years«.⁶²

For his part, the Democratic candidate for the presidency of the United States, Joe Biden, announced⁶³on August 25^th that in his term of office he will consider the Green New Deal as «a crucial framework» for tackling climate change, whereby «new oil and gas permits will be banned on public lands and waters» and the Biden Clean Energy Revolution Plan will be implemented, promoting the development of «clean» energy, which would mark a radical change in the current White House energy policy. However, it is not clear whether the Democratic candidate, if elected, would reverse Trump’s plan in Alaska’s protected areas.

Saudi Arabia.

A situation that has been increasing within OPEC is that the oil policies of the countries are answering more and more to the interests and needs of their operating oil companies than to national interests. The most emblematic example of this was the case of Venezuela during the period of the “Apertura Petrolera” (“Oil Opening”) in the years 1986-1998, when in OPEC the interests of the national oil company PDVSA prevailed over those of the Venezuelan State. The same phenomenon, with its own characteristics and particularities, is currently being observed in Saudi Arabia.

As part of the plan⁶⁴«Saudi Vision 2030″, launched by Crown Prince Mohammed Bin Salman, the national company Saudi Aramco has opened itself to private capital, issuing shares in Tadawul, the Saudi Arabian stock exchange.

This process, initiated in 2016, had as one of its goals to put 5% of Saudi Aramco’s shares up for sale in Tadawul; this has forced the Saudi national company to act according to the logic of private companies in the oil sector, where «priority is given to the value and capital income of its assets,…seeking the profitability of their investments«, to the detriment of the behavior of the national companies, who «prioritize property over oil… and the country’s fiscal income, oil revenues, royalties«, as expressed by the former Venezuelan Minister of Oil and former Secretary General of OPEC, Alí Rodriguez Araque, in his book El proceso de privatización petrolera en Venezuela (“The process of oil privatization in Venezuela”; Fondo Editorial Darío Ramírez, Caracas: 2014).

Therefore, the decision taken by Saudi Arabia when it announced, in December 2019, that the state oil company Saudi Aramco was placing 1.5% of its shares in the stock market⁶⁵, placed the Saudi giant at the gates of a scenario unfamiliar to that of an oil producing country. Aramco is the best valued oil company in the world, with an estimated value of 1.9 trillion dollars by 2019, which is why its entry to stock market and privatization left it with an income of more than 104 billion dollars from the sale of 1.5% of the shares. Crown Prince Bin Salman ensured a minimum dividend of $75 billion per year⁶⁶, starting in 2020, at a rate of $18.75 billion at the end of each quarter.

These announcements and commitments were made in December 2019, without being able to foresee the emergence of the COVID-19 pandemic in February 2020 and the collapse of oil demand and price from March of that year.

Probably this commitment made by the Saudi Kingdom and the resulting resource needs were determining factors in the Kingdom’s decision to start a price war⁶⁷with the Russian Federation, following the failure of the OPEC+ meeting on March 6^th, when the two major producers failed to reach agreements.

In this regard, in the Russian Federation, the president of the oil company Rosneft expressed⁶⁸his opposition to any agreement with the Saudi Kingdom in OPEC+; as a consequence, both oil giants engaged in an overproduction race to win markets and as a punitive measure against their commercial competitor, a race that, unfortunately, coincided with the rapid expansion of the pandemic, and caused the market fundamentals to collapse throughout March and April.

However, the collapse of the price was of such magnitude (it even marked negative values), and so important was the political and diplomatic pressure applied by the U.S. administration and by President Trump himself⁶⁹, that Russia and Saudi Arabia had to put the commercial differences of their companies aside and were able to reach the historic OPEC+ agreements of April 12^th to cut 9.7 million barrels of production, programming a policy of cuts until April 2022, which was a positive sign for the oil market and has allowed the recovery of the price of oil.

In the actions of the three largest oil producers in the world —the United States, Russia and Saudi Arabia— the interests of the operating oil companies of each country prevailed and, of course, their respective governments have established their strategies based on such corporate interests.

Thus, Russia, whose production is in the hands of companies with significant private capital participation (such as Rosneft), got involved in a market war with Saudi Aramco, which has also acted under pressure from dividend commitments to its shareholders and the success of the Crown Prince’s «Saudi Vision 2030» plan. For its part, the U.S. administration, in a position where it put aside its free market fundamentalisms, demanded that Russia and Saudi Arabia intervene in the market and cut production, in order to save the United States’ oil producers from bankruptcy and to keep both its economy afloat and Donald Trump’s aspirations for presidential reelection alive.

Already with the effects of the collapse of the oil market and prices, in the period April-June 2020, Saudi Aramco presented a cash flow⁷⁰of 6.1 billion dollars, and paid 18.8 billion dollars in dividends, which shows a deficit of 12.7 billion dollars; in the first quarter of the year, the same gap was 3 billion dollars.

THE GAP BETWEEN SAUDI ARAMCO’S CASH FLOW AND DIVIDENDS IN 2020
(per quarter)

Meanwhile, private oil companies, in their reports for the first and second quarters of the year, showed the decisions they made to reduce investment capital, as well as spending capital, to avoid or minimize the loss of asset value⁷¹. In the case of ExxonMobil, the shares dropped their value for the year by 41%, but without taking on debt and with a disinvestment of 10 billion dollars; while Shell did so by 48%, avoiding debt and amortizing 16.8 billion dollars. For its part, Saudi Aramco, only fell 2% in the value of shares, due to the expectation of investors that the Kingdom, through the Crown Prince, would fulfill its promise to distribute the dividends promised in 2019, regardless of the situation of the company. So Aramco, with a cash flow of $ 6.1 billion and expenses for payment of dividends of $ 18.8 billion, has opted for the reduction of its investments, the sale of its assets and increased production.

