PRICES

As of today, Friday, May 29^th , the oil price references closed higher, with the Brent at $37.84 a barrel and the WTI at $35.49 a barrel. May closed as well as a month of oil price recovery, where the Brent has had an increase of 41.4 % and the WTI an increase of 78.8 % compared to the prices of Monday, May  4^th of $26.75 and $19.84 per barrel, respectively.

BRENT INCREASE (May)

WTI INCREMENT (May)

This price recovery is more of a «rebound» in oil prices after the falls suffered since the beginning of March, when the spread of COVID-19 caused a collapse in oil demand, coinciding with the «price war» between Saudi Arabia and Russia, which flooded the market with an over-supply that was immediately reflected in the drop in price and the increase in inventories.

The market reacts positively to the start of the oil cut of 9.7 million barrel per day agreed by the OPEC+ countries and which came into effect on May 1^st , as well as to the announcements by the Persian Gulf countries: Saudi Arabia, Kuwait and the Arab Emirates of additional cuts to those agreed in OPEC+, the cuts announced by Norway, and the fall in North American production, both from USA and Canada.

The reduction of the excess supply of oil as well as the gradual recovery of the demand expected during the second half of the year with the beginning of the lifting of transport restrictions and the reactivation of the economy, particularly in China and Asia, must be accompanied by the “drainage” of the large inventories of crude oil and products to, subsequently, focus on the recovery of the oil prices before the onset of the crisis.

The closing prices of May for Brent and WTI are still 38% and 31% below their values at the beginning of March, when Brent and WTI were trading at $52.5 and $46.78 per barrel, respectively.

PRODUCTION

The market considers, and all of the available information indicates, that the production cuts agreed by the OPEC+ countries have a high percentage of compliance, thus being reflected in both the drainage of floating storage as well as price recovery.

OPEC+

OPEC´s countries and their partners are jointly monitoring the effects of production cuts.

We will have to wait for the monthly report from OPEC or the OPEC+ Monitoring Committee to have official information on the compliance with the agreed cuts, but the recovery of the price during the whole month of May has consolidated as a trend and at the same time is as a  reflect of the fact that the oversupply of oil in the market is starting to decrease.

In addition to the OPEC+ cuts that began on May 1^st, additional cuts of one million, 80 thousand and 100 thousand barrels per day were announced by Saudi Arabia, Kuwait and the United Arab Emirates, respectively, which will be effective from July 1^st .

Compliance with the cuts, the additional cuts, as well as the prospects for recovery in global oil demand, will be central to any further decisions on whether or not to adjust the cuts agreed by OPEC+ during the next meeting to be held on 9-10 June.

The messages of political cohesion between the two major oil producers within OPEC+ continue to dispel any doubts in the market as to the commitment at the highest level to stabilizing the oil market.

Thus, on May 27^th, 2020, according to the Kremlin, Russian President Vladimir Putin and Saudi Prince Mohammed bin Salman al Saud held a telephone conversation where they continued their discussion on developments in the global energy market and pointed out the importance of joint efforts to reach agreements in the OPEC+ format on reducing oil production in April. They agreed on closer coordination on this issue between the Russian and Saudi Arabian energy ministries.

This week the Saudi news agency SPA reported that Iraq’s energy minister Ali Allawi met with his counterpart, Prince Abdulaziz bin Salman of Saudi Arabia, and later reported that they were satisfied with the effects on the market and his response to the production cuts. This message is important because Iraq, being a major producer within OPEC, has been on the sidelines of production cutbacks for many years due to internal problems arising from the war and the prolonged internal destabilization the country has been undergoing.

The most important objective to be achieved by the end of th second quarter of the year, is the achievement of a balance between supply and demand as a consequence of  the reduction of excess oil production, with a view to stabilizing the market towards the end of the year.

On May 28^th , Russia’s Energy Minister, Alexander Novak, told the TASS network that demand for oil remained low but had increased by 20% in May compared to April. So far, the oil surplus is between 7-12 million barrels per day, but the Energy Minister estimates that the market will readjust due to the increase in demand during June-July.

Norway

On the other hand, on May 25^th , an official statement by the Norwegian Minister of Energy, Tina Bru, ratified that the production cut announced by her country will begin in June, with a reduction of 250 thousand barrels per day, increasing by 134 thousand barrels per day in the second quarter, to reach a total of 300 thousand barrels per day by December.