EVOLUTION OF THE DIVIDENDS OF
EXXONMOBIL, SHELL AND SAUDI ARAMCO
(January-August 2020)

Private investors prioritize asset value over resource ownership. Saudi Aramco has no way to maneuver, only to disinvest in production, transportation and/or refining projects to preserve the capital value of the asset. This is the first time that Aramco has divested its operations, making moves to place Abdulaziz Al-Gudaimi, who was in charge of upstream management as one of Aramco’s six vice presidents, at the head of the Corporate Development organization⁷², a portfolio to evaluate and divest Aramco’s assets.

After Saudi Aramco published its management report for the second quarter of the year⁷³ (where it was reported that the company’s net income suffered a 73.4% year-on-year drop), its president, Amin H. Nasser, reported⁷⁴on August 10^th that the Saudi State company made the decision to increase production capacity from 12 to 13 million barrels of oil per day, which «should not have a major impact on our capital in 2021«.

This decision by Aramco was followed by the announcement of a significant reduction in its investments by 2021 from its initial estimates of $40-45 billion. Operators and internal sources in the company informed that the Saudi national company would be reducing investment⁷⁵, suspending projects for 20 billion dollars in petrochemical complexes in Yanbu, Saudi Arabia, and investments for 10 billion dollars in the construction of a new refining and petrochemical complex in China, as well as reversing the decision to acquire a 25% participation in Sempra Energy’s Texas LNG Terminal, and announcing at the same time that the privatization of important crude transportation assets in the country.

Hence the insistence of the Saudi oil Minister, Abdulaziz bin Salman, on maintaining the flexibility of the agreements on production cuts, so that it allows increasing the oil supply, in spite of the warnings of «fragility» of the market made by the Russian Minister Alexander Novak.

 Russia

Russia’s oil production stood at 9.86 million barrels of oil per day for the month of August, according to data published⁷⁶on September 1^st by the Russian Ministry of Energy, of which, according to OPEC⁷⁷, 800 thousand barrels per day correspond to condensed liquids, leaving oil production at 9.06 million barrels per day, an increase of 500 thousand barrels per day with respect to July’s oil production, due to the relaxation of the agreed cuts.

According to information⁷⁸provided on August 19^th by the Minister of Energy, Alexander Novak, Russia had achieved 97% compliance with the production cuts agreed upon by OPEC+ and, by August, was meeting 100% of its oil production reduction commitments.

The flexibility that Russia has to increase its production is of 500 thousand barrels of oil per day as of August; however, Minister Novak announced⁷⁹on August 12^th that production will be 400 thousand barrels per day, to compensate for the Russian overproduction in May and July, which would reflect Russia’s compliance with its quota assigned in the OPEC+ cuts. Official data published by the Russian ministry suggest that in August the announced compensation could not be met.

On the other hand, Minister Novak stressed that if the production cuts continue to be implemented within the framework of the OPEC+ agreements, and the market continues to recover at the same pace as it did in the last quarter, the implementation of some measures to make the cuts more flexible could be evaluated.

ECONOMY

COVID-19

Reports from the World Health Organization (WHO) have shown a steady increase⁸⁰ in COVID-19 infections, which rose from 21 to 22 million in the week ending Friday, August 21^st, and 24.3 million in the week ending August 28. The number of deaths from this disease reached 800,000 in the third week of August and 828,000 in the last week of the month, while those recovered, according to Johns Hopkins University⁸¹, total 15.9 million. All this amid reports of new⁸²outbreaks in Germany, Spain, Italy, France and South Korea, countries considered relatively successful in controlling the emergency caused by the pandemic.

As for the most affected countries, during this fortnight the list remained similar to recent weeks, with the United States⁸³, Brazil⁸⁴and India⁸⁵, leading the way in terms of number of deaths and infections; followed by Russia, Peru, South Africa, Colombia, Mexico, Spain, Argentina and Chile, in the worrying and growing global list of infections.

There is a lot of expectation worldwide about the announcements by different countries and by companies regarding a vaccine that would end the COVID-19 pandemic, which has caused that the creation of the so-longed-for vaccine becomes a real commercial, scientific and political competition among some of the great economies.

Since Russia announced⁸⁶, on August 11^th, the registration of the «Sputnik V» vaccine, both China and the United States have accelerated their processes to obtain their own vaccine. On August 17^th, China approved⁸⁷its «CoronaVac» vaccine, which will be produced by important laboratories, among them Elea Phoenix. Both Russia and China are still in phase 3 of the process of creating the vaccine; the WHO expressed its concern, since both countries have registered the vaccine without completing phase 3 of the process.

For its part, the U.S. announced⁸⁸, on August 30^th, that it was willing to test its vaccine before the end of phase 3.

The University of Oxford, in the United Kingdom, was more cautious when it announced⁸⁹, on August 25^th, that the vaccine they have been developing could be presented, after completing the phases of the process. Meanwhile, other countries, such as India and Argentina, announced that they are developing their own vaccines, which would be presented in 2020 and 2021, respectively.

In Italy, the Lazzaro Spallanzani Institute in Rome, announced⁹⁰on August 24^th that it will start testing its vaccine, «GRAd-COV2«, developed by the ReiThera laboratory. It will be tested, in its first phase, on ninety volunteers in the next weeks, and then it will pass to a second phase that, according to the Institute’s director, will be carried out in Mexico and Brazil.

There are several countries whose governments are requesting that the vaccine be tested on their populations, among them Cuba, Mexico, Venezuela, Brazil, India, North Korea, the United Arab Emirates and the Philippines.

Recommendations from the President of the World Bank

In remarks⁹¹to the British newspaper The Guardian, the President of the World Bank, David Malpass, said that the reports of the Organization for the month of September will reflect that 100 million people will enter the poverty line as a result of the crisis caused by the pandemic. Malpass also said that «… poor countries had been worse hit by the economic fallout from COVID-19«, turning the recession they suffer into economic depression.

The president of the multilateral organization also said that the current situation is «…worse than the financial crisis of 2008, and for Latin America worse than the debt crisis of the 1980s«. He also pointed out that the current situation has worsened the already existing problems of inequality between economies, insofar as the financial stimuli of industrialized countries are aimed at solving internal problems, reducing cooperation resources for developing countries, which intensifies the recessions in these nations and the inequality between these two disparate groups of countries.

The President of the World Bank called for the implementation of «…a more ambitious debt relief plan for poor countries«, arguing that a more radical approach to foreign debt is needed, one that goes beyond the extension until 2021 of the debt payment holidays that the G-7 nations are considering, and that «…the first systematic write-offs of debts since… 2005» be considered. Malpass expressed similar arguments on this issue at the meeting with G-7 finance ministers and the Director of the International Monetary Fund on Monday, August 17^th.

World Trade Recovery

According to a report by the Germany’s Kiel Institute for the World Economy⁹², the world economy has revived faster than it did during the financial crisis of 2008. Considering that the pandemic led the world economy to an unprecedented decline, the upturn in transportation and economic activity, after the easing of mobility restrictions, was better than expected, according to Gabriel Felbermayr, the president of the institution.

WORLD TRADE RECOVERY

These optimistic forecasts of a possible upturn in world trade were backed by the International Monetary Fund, when the president of this institution, Kristalina Georgieva, declared that a «renaissance of trade» is expected⁹³. The German government is also optimistic, after the Federal Statistical Office (Destatis) ⁹⁴ showed a low contraction in the German economy in the second quarter.

However, the World Trade Organization⁹⁵ considers that expecting a «V-shaped» economic rebound —meaning a deep recession followed by a strong recovery— might be too optimistic.

USA

The announcements of the Fed

At the meeting of the regional central bank presidents in Jackson Hole, Wyoming, on August 27^th, U.S. Federal Reserve (Fed) Chairman Jerome Powell announced⁹⁶a new strategy to address the growing risks to unemployment and price control from the COVID-19 pandemic, by setting an inflation target of a long-term average level of 2%, with periods when it may be above or below that level, and by ensuring that employment does not drift away from its peak levels.

According to the Fed, «…following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time«. Likewise, Powell appreciates «… the benefits of a strong labor market, particularly for many in low- and moderate-income communities”, and considers that «a robust job market can be sustained without causing an outbreak of inflation«.

MEETING THE FED’S 2% INFLATION TARGET
(2012-2020)

The stock markets reacted positively upward to this announcement of greater flexibility by the Fed —with inflation occasionally exceeding 2%— and a move away from its previous policy in which low unemployment could cause excessive inflation.

As for the impact of the COVID-19 crisis on inflation, economists and experts disagree⁹⁷, assessing the issue from two different perspectives.

For some, the «no-expense-spared» approach to fighting the coronavirus could eventually bring price increases on a scale not seen before, due to the enormous amount of money created by governments to fight the pandemic, which would sooner or later stimulate inflation; it would increase household income from financial support and stimuli, which would lead to higher levels of spending; it would promote a more flexible attitude by central banks to allow a manageable level of inflation and not to modify interest rates to achieve economic recovery; and would create distortions and disruptions in the supply chain of goods.

BENEFITS GRANTED BY THE GOVERNMENT TO U.S. HOUSEHOLDS (percentage, 2000-2020)

On the other hand, there are analysts who consider COVID-19 to be exacerbating previous conditions from more than a decade ago, when deflation, rather than overheating the economy, was the predominant trend. This would occur due to the slow circulation of money which, during the pandemic, has been slowed down by the fall in consumption; to the increase in household savings as a protection measure in the face of economic uncertainty; to the unemployment that has skyrocketed, preventing the economy from using all its resources, and to the spare capacity generated by the fight against the coronavirus, which has been similar to a war in terms of the deterioration of the economy.

U.S. HOUSEHOLD SAVINGS (percentage, 1960-2020)

Favourable indicators

The IHS Markit Purchasing Managers’ Index-PMI shows⁹⁸a positive change for the U.S. from 50.3 in July to 54.7 in August, a rise in PMI in the composite calculations and in the calculations of services and manufacturing not seen since February 2019; this rise is driven, according to IHS, by «…stronger customer demand…, new business growth…, manufacturing expansion greater than July…, [and] renewed sales growth”. The good numbers for this indicator, plus the increase in foreign sales at the fastest rate since 2014, and the growth of U.S. home sales by 24.7 percent (from 4.7 million homes sold in June to 5.86 million sold in July), come despite the fact that coronavirus infections continue to rise.

U.S. Unemployment and the Department of Labor’s New Measurement Methodology

In the week ending August 22^nd, the U.S. Department of Labor report showed⁹⁹that the number of applicants for unemployment benefits rose again to more than one million, standing at 1,006,000 applications, 98,000 fewer than the week ending August 15^th, which showed 1,104,000.

On the other hand, the numbers for the week ending August 29^th  showed¹⁰⁰another decline in the number of requests, to 881,000, some 130,000 less than the previous week and much better than the 950,000 requests estimated by economists surveyed by Dow Jones¹⁰¹.

While this new figure can be attributed whether to the decreasing trend in unemployment, or to an improvement in the labor market that marks progress toward its sanitation, it also reflects the change in the methodology used by the U.S. Department of Labor (DOL) to measure this item: starting in September, the DOL stopped using what it calls «multiplicative factors» (which are used more in times of relative economic stability) to calculate the number of applications, and began using «additive factors» (which do not give adjustments much above or below the series of numbers), which are preferred in cases of more abrupt changes in the economy.

This change in the parameter is what gives rise to the figure of 850,000 applications; if the previous methodology had been maintained, says an economist from the firm Pantheon Macroeconomics, the total number of applications for unemployment benefits in the last week of August would have been 1,200,000. It is worth asking if, beyond the search for accuracy by the DOL, this change in the way of measuring unemployment benefits could respond to the government’s interest in presenting successful numbers on this very sensitive issue, and even more so during the presidential elections. In any case, and despite the downward trend of this index (after reaching historically high levels in April 2020), the levels are so worrisome that they have caused a change in the Fed’s strategy regarding the management of inflation to promote the strengthening of employment in the country.