Norway, the main oil exporter in Europe with a production of 1,859 thousand barrels per day, announced last April 30^th , a voluntary cut of 300 thousand barrels per day for this year to contribute to the stabilization of the market and the recovery of the oil price, joining the efforts of the OPEC+ countries.

USA

In this week’s report, the U.S. Energy Information Administration (EIA), reported again a decline in oil production, recording 11.4 million barrels of oil per day as of May 22^nd , a drop of 1.7 million barrels per day, 13%, from the 13.1 million barrels produced on February 27^th  of this year, before the onset of the crisis.

In the previous week’s bulletin (link), we referred to the drop in production in the United States, as a direct consequence of the collapse of WTI, the benchmark for American crude, given the high production costs of both traditional areas and shale oil. The recovery of the latter has become a strategic problem for the U.S. due to the difficulties associated with its recovery, both financial and technical, considering the complexities and characteristics of its production areas.

As indicated in the previous bulletin, drilling activity has fallen by 56% over a two-month period, from 772 active drills to 339 active drills.

DROP IN DRILLING ACTIVITY IN THE U.S.

Shale production depends largely on new drilling, which immediately generates high volumes and degrades over time. Such is the United States’ dependence on new drilling that 55% of the country’s shale production comes from wells drilled in the last 14 months, according to ShaleProfile.

Therefore, the gradual reduction of new drilling and cancellation of underground activities in these sands will greatly affect the recovery capacity of Shale Oil production in the short term.

According to estimates by the energy magazine «World Oil», oil production from US shale fields will probably fall by more than a third this year to less than 5 million barrels per day, according to the data company ShaleProfile Analytics.

A Bloomberg study of US shale oil production companies estimates that well cuts will depend largely on WTI prices, which need to be more than $20 a barrel. The study reported that companies like Parsley Energy Inc. and Centennial Resource Development Inc. informed that they stopped drilling and fracking, while others, like EOG Resources Inc. and Diamondback Energy Inc., expect to continue drilling new wells but in a very small number.

The variation of the WTI Nymex marker has a different impact on North American crude oil producers, as this marker is specific to a given geographical area as well as to particular chemical characteristics, and therefore does not fully represent crudes of other qualities.

The rest of the crude oil markers used in North and Latin America are related through the WTI Cushing price index formulas. This explains the variation of prices used in the area and the greater impact that some producers have suffered from the fall of WTI affecting their drilling operations to a greater extent, as is the case with shale oil or production in Latin America.

NORTH AMERICAN CRUDE OIL PRICES
(March to May 2020)

DEMAND

The economy and global demand for oil continue to be strongly impacted by the COVID-19 pandemic.

Economy

As of Friday, May 29^th , 5.8 million cases have been confirmed globally, with 360,000 confirmed deaths and 2.4 million people recovered. The peak of infections is in the United States, with 1.76 million confirmed cases and 103,000 deaths, making it the country with the highest number of confirmed deaths, 63% more than the United Kingdom, with 37,837 deaths.

The second country with the largest number of cases is Brazil with 441,000 confirmed cases, while the European countries most affected by the pandemic: Italy, Spain, and France passed the peak and entered the decline curve of infection, with 232,248; 238,564; and 149,668 cases and 33,229; 27,121; and 28,714 deaths, respectively.

Speaking at a panel organized by the United Nations on Thursday, May 28^th , entitled «Financial Devastation,» the director of the International Monetary Fund, Kristalina Georgieva, said that the agency expects the global economy to shrink by more than 3% by 2020, an outcome worse than that in 2008 and 2009.

On the other hand, the impact of the coronavirus on the European economy will be even greater than expected. At least this is what the president of the European Central Bank (ECB), Christine Lagarde, has said, and she has assured that the forecasts of contraction for the Eurozone range from 8% to 12%, compared to 5% in the previous less negative scenario. «I think the soft scenario, with a 5% fall in GDP in 2020, is already outdated».

Unemployment in Europe has skyrocketed as a result of the current COVID-19 crisis. According to the estimates of the European Commission, the countries most affected have been Spain, Italy, and France.