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

The Power of the Market in the Creation of Inequality

On August 18^th, the Federal Reserve Board (Fed) published¹⁰²a study in July called «Market Power, Inequality and Financial Instability«, in which two economists analyzed economic trends and situations in the U.S. in the last 40 years, concluding that there is a decline in competition that has given way to large firms controlling the market, and that has generated changes in terms of stagnant wage growth, increased corporate profits and rising inequalities of income and wealth, the growth of debt incurred by the middle and lower classes (whose salaries have not grown and who need resources to survive), a greater benefit to those who manage stocks and property (to the detriment of those who earn a salary), and a greater risk of financial instability in general.

The model suggests, as a way to avoid a crisis due to these factors, a policy of redistribution, either through taxes on monopolies or social programs that moderates the growth of income inequality.

Although the study is an unofficial mathematical and econometric model and does not refer to specific companies or to the oil or energy sectors, this analysis commissioned by the Fed adds to the multiple examples that exist about how the economic and political system in the United States is made to benefit big capital and promote the consolidation of companies in monopoly schemes, and how this system affects those who have less and are vulnerable to financial or economic crises.

China

The Xinhua press agency reported¹⁰³on August 28^th that the profits of the largest companies maintained a constant recovery in July (in the order of $85.56 billion; 8.1% higher than the data for June, and 19.6% year-on-year), despite the uncertainties caused by a terrible and complex domestic and international environment.

Some of these difficulties are reflected in the 24.99% year-on-year drop¹⁰⁴in sales of Chinese branded passenger cars, or in the concerns¹⁰⁵ about defaults on the country’s domestic debt, as well as in the Beijing government’s caution to avoid reciprocating U.S. actions that seek to limit Huawei’s access to Western technology, because, according to analysts, «…any move to punish U.S. businesses could affect the still fragile economic recovery from the coronavirus pandemic«¹⁰⁶, although the TikTok application and social network announced¹⁰⁷that it will appeal in court the Trump administration’s executive order prohibiting any U.S. transaction with its parent company ByteDance.

Hong Kong has no longer preferential status in the U.S.

In the framework of the tensions generated in the U.S.-China relations, President Donald Trump announced¹⁰⁸on July 15^th the end of preferential treatment for Hong Kong, which had been in effect since 1992.

Among the measures taken by the White House are: the loss of privileges for Hong Kong passport holders when they travel to the U.S.; loss of export benefits, and sanctions on 11 senior officials, including the city’s leader, Carrie Lam.

Additionally, the U.S. administration indicated that they will stop selling military equipment to Hong Kong, suspend their extradition treaty, and end reciprocal tax treatment on shipments.

For the United States, Hong Kong is the only Chinese jurisdiction that offers U.S. companies a relatively secure way to access this market and uses U.S. dollar parity, linking it to the U.S. financial system.

Hong Kong Executive President Carrie Lam has said that it is «totally unacceptable» for foreign legislatures to interfere in Hong Kong’s internal affairs, and that sanctions would only complicate the city’s problems.

Europe

In view of the announcements¹⁰⁹by the U.S. Federal Reserve on August 27^th about a change in its policy that aims at a more flexible inflation target, in which the 2% inflation goal will no longer be annual but will be sought in the long term, experts¹¹⁰predict that the European Central Bank (ECB) will also follow this path in its monetary policy, in order to allow periods of inflation that are above the target set by the ECB that indicates an inflation «below, or close to, 2%«.

The approaches of the Fed and the ECB, so far, have differed in their emphasis on inflation or employment: in the case of the U.S. financial institution, employment has been the main mandate, over and above inflation, and it prefers to target full employment policies «…as evidence that it has fulfilled at least part of its dual mandate”. As for the ECB, the mandate is aimed at price stability, and therefore some consider that this inflation-focused mandate is «hierarchical» with respect to any other.

However, in the framework of a review of the multilateral financial institution’s strategy planned for the second half of 2020 —a review that was pending, in order to adapt the bank’s policies to the challenges of climate change and globalization, as well as to the aging population and weak productivity in Europe— analysts estimate that the COVID-19 crisis will lead the ECB and its president, Christine Lagarde, to consider a level of inflation averaging 2% over time as a «tempting option,» which would allow «…to tolerate a faster pace after periods of weakness, avoiding early interest rate increases when price growth approaches its goal«; this approach to average inflation would also bring more stable prices, avoiding a very low rate that would lead to deflation, and complying with the main mandate of the European Central Bank.

INFLATION LEVELS IN THE EURO AREA WITH RESPECT TO AID TO ECONOMIES AND INTEREST RATES (2011-2020)

Likewise, this policy would give the ECB a more elastic handling of both the economy and the aid to European countries in the midst of the pandemic, in the face of those who talk about putting the reins on financial stimuli when inflation approaches that goal; other critics who could object to this new approach to inflation would be central banks like Germany’s Bundesbank (which usually opposes more flexible policies of the ECB), and the Central Bank of Austria, which favors a lower inflation goal. And there are those who believe that the ECB’s Board of Governors will be more skeptical and will seek to agree on a «symmetrical» target of 2%, that is, the ECB will adjust its policies when inflation exceeds the target, and relax them when it is under that marker.

In the end, the European Central Bank will most likely adjust its policy to U.S. guidelines, because what the Fed does about inflation and dollar devaluation will affect Europe and the rest of the world, which will have to adapt to these changes.

On the other hand, the news in the third week of August showed that the IHS Markit PMI-Purchasing Managers’ Index, published¹¹¹on Friday, August 21^st, and used as an indicator of the economy’s recovery, fell in the Eurozone from 54.6 in July to 51.6 in August, far below analysts’ expectations, who see this decline as a brake on economic rehabilitation and on the possibilities of a V-shaped recovery. Added to the upsurge in COVID-19 cases in Germany, France, Spain, and Italy, and despite the good news of an agreement between the European Union and the United States on tariff reductions (the first in more than two decades)¹¹², the situation looked worrying for the region.

With regard to efforts to reactivate the economy, it can be highlighted the news on September 3^rd in France, where the government of Emmanuel Macron announced the country’s stimulus plan, for the amount of 100 billion Euros (40% of which would come from the recovery program approved by the European Union), and would be directed towards the areas of competitiveness, employment, social policies and financing the transition to a greener economy, using  measures such as employment subsidies, tax cuts for businesses and projects related to environmental issues (transport, including rail, and renovation of buildings to make them more energy efficient); all of this, in order to generate close to 200,000 jobs and reactivate the economy in 2022 at 2019 pre-COVID-19 levels.

The French government’s plan, called «France Relance” (“France Relaunch”), seeks to move away from the emergency spending already set to combat the crisis resulting from COVID-19 (a crisis that would lead to a 10% reduction in the French economy by 2020; the largest in the Eurozone), and focus on long-term problems such as weak investment and job creation. It should be noted that the goal of recovering the economy in 2022 to pre-pandemic levels with «France Relance» coincides with the holding of presidential elections in France in two years.

Russia

The Accounts Chamber of the Russian Federation reported¹¹³on August 20^th that the Russian State has requested more than 4.5 trillion rubles ($56 billion) in loans, the highest level in 15 years. With a 55% fall in oil and gas revenues in the first half of 2020, compared to the same period last year, and with a deficit in the budget of 5% of the GDP this year (as opposed to the surplus of 1.8% that Russia had in 2019), Putin’s government has preferred the loan mechanism to cover the deficit instead of using the product of oil exports gathered in the $175 billion Sovereign Fund.

An analysis¹¹⁴of the corporate results of Russian companies during the summer has shown that technology and computer companies (such as Yandex or Mail.Ru) have generated profits and have weathered the economic ups and downs of the pandemic better than the traditional oil and gas giants (Rosneft, Gazprom) and mining —which «…have seen their share price fall by a fifth since the beginning of the pandemic«— or the banking sector.

DEMANDA

With regard to demand in the third quarter of 2020, OPEC forecasts¹¹⁵that it will be at 92.1 million barrels a day, while the Energy Information Administration (EIA)¹¹⁶ and the International Energy Agency (IEA) estimate¹¹⁷that it will be 94.96 and 95.25 million barrels a day, respectively.

In the projections for 2021, OPEC expects an increase in demand to 97.6 million barrels a day, while the EIA estimates that it will reach 97.1 million barrels a day, and the IEA’s is making the highest estimate of 100.1 million barrels a day.

OIL DEMAND ESTIMATES FOR 2021 ACCORDING TO OPEC, EIA, IEA

An IHS Markit report reports¹¹⁸that global oil demand, after bottoming out in April due to the coronavirus crisis (reaching a 78% drop, compared to the same period in 2019), has increased by 13 million barrels per day in the last four months, 89% year-on-year, and aims to 92-95 million barrels per day in the first quarter of 2021.

The International Air Transport Association (IATA) indicators of passenger transport demand in July report¹¹⁹a gradual recovery compared to April 2020; the RPK (Revenue Passenger-Kilometers) index fell to 79.8% year-on-year in July, compared to a drop of 86.6% in July 2019, while the seasonal adjustment of the RPK increased by 14% in July 2020 compared to the previous month, which had already shown an increase compared to May 2020. These smaller year-on-year declines were most strongly reflected in Asia-Pacific, North America, and Europe, regions where demand was driven by increased passenger traffic in domestic markets (with RPK falling 57.5% year-on-year), while, according to the IATA report «international demand did not show significant improvements, as new COVID-19 epicenters emerged in several countries, leading to the re-imposition of travel restrictions«, with the European international market being the exception to this trend due to the reopening of the Schengen Zone in mid-June.

RPK-PASSENGERS PER KILOMETER TRANSPORTED (2016-2020)

Similarly, global cargo transportation experienced¹²⁰improvements in July: the corresponding demand indicator CTK (Cargo Tonne-Kilometers) fell by 13.5% compared to 2019, which, adjusted for the season, shows a 2.6% year-on-year improvement. Led by Africa and North America, all regions experience «modest improvements over June» in the CTK index and, consequently, in their international cargo traffic; with the exception of Latin America, where, according to IATA reports, «cargo volumes… deteriorated… in the midst of difficult economic and health conditions«.

THE THREE BIG CONSUMERS

China

In our July 24^th Oil Report, we had warned of high levels of crude oil storage by China —close to 600 million barrels— that was going to reduce imports for the second quarter of 2020, after a record in June with imports of 12.9 million barrels per day and an average of 11.64 million barrels per day in the second quarter of 2020, with the refineries producing at a capacity of 14 million barrels per day.

Already on July 21^st, according to the last official data published¹²¹by China on August 17^th, imports had fallen by 900 thousand barrels of oil per day, when 12.1 million barrels of oil per day were registered.

According to estimates from the website Oilprice.com¹²², the Chinese demand for crude oil for the month of August could fall with respect to May, June, and July, while private refineries will show a 40% drop in purchases.

The scarce information about commercial inventories and strategic reserves, as well as the absence of information about demand, always makes it difficult to make a correct estimate about this important element in the first oil importer of the world. That is why many times tanker reports are used.

According to information compiled¹²³by the Bloomberg news agency on August 28^th, the amount of supertankers bringing oil into the country is at its lowest level since the end of March; it is stated that the number of VLCC (Very Large Crude Carrier) and ULCC (Ultra Large Crude Carrier) tankers with scheduled destination in China fell to 79 on the week of August 17^th, compared to the seasonal average of 88 supertankers.

India

In relation to the demand of crude oil in India, it is reported the change caused by the coronavirus crisis in the structure of the oil and gas sector of the third-biggest world consumer (India imports 80% of the oil it uses). July data, published this week¹²⁴, indicates that crude oil imports have fallen 36% year-on-year and stand at 3 million barrels per day; a drop in demand that the refineries have taken advantage of to close units and carry out maintenance work.

Of the amount of oil imported¹²⁵by India in July, most came from Middle Eastern producers (71.55%). The main oil exporters for the Indian nation were Iraq, Saudi Arabia, United Arab Emirates, United States, Kuwait, Colombia, Qatar, and Nigeria.