COUNTRIES MOST AFFECTED BY UNEMPLOYMENT IN EUROPE

The US economy, with an estimated fall of 20-30% for the second quarter of this year 2020, continues to face problems for its reactivation, being the country at the peak of the COVID-19 and facing severe problems with real rates of its impact on employment and industrial activity, despite massive economic aid packages of more than $6 trillion, approved by both the White House and the Congress of that country.

This week the U.S. Department of Labor, according to its weekly report of May 28^th , received 2.12 million new applications for unemployment assistance; the cumulative number of applications this week is 41 million. Labor Secretary Eugene Scalia estimates that the unemployment rate could reach 20% by 2020.

While the Economic Commission for Latin America and the Caribbean (ECLAC), in its study published on May, 16^th , estimates that the contraction of economic activity in the region will be 5.2% by 2020, the unemployment rate will be 11.5% with an estimated 37 million unemployed in the region.

The only economies that appear to be on the road to recovery are the Asian economies, led by the recovery of economic activity in China, the world’s second-largest economy, and the main oil importer in the world. China has an estimated growth of 1.8% for this year, after the peak of the pandemic, and is beginning to recover from its effects on the economy. 

RECOVERY OF THE CHINESE ECONOMY,
AFTER THE IMPACT OF COVID-19

Despite signs of recovery in the Chinese economy, government authorities did not make forecasts or set targets for this year’s economic performance, as Prime Minister Li Keqiang pointed out in his message to the National People’s Congress on May 22^nd .

CHINA’S ECONOMIC RECOVERY

While India, the third-largest oil importer in the world, continues to face containment measures for its 1.3 billion people and a decline in its economy, the report of the Central Statistics Office (CSO), published yesterday, May 29^th , showed the growth forecast confirming the downward trend, with a significant decline from 6.1% growth in 2018-19 to the 4.2% expected by the end of 2019-20.

Oil demand

All the specialized agencies and organizations agree on estimating that the drop in world oil demand had its peak during the first quarter of the year, especially during March and April when it fell by more than 20 million barrels per day – an unprecedented situation caused by the rapid spread of coronavirus and the impact of COVID-19 on the world’s major industrialized economies. A gradual recovery in demand is expected in the second half of the year, as restrictions on movement and travel are relaxed or lifted altogether, and industrial, manufacturing, and trade activity is resumed.

The US Energy Information Administration (EIA), in its Short-Term Energy Outlook report issued in February – before the beginning of the COVID-19 crisis, estimated an average annual demand of 101.7 million barrels per day. However, at the end of the second quarter of the year, and after the drop in demand seen in March and April, the EIA estimated, in its report dated May 12^th , that demand would fall by -9.1 million barrels per day, predicting that the average world demand for oil in 2020 would be of 92.6 million barrels per day, a reduction of 8.1 million barrels per day compared to the average demand of 100.1 million barrels per day in 2019.

Whereas OPEC, in its latest market monitoring report dated May 13^th , estimates that oil demand will have a slow recovery, reaching 92.82 million barrels per day by the end of this year, as reflected in our latest report.

The International Energy Agency (IEA), in the «Global Energy Review 2020» published at the beginning of May, estimates that the fall in demand for crude oil will be of 9.3 million barrels per day, bringing it to 92.4 million barrels per day.

Asia and China

Oil demand from Asian economies is showing signs of a slow recovery led by the Chinese economy, with a recovery in consumption in the region evidenced by the activity of the refining sector and the price of products.

FUEL PRICE INCREASE DUE TO RECOVERY OF DEMAND IN ASIA

The Valora Analitika Group said this week, in a publication dated May 27^th , that the energy sector consultant, Wood Mackenzie, estimates that China’s oil demand will be of 13 million barrels per day by the second quarter of 2020, which, although it is 2.5% less than the same period in 2019, represents an increase from the first quarter, when it fell to 16%.

USA

According to the Energy Information Administration, the volume of demand as of May 22^nd  in this month registered 16.1 MBD, which reflects a 10% increase compared to the demand of 14.5 MBD registered on April 24^th . However, the consumption of 20.4 MBD registered in February is still not recorded, so that currently the U.S. demand is around 26% below its normal levels.

U.S. OIL DEMAND

Storage

As we have mentioned, the high inventories of oil and built products during the first quarter of the year, especially in March and April, will begin to drain, with abundant cheap oil, as the oversupply of oil decreases and demand begins to be restored. Due to its high costs, this drainage process will begin with floating storage, as the first resource to supply the market.