In addition, the Indo Asian News agency reports¹²⁶that diesel consumption in the country in the first two weeks of August fell 20% compared to July 2020, and 23% year-on-year. As for gasoline consumption, although it grew 2% in the first half of August, it is still 6% below demand for the same period in 2019—a sign that the land transport sector in India is still affected by the consequences of quarantines and business closures caused by COVID-19.

The same news article reports a similar behavior in air transport, a sector that fell 2% in its aviation fuel sales with respect to July, which places the year-on-year fall of jet fuel at 66%. Liquid petroleum gas consumption also fell 6.5% compared to July. The report considers that the recovery of demand, driven by the reopening of May and June, is coming to an end, and that India’s economy will continue to be affected by the impact of the coronavirus and the possibility that it will spread for a longer period than expected.

USA

U.S. oil imports, as reported by the EIA¹²⁷, showed a rebound during the week of August 21^st, although this level is still 13% below the average for January 2020.

This week¹²⁸, crude oil imports register 4.9 billion barrels per day: a figure that shows a sudden 16% decrease in relation to the previous week.

The drop in crude oil imports from Saudi Arabia stands out, placing it at the lowest levels in decades. The data offered by the tracking of maritime cargo by the Bloomberg news agency shows that in August¹²⁹exports fell to 177,000 barrels of oil per day, a drop of 86.4% regarding the 1.3 million barrels per day registered in April 2020. Currently, the U.S. market —whose supply from Saudi Arabia takes about 45 days to arrive since it is shipped in port— represents 3.1% of Saudi exports.

OIL EXPORTS FROM SAUDI ARABIA TO THE U.S.
(March 2017 – August 2020)

This information confirms what some analysts have considered to be the Saudi strategy of restricting exports to the North American market, so as to stimulate the drainage of crude oil inventories in the U.S., with the objective of achieving the progressive stabilization and increase of the price of WTI.

Furthermore, crude oil refining in the US averaged 14.7 million barrels per day during the third week of August, according to the EIA¹³⁰, up 225,000 barrels from the previous week; with the refineries operating at 82% of their operating capacity. Gasoline production increased to 9.5 million barrels per day, as did distilled products, which averaged 5.1 million barrels per day. However, the supply of oil products during August reached an average of 18.5 million barrels per day, which is 14.6% less than the amount for the same period in 2019. Comparative decreases also occurred with the average supply of motor gasoline (8.8 million barrels per day vs. 9.7 in 2019), fuel oil distillate (3.7 million barrels per day vs. 3.8 in 2019) and jet fuel, whose supply fell by 45.7% year over year.

STORAGE

Global oil inventories are above the average of the last five years. The EIA monthly report¹³¹forecasts an average of 80 days of coverage in 2020 and 65 days of coverage in 2021.

According to OPEC, the most significant increase at the end of the first semester is in the United States, which has begun to show a slow reduction in the last four weeks. Likewise, Asia and Europe have shown a progressive reduction with respect to the record storage levels of the second quarter.

In a report¹³²by S&P Global Platts Analytics dated August 18^th, it is noted that the largest volume of floating storage is in Asia. Approximately 169.57 million barrels were accounted for at the close of August 17^th in Kpler data¹³³, and they estimate that vessels remain in the area for about seven days.

FLOATING STORAGE IN ASIA
(December 2019-August 2020)

Due to the collapse of onshore storage and record imports in the first half of the year, China —the world’s largest importer of crude oil— is holding more than 100 million barrels in ships, which has led to a collapse of its ports for discharge and associated costs for delays.

USA

According to the latest EIA report¹³⁴, the volume of inventories as of September 2^nd, was 498 million barrels, a reduction of 1.8% in relation to the previous week. On August 14^th, storage fell¹³⁵by 4% compared to July 17^th, when it began to show a sustained decline.
The reduction continues to be mainly on the East Coast (PADD 2) and the Gulf Coast (PADD 3). Despite having lost 5 million barrels of reserves since August 14^th, they are at their highest level for the seasonal period of the year.

The high levels of inventories in the United States made it possible to face the extraordinary loss in production and refining capacity on August 25^th, 2020, due to closures and shutdowns as a preventive measure because of hurricane «Laura.»

However, the same EIA report states that the composition of gasoline prices has changed due to various extraordinary events so far in 2020, where the refining component fell, at retail value, from 13% in 2019 to 2% by August 2020. This generates low incentives for private refineries, which puts at risk the possibility of being able to operate at 100%. The recovery that the WTI has had so far, stable in August above 40 dollars a barrel, does not seem to be sufficient for the profitability of private refineries, which will also be affected by a great decrease in their exports to China, which registered a historic figure of 177 thousand barrels a day in August.

THE FALL OF INVENTORIES DOES NOT INCREASE WTI’S FUTURE (September 2019 – August 2020)

This situation may influence an increase in inventories in the U.S., and make them recover the 9 million barrels lost in August, at a time when the United States oil market seems to need a growth in demand in order to make use of the stored barrels.

On the other hand, the EIA reported¹³⁶  that the days of coverage, as of September 2^nd, are at 34.5, a reduction of 0.6% from the previous week, and 30.3% above the 2019 levels.

OIL INVENTORY DRAINAGE
OF THE UNITED STATES

EIA projections indicate that inventories will be reduced starting the second half of 2020, and forecast an annual average, for 2020 and 2021, of 483 and 469 million barrels per day, respectively.

According to information from the EIA¹³⁷, strategic oil reserves in the U.S. showed a reduction as of the first week of the month; by September 2^nd they reached a storage volume of 648.16 million barrels per day, which translates into 8.25 million barrels less than the levels registered on July 31^st, 2020.

In the same report, it was noted that U.S. crude oil inventories, including strategic reserves, stood as of September 2^ndat 1,146 million barrels, which is 7.2% higher than the average inventory for January 2020.