Floating storage

In the previous bulletin, we reported that according to the Frontline Group, the volume of crude oil in floating storage reached 200 million barrels of oil in the first quarter of 2020. A very high number reflecting the crisis of onshore storage in the face of oversupply of oil.

The oil analysis firm Vortexa said this week that 25 million barrels of oil in floating storage were drained into Asian markets, given the revival of demand in China and India.

INCREASED FLOATING STORAGE
(March-April 2020)

The Kpler oil agency data highlights that floating storage in Asia decreased from 35 million barrels on May 23^rd  to 29 million barrels three days later. The main factor, apart from the reactivation of demand, is also the reduction in the world’s oil supply.

In the case of the maritime sector, Alphatanker, in its Monthly Monitor, points out that the boom period in the storage of VLCCs (Very Large Crude Carriers), vessels with a capacity of between 1-2 million barrels of oil, is coming to an end. The reason is that there has been a sharp fall in the contracts for these vessels compared to previous weeks, what is a clear indication of their declining use as floating storage.

Alphatanker stresses that the release of the floating storage is a gradual process, which could take from June, six to nine months.

Onshore storage

This week, oil stocks have shown signs of relief with the return of demand mainly in Asia, where containment measures and restrictions in the region would be eased, as well as in Europe.

Oil stocks in Asia are beginning to be released, and refineries in China, Korea, Japan, and India are resuming operations as the region’s economy slowly reactivates. A report from Bloomberg news agency highlights that the area’s storage facilities are beginning to be released and that the volumes located in floating storage are the first option for the refiners.

At the same time, it is important to take into account that South Korea, because of the largest storage capacities in the region due to its strategic location, has become a commercial crude oil storage site in Asia.

USA

In the week to May 22^nd, the crude oil inventories increased by 7.9 million barrels, to 534.4 million barrels, according to the Energy Information Administration’s (IEA) weekly report.

The days of coverage of the U.S. inventory is at 41.7 days, a slight increase of 0.5 from the previous week, its trend since April 17^th , when it was at 38 days of coverage storage. This is progressively increasing. To date, the days of storage coverage are 48% higher than in 2019 when they were less than 28 days of coverage.

The increase in US strategic reserves reached a historic volume of 534 million barrels, largely due to oil imports of 2.1 million barrels per day. Analysts had expected storage to decrease by 1.9 million barrels the previous week.

OIL INVENTORY LEVELS IN THE USA

Venezuela

The country remains in the grip of deep economic, political, and social crises that began long before the emergence of the COVID-19 pandemic.

With the country under total confinement, there are reasonable doubts that the government is concealing information regarding the country’s pandemic impact, just as it has concealed the country’s epidemiological, economic, and social indices.

This week, Johns Hopkins University issued a report on the situation of the COVID-19 in the country, estimating that the cases reach 30,000, according to their records.

Dr. Kathleen Page, a researcher at Johns Hopkins University, said the report was made after interviews with health personnel in the country, where the serology tests performed have a high margin of error, in addition to the fact that the health system does not have the minimum requirements to manage the health crisis, so they warn that the pandemic can escalate exponentially, without the government or the health system having the capacity to deal with a situation like this.

Economy

The Venezuelan economy suffers a strong recession, falling to unprecedented levels of -64%, accumulated throughout the past 6 years, with hyperinflation estimated at 1,000,000%, international reserves are at only 6.3 billion dollars, the lowest level in the last 30 years and the destruction of the monetary sign, the bolívar.

The official exchange rate is 200,000 bolivars to the dollar, which puts the monthly minimum wage at $2.5 per month, equivalent to $0.08 per day, the lowest in the entire region, even below Haiti and Cuba, and below the UN-defined extreme poverty line of $1.9 per day.

This economic debacle has caused a dramatic deterioration in the quality of life of the population, with acute shortages of food, medicines, basic services, such as water, electricity, transport, communications, fuel, and employment, leading to an exodus estimated by the UN at 5 million Venezuelans since 2016.

The report of the Economic Commission for Latin America and the Caribbean (ECLAC) on the impact of the COVID-19 in Latin America, presented on April 21^st , places Venezuela, with the largest drop in GDP, of -18 %, the worst performance in the whole region.