The drainage of commercial inventories and strategic reserves is a fundamental factor for the recovery of the oil price, after the important reductions in the supply of crude oil in the market and while waiting for a strengthening of demand. As we pointed out in previous Oil Reports, at the beginning of this unprecedented crisis in the oil market, after the producers were able to reach an agreement in OPEC+ to drastically reduce the oil supply, the next indicator of stabilization would be the reduction of floating storage and, after that, the drainage of the inventories of large volumes of cheap oil, acquired in the first half of the year.

VENEZUELA

As we have been reporting in the previous editions of our Oil Report, the situation of the Venezuelan oil industry has been seriously deteriorating for at least six years.

In 2020, the crisis¹³⁸generated by COVID-19, which to date records —according to official figures— a total of 42,898 infections (of which 8,393 are active cases and 358 are deaths), in conjunction with the deterioration of the economy, has exponentially intensified the negative situation experienced by the oil industry, the country’s main source of income.

Currently, oil production figures in Venezuela barely reach 339 thousand barrels of oil per day, according to data from secondary sources published in OPEC’s MOMR published¹³⁹in August.

This drop in the country’s oil production is not related to the production cuts agreed by OPEC+ last April because, like Iran and Libya, Venezuela has been exempted from complying with the quotas established in this agreement.

VENEZUELAN OIL PRODUCTION (2014-July 2020)

Presidential Commission

In February 2020, the Venezuelan government, in a new intervention on PDVSA, created¹⁴⁰the «Presidential Commission for the Defense, Restructuring and Reorganization of the Oil Industry Alí Rodríguez Araque» with plenipotentiary powers to act at its convenience, operating on the basis of a «Plan for the Privatization of PDVSA«, which the authorities do not want  to present to the various State agencies and whose purposes and objectives violate fundamental aspects of the Constitution of the Bolivarian Republic of Venezuela, as well as those of the Organic Law of Hydrocarbons.

In the six months that the Commission has in existence, the situation in PDVSA, far from improving, has worsened; however, in spite of this situation, on August 19^th the operation of this group was extended¹⁴¹for six months until February 2021.

The following are some data related to the deterioration of the Venezuelan oil industry since the Presidential Commission began its activities:

National production is plummeting

At the time of the creation of the abovementioned Commission, Petróleos de Venezuela (PDVSA) was producing —according to data from secondary sources published¹⁴²by the OPEC MOMR— 730 thousand barrels per day of oil, while the figure in July was barely 339 thousand barrels, which represents a 53.56% decrease in its production.

OIL PRODUCTION OF VENEZUELA
(January – July 2020)

Drop in exports

Oil exports in Venezuela have also suffered a negative impact as a result of the loss of the oil and product output, along with the serious problems of crude transportation after current PDVSA’s managers allowed the company’s fleet of ships be lost, a fleet that in 2014 had 37 vessels of its own and 87 vessels with mixed companies, including 4 VLCCs (Ayacucho, Boyacá, Carabobo, and Junín).

This loss of oil transportation capacity is aggravated by the U.S. sanctions imposed on PDVSA at the beginning of 2019, as well as the departure from the country of the Russian company Rosneft and China’s Petrochina, which has complicated PDVSA’s export possibilities to the extreme; since 2015 the country’s oil exports have been progressively ceded to all types of private operators and traders.

According to data registered¹⁴³by Eikon of Refinitiv, oil exports in Venezuela suffered a 50% drop in May, compared to the period January-April 2020, reaching 452 thousand barrels per day; these are the lowest volumes handled since the “Sabotaje Petrolero” (“Oil Sabotage”)¹⁴⁴ that affected the industry and the country between December 2002 and January 2003.

In June and July, shipments averaged 379 thousand and 388 thousand barrels per day, respectively, which match, to a large extent, to the drainage of crude oil and cargo inventories that are exchanged for diesel and are used to pay debts to suppliers.

OIL EXPORTS IN VENEZUELA
(January – July 2020)

It is likely that by the end of 2020, Venezuelan oil exports will be increasingly reduced, as it has become known from unofficial sources that the U.S. government has set October as the deadline for eliminating the exemptions it has so far granted from the sanctions imposed against the South American country in early 2019.

This week¹⁴⁵there has been speculation on the importation of Venezuela’s Merey crude oil from China, despite the fact that, according to the Chinese Customs Department, there have been no official imports of Venezuelan crude oil since September 2019. However, the Asian country has massively increased imports of crude oil for the production of asphalt, which is used for road construction after the flooding period in China is over.

Most of these vessels come from Malaysia, an ideal place to transfer the cargo from ship to ship, sometimes with the purpose of masking the true origin of the cargoes and thus avoid possible sanctions.

No gasoline in Venezuela

The fuel situation in Venezuela continues to deteriorate, with 90% of the national refining system paralyzed, Petróleos de Venezuela‘s own fleet of vessels in decline and limitations on the importation of gasoline and additives for its preparation, which presents, for the next few months, a not very encouraging panorama as the options available to supply the demand of the internal market —which has been reduced in recent years— are running out.

Oil workers denounced the stoppage of gasoline production at the Cardón¹⁴⁶and El Palito¹⁴⁷refineries on August 15^th and 27^th, respectively, as both had problems with the stoppage of the catalytic cracking unit and, in the case of Cardón, its catalytic reformer was also stopped, so that neither of the two refineries can produce fuel. Cardón was producing 45 thousand barrels of gasoline per day, when its capacity is 305 thousand barrels per day, while El Palito, with a capacity of 145 thousand barrels per day, was producing only 25 barrels per day of gasoline. This is a situation that accentuates even more the energy, economic, social, and political crisis in which Venezuela finds itself.

Although the official figures are not known, oil workers assure that the processing of crude oil in the country oscillates between 30 thousand and 40 thousand barrels a day, which is insufficient to satisfy even the already reduced internal demand, which is estimated at no more than 120 thousand barrels a day, a fall of 96.2% regarding the values of 2014, when it was located at 1,072 thousand barrels a day.