Oil activity

The Venezuelan oil industry is in the worst situation in its history, since the government began, starting in 2014, to politically persecute its directors, managers, and qualified workers, exiling and putting in prison more than one hundred managers and workers, handing over the management of the company to seven successive Boards of Directors composed by personnel without qualifications or knowledge, or without the possibility of making decisions on the management of PDVSA, and then, starting in 2017, handing over the management of the company to the military sector.

In these six years, the industry has been subject to successive interventions, suspension of investments, and diversion of budgetary resources essential for the maintenance and operation of its core processes of oil and gas production, processing, refining, and export of oil and products.

The last OPEC report, corresponding to April, positions Venezuela’s oil production at 622 thousand barrels per day, equivalent to the production levels of 1945, a drop of 2.4 million barrels of oil per day with respect to the closing of 2013 of 3 million barrels per day and a collapse of the Venezuelan refining system. This means that the internal demand for fuels cannot be met, nor can products be exported.

Fuel production in the national refining circuit reached 3,011 million barrels per day by the end of 2013, of which 703 MBD were available to meet domestic fuel demand and 2,425 MBD were destined for export. Currently, the refining system is technically paralyzed, with production far below 10% of its capacity, so PDVSA has not been able to meet the internal demand for fuel, estimated at only 120 MBD of fuel due to the strong economic recession.

Oil Production

In addition to the problems of the deterioration of infrastructure, installations, and abandonment of drilling and underground activities that have resulted in the collapse of 79% of the country’s oil production, there is the issue of the departure of important operators from the country, such as Rosneft and Chevron, the latter forced to cease operations in Venezuela due to the sanctions imposed by the US government.

In addition to the departure of the operators, international oil service companies, such as Halliburton, Schlumberger, Baker Hughes, and Weatherford have also left the country due to the non-renewal of operating licenses issued by the U.S. Treasury Department in the context of U.S. sanctions against it.

The departure of these operators and service companies, however, could not be assumed by PDVSA, due to the dismantling of its own operational capacities, which were decimated by government interventions and the departure of more than 30,000 workers as of 2014.

In situations of sanctions, such as those suffered by the company in 2010 from the United States itself, or the sabotage of the oil industry in December-March 2003, PDVSA was always able to successfully confront them, due to its operational and managerial capacities and the mobilization of the workers, as well as the creation of new oil subsidiaries as of 2008, such as PDV Marina, or PDVSA Oil Services, which allowed PDVSA to handle more than 70% of its exports or more than 60% of the drilling and oil services activities in the country.

The impossibility for PDVSA to manage its production volumes, having abandoned its fleet of transport vessels or having let its operational capacities deteriorate over the last six years, has made it difficult for the Venezuelan terminals to vacate their storage volumes.

According to information released by Reuters, Merey’s inventories at the Jose export terminal increased by 2 million in 20 days, when it went from 7.2 to 9.6 million barrels, leaving availability for just 318,000 barrels.

This situation forced Petrosinovensa, the joint venture between PDVSA and CNPC, to halt its operations for the second time in the month, on Sunday, May 24^th . At present, just few crude oil improvement plants are in continuous operation.

We will have to wait for the next OPEC report, to review the country’s production in this adverse scenario.

Fuel imports

The government has finally recognized that, given the inability to resume operations of the national refining system, after its unsuccessful attempts with both the El Palito refinery and the Paraguaná Refining Complex, it must import gasoline.

It’s not the first time the government has done this. Since 2018, fuel imports to the country have been increasing, as the national refining system continued to deteriorate, preventing the supply of fuel to the domestic market.

This business was under the control of traders close to one of the power groups within PDVSA that managed to bring in volumes of fuel until this year. With Quevedo’s departure and the installation of the Restructuring Commission, headed by the current Vice President of Economy and Minister of Oil, an agreement was established with Iran for the supply of fuel to the country, in addition to the supply of inputs and technical personnel for the national refining system.

Iran, an OPEC member country that has suffered the imposition of strict economic sanctions on its oil industry for many years, nevertheless has the capacity to meet its internal demand and to export fuel.

Within the framework of this alliance, of which nobody knows the terms and conditions, Iran agrees to the sale of fuel to the country. It is not known at what price it was transshipped, but it has been sent to Venezuela in 5 ships with fuel and additives.

After an intense campaign of propaganda and intrigue on the part of the government, seemingly to analyze the seriousness of the situation related to the operational collapse of PDVSA and the Venezuelan refinery system, the ships finally arrived in the country, without any setback or problem.

The first vessel, called Fortune, with a volume of 270,000 barrels of fuel, unloaded on Sunday, May 24^th . Later, the Forest, Faxon, and Petunia tankers arrived, the first two with 275,000 and 268,000 barrels of fuel respectively, and the last one unloaded at the El Palito refinery with 365,000 barrels of alkylate fuel.

The volume of imported Iranian fuels amounts to approximately 1.17 million barrels, equivalent to one day of fuel production in the country back in 2013, and is enough for 9.8 days of national demand, if the strict quarantine measures imposed on the country get lifted, considering that national consumption only amounts to 120 thousand barrels per day.

But the government has already announced that this fuel will be available only for «authorized vehicles», which suggests that, since distribution is under the control of the National Guard, the fuel black market will continue to thrive. Currently, one liter of fuel sells for up to $2 on the black market.

On the other hand, the government has also announced its intention to charge fuel on the domestic market in dollars at international prices.

The importation of fuel and the collapse of the national refining system seem to have provided the government with an opportunity to advance in its plan to sell fuel to the domestic market at international prices, eliminating fuel subsidies, which used to be a traditional advantage enjoyed by the Venezuelan people as oil owners.

With its economy adjustment plan in line with the IMF’s adjustment recipes, but unable to reach agreements with the IMF, the government is making progress in its shock policy aimed at eliminating subsidies to fuel, gasoline, diesel, and gas.

Beyond any punctual adjustment in fuel prices, it seems that the government will be willing to sell fuels at international prices, preparing the favorable conditions for the privatization of the sector, as proposed by the PDVSA’s Restructuring Commission.

The tariffs currently discussed by the government range between US $0.50 and $0.70 per liter, equivalent to $20-30 for a 40-liter tank, which is the equivalent of 10-15 minimum wages for an average vehicle in the country.

There is no technical, economic, or political justification for this situation nor the national government’s claims since the Venezuelan people are being made to pay for the government’s inability to run PDVSA. On the other hand, it is an absolutely regressive and anti-popular measure to impose an absurd extra cost on the internal fuel market in a country in a severe economic crisis, an impoverished people, and with all kinds of deficiencies.

The government and its economic program are absolutely contrary to President Chavez’s oil policy and to the system of economic and social guarantees and competitive advantages that the economy and the citizens of our oil-producing country, the country with the largest oil reserves on the planet, have always enjoyed.

PRICES

This third week of May consolidated a trend towards the recovery of oil prices, after the sharp fall in March and April. Brent crude was quoted at $36 per barrel on wednesday May 20^th, the highest price since March. Simultaneously, the WTI marked its highest price of the month at $34.63 per barrel last Thursday May 21^st. The International Energy Agency (IEA) reports a rise in futures prices for the US benchmark of $8 per barrel from the previous week. Both the Brent and the WTI markers have recovered significantly since the beginning of the price crisis in March. The  recovery has been of 47% and 67% of their value respectively.

BRENT FALL AND RECOVERY

WTI FALL AND RECOVERY

The Brent and WTI references quoted at $34.91 and $32.95 per barrel respectively at the close of the European markets on Friday May 22^nd. These prices represent an increase of 2.57% and 4.85% respectively compared to last Monday’s price. At the same time, they represent a 6.50% and 11.6% compared to the prices on April 30^th when expectations of oil cuts on May 1st began.

OIL PRICES MAY 2020

The market is reacting optimistically to the implementation of production cuts of 9.7 million barrels of oil per day by the OPEC+ countries. These production cuts   came into effect on May 1st. The markets have reacted positively to the high level of commitment to compliance with the cuts from both Saudi Arabia and Russia as well. This commitment was ratified by the oil ministers of both countries. It was confirmed with strict adherence to the large production cuts agreed by each country.

Likewise, the market considers the announcement made by the monarchies of the Persian Gulf: Saudi Arabia, Kuwait, and the United Arab Emirates to be a clear step towards the reduction of the oversupply. The announcement consists in making an additional cut to what was agreed on in the framework of the OPEC+ of 1 million, 100 thousand and 80 thousand barrels of oil per day respectively with effect from July 1.