FUEL PRODUCTION IN VENEZUELA
2014 – 2020

In addition to this situation that affects the refining facilities in the country, two new actions are added; this time in the Caribbean islands of Bonaire and Curaçao.

The first issue refers to the issuance of a statement¹⁴⁸by the Bonaire Transportation and Environmental Inspectorate (ILT, as per it is initials in Dutch) requesting PDVSA to completely empty the tanks and pipelines of the BOPEC terminal, as they represent an environmental risk due to the lack of maintenance of the facilities, which may cause leaks.

The second one refers to a lawsuit filed by Refineria di Korsou (RdK), owner of the Isla refinery located in Curaçao, due to PDVSA’s failure to comply with the monthly payments for the years 2018 and 2019 established in the operating agreement entered into; the lawsuit against PDVSA amounts to US$ 51 million, in a process that is moving forward in a New York State court.

Meanwhile, the service stations in Venezuela remain closed with long queues around them, but without the certainty of opening for selling fuel.

This terrible situation is widespread at a national level; however, the states bordering Colombia have the minuscule oxygen that represents the fuel coming from the smuggling out of the neighboring country; such fuel is sold at 2.25 dollars per liter, so that 90 dollars are required to fill a 40 liter tank, an unsustainable situation in view of the serious economic crisis that Venezuela is going through (the monthly minimum wage is equivalent to 2.40 dollars, when the unit value of the foreign currency reaches 333 thousand bolivars). If we compare the price at which fuel is sold on the parallel market in Venezuela with respect to the value of the liter of fuel in the United States¹⁴⁹ and Europe¹⁵⁰—specifically the Netherlands, which handles the highest price for this fuel— a difference of 70.6% and 17.3%, respectively, is evident.

On August 14^th, the U.S. government announced¹⁵¹ the  seizure of a shipment of 1,116 million barrels of fuel from Iran to Venezuela.

Against this backdrop, Biyan Zanganeh, Minister of Oil of the Islamic Republic of Iran, stated¹⁵²that the gasoline shipment was the property of Venezuela and had been sold under the «Free On Board» sales mechanism, whose damages or losses —if any— are assumed by the buyer.

The restrictions for the sale of gasoline to Venezuela, as well as for the commercialization of oil products are intensifying, so the owners of shipping companies are attentive to the movements of their vessels, in order to avoid U.S. sanctions.

Such is the case of the «Alkimos” ¹⁵³, a vessel that was chartered by the ES Euroshipping AG company to transport gasoline from Panama to Aruba. However, the ship’s owner retained the cargo until it was taken to the port of Houston, USA, because he suspected that the final destination of the fuel was Venezuela. From that moment on, a legal process began, and that process culminated this week with the decision of the Southern District Court of Texas to sell the gasoline.

The Gas Nightmare

The drop in oil production has a direct impact on gas production in Venezuela, since 90% of the gas production is oil-associated, while the existing reserves of free gas have been delivered to foreign companies, as is the case of the “Rafael Urdaneta Project”, in western Venezuela (which was delivered to European companies that are partners of PDVSA), the “Deltana Platform” and the “Mariscal Sucre” Projects, in the eastern part of the country, which were transferred to Russian companies and oil operators located in Trinidad and Tobago.

According to information provided¹⁵⁴by workers of the Unitary Federation of Oil Workers of Venezuela (Futpv, as per its initials in Spanish), the deficit of domestic gas in the country reaches 90%, so that the population is currently resorting to alternative methods, such as firewood, to prepare its food.

The current production of Liquefied Petroleum Gas (LPG) in Venezuela barely reaches 16 thousand barrels per day, according to information received from unofficial sources.

In a report¹⁵⁵published by the Venezuelan Observatory of Social Conflict, corresponding to the first semester of 2020, a total of 2,505 protests related to the deficiency of public services in Venezuela were registered, of which 511 were related to the shortage of LPG, while 1,014 were related to the failures in the electrical service, and 980 to the lack of drinking water.

Loss of the Own Fleet

As we have been denouncing in previous Oil Reports, Petróleos de Venezuela‘s own and controlled fleet has suffered a gradual decrease for at least six years, so the lack of capacity to transport the crude produced in the country —which today has been reduced to historical minimums— represents an enormous additional problem for the state oil company.

Until 2014, PDVSA had its own and controlled fleet of 83 vessels, which made it possible to guarantee the transportation of crude oil in the national and international markets. For that year 2014, an amount of 684 million barrels of oil and products were mobilized.

VOLUMES TRANSPORTED
WITH ITS OWN CONTROLLED FLEET
2014

These figures of former times contrast with what is currently happening with the Venezuelan oil industry fleet, which has lost important large capacity tankers, such as the VLCC «Boyacá«, «Junín» and «Carabobo«, all of them vessels that belonged to a joint venture with PetroChina, as well as the vessel «Ayacucho«, which was ceded to Russian operators and renamed «Máximo Gorky”.

Operational Collapse

The deterioration of oil installations in Venezuela has caused multiple accidents in various regions of the country, ranging from the sinking of ships and platforms to crude spills of different magnitudes, among them the one registered¹⁵⁶on July 19^th off the coast of the Falcón state, whose origin was the El Palito refinery in Carabobo state.

The environmental impact of this oil spill, which exceeds 25 thousand barrels of crude, is incalculable; its extension for more than 15 kilometers from the coast evidences the lack of expertise of the institutions responsible, mainly PDVSA, in containing the crude spilled in the Caribbean Sea.

On August 22^nd, a PDVSA boat sank in Lake Maracaibo, in the area of Block III, near Tía Juana field. The video was broadcasted on social media, revealing the deplorable state of the assets of the Venezuelan state oil company, as well as the precarious conditions regarding staff security equipment with which workers in the national oil industry in Venezuela work.

In connection with this accident, photographs were distributed¹⁵⁷of the GP17 oil barge, a floating flow station belonging to the Petrowarao mixed company, which was located in the Ambrosio field of Lake Maracaibo and sank in September 2018 due to lack of maintenance.

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