The most important aspect to highlight is the political commitment of OPEC+ member countries to comply with the cutback agreements, as well as the announcements of the Persian Gulf monarchies. There is no doubt now that the price war between Russia and Saudi Arabia is over as well as the commitment of the leading OPEC countries to eliminate overproduction and stabilize the market. This is what is reflected in the price recovery.

PRODUCTION

The completion of the agreed cuts by the 23 OPEC+ countries and the additional effort by Saudi Arabia, Kuwait, and the United Arab Emirates and their impact on the market will be reviewed by OPEC at an extraordinary meeting scheduled for June 10. According to the Secretary-General of the Organization, Mohammed Barkindo, the adhesion of the member countries to the production cut commitments, from which Iran, Libya, and Venezuela are exempt, has been satisfactory.

In addition to these cuts there is Norway’s announcement of a 300,000 barrel per day cut in oil from June 1^st, as well as a drop in production from the U.S. and Canada.

The collapse of production in North America

The fall of the oil production in North America has been more pronounced and faster than some analysts expected.

Some analysts predict a drop in Canadian oil production of about 1 million barrels of oil per day. According to the IHS Markit,  Canadian Natural Resources, Suncor Energy and Husky Energy announced a reduction in oil production on May 8th. This reduction is of 700,000 barrels of oil per day of heavy crude oil from the Athabasca oil sands.

At the same time, the US Department of Energy (DOE) estimated that the decline in oil production in the US will be of 2 million barrels per day by the end of 2020.

The United States Energy Information Administration (EIA) has already reported a drop in oil production of 92 million barrels of oil per day in the first quarter of the year. It has estimated a drop at the end of this year of 94 million barrels of oil per day as well. This drop is mainly due to the low prices of WTI compared to the high costs, especially in traditional areas and mature fields of its national production.

One index that is of public information and that is directly related to the drop in oil production activity in the US is the number of active drills. This week the IEA’s Drilling Productivity Report, based on information reported by Baker Hughes, indicates that the number of active drills in the US has fallen 56% (433 drills) since March 17.

DECLINE IN DRILLING ACTIVITY IN THE USA

The number of active drills in the US has fallen by 433 drills between March 17^th and May 12^th from 772 drills to 339 drills. This fall in active drills mainly affects the three main oil-producing regions: Permian, Eagle Ford, and Bakken, thus hitting oil production from shale oil. This is particularly the case in the Permian regions where 405 platforms normally operate and only 175 are currently active, the Eagle Ford region with a 64% decline in South Texas, and the Bakken region with a 67% decline in Montana and North Dakota.

DECLINE IN DRILLING ACTIVITY BY OIL REGIONS IN THE U.S.

The drop in drilling activity continues to affect the production of shale oil in the United States. The production of shale oil will decrease by 197 thousand barrels per day in June compared to the previous month. This is the lowest in the last two years which makes it the largest area of reduction of oil and gas production. Rystad Energy estimates that the largest drop in production of shale oil in the U.S. will happen in May and that its recovery will be in the next quarter. TheWorld Energy Trade explains in an information note the that companies in this sector will take measures or «Frac Holidays» to disable the fracking equipment. These measures will be taken for the second quarter of 2020.

The production of shale oil is very sensitive to the price of oil because of its high production costs and the fact that it is an activity based on the use of hedge funds. This makes it dependent on the capacity of managing the financial debt contracted by the producers which an issue that the U.S. administration faces. This is the reason why the U.S. Federal Reserve implemented the Main Street Lending Program. The program addresses the collapse of small and medium-sized oil companies in this country.

The number of active drills in the U.S. has historically followed the changes in WTI prices with a delay of about four months. However, the current drop in the number of active drills followed the recent decline in oil prices much more rapidly than in the past, as it can be seen in the following chart from the EIA. The spot price of West Texas Intermediate began in March 2020 at $46.78 per barrel and ended the month at $20.51 per barrel; most of the decline occurred in the first half of the month.

CORRELATION BETWEEN WTI AND DRILLING ACTIVITY IN THE USA

Therefore, U.S. production has been one of the most affected by the crisis. Unlike Saudi Arabia, Russia, and other producers, U.S. production is more expensive requiring prices of at least $34 per barrel. The closing of wells or drilling activities has a greater impact on mature deposits such as traditional areas or more complex geological formations like shale oil.

COLLAPSE OF OIL PRODUCTION IN THE USA

The recovery of these volumes of oil production, which the U.S. Secretary of Energy Dan Brouillette estimates at two million barrels per day for 2020, as well as the strategic position of the U.S. as the world’s leading oil producer, or at least, with energy independence, will depend fundamentally on the economic and financial environment of the sector but to an equal or greater extent, on the technical complexities of the century-old oilfields and the shale sands of the U.S.

The recovery of these volumes of oil production will fundamentally depend on the economic and financial environment of the sector as mentioned before. However, it will depend, in an equal or greater extent, on the technical complexities of the century-old oilfields and the American shale oil and fracking complexities. The United States is facing challenges to maintain its strategic position as the world’s leading oil producer, or at least, be a country with energy independence. 

DEMAND 

International demand for oil continues to be affected at historic levels by the impact that the COVID-19 pandemic has had on the economy. The economy  has entered into a recession affecting to a greater extent the large industrialized economies. The Euro Zone has fallen by 6%, the UK by 8.5%, the USA by 5.2%, and China by 6.8% in the first quarter of the year. The demand has been also affected by the measures to restrict air traffic and mobility taken by governments around the world to confine and close borders.

This situation is the reason why OPEC, the International Energy Agency, and the U.S. Energy Information Administration have agreed that in 2020 the fall in demand will be historical. They estimate the fall will be at 10% to locate it in a range between 90-92 million barrels per day. This represents a fall of 10 million barrels per day of consumption.

COLLAPSE OF WORLD DEMAND OF OIL 2020

The International Energy Agency (IEA) has further reduced its demand forecasts in May’s Short-Term Energy Outlook (STEO). It forecasts that world demand will be 92.6 million barrels a day by 2020, a reduction of 8 million barrels a day. This estimation is based on macroeconomic projections by Oxford Economics and IHS Markit.

The big three

The three major consumers and importers of oil worldwide: USA, China, and India continue to be affected by containment measures, economic recession, or uncertainties regarding recovery and economic results for this year 2020. These countries concentrate 40% of the world’s oil demand.

THE WORLD’S THREE BIGGEST OIL CONSUMERS

The North American economy continues to be impacted by the growing number of people infected and killed by COVID-19. As of Friday May 22nd, the country had 1,601,534 infected and 96,007 deaths. Unemployment continues to set record levels, the latest report from the U.S. Department of Labor indicated that there was an increase of 2.4 million requests for unemployment assistance this week. These numbers bring the country’s unemployment rate to an estimated 36 million since February or 14.7%.

Projections indicate that the U.S. economy will have a 20-30% drop by the second quarter according to an economic advisor to President Donald Trump. Demand for oil will decline by 23.1 million barrels per day during the second quarter of 2020. On Friday May 22nd, the President of the U.S. Federal Reserve Jerome Powell estimated that the U.S. economy would recover by the end of 2021 «assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year. “people will have to be fully confident. And that may have to await the arrival of a vaccine (to COVID-19)”.

DECLINE IN OIL DEMAND IN THE USA

India continues to be affected by the containment measures and the recession of the economy with an estimated economic growth for this year of only 1.2%. This country has a consumption of 4.4 million barrels of oil per day. However, it showed a dramatic fall of 53% of its demand in April with 1.8 million barrels per day.

DECLINE IN OIL DEMAND IN INDIA

Moreover, although China seems to have successfully overcome the spread of the COVID-19, its economy is beginning a recovery marked by uncertainty. On Friday May 22^nd, the Chinese Prime Minister Li Keqiang indicated in his annual message to the National People’s Congress that the government could not set a growth goal for the economy this year. The government will focus their objectives on employment and stimulus policies.

ECONOMIC DOWNTURN IN CHINA

Some agencies have predicted that the economy will grow by 1.8% after the 6.9% drop in China’s economy during the first quarter of this year. On the other hand, regarding oil consumption in China, the China National Petroleum Corporation (CNPC) estimates that oil demand in the country will fall 5% this year. This is after a growing recovery due to the lifting of restrictions on mobility and confinement by the COVID-19 pandemic. The oil consumption in China is  estimated at about 13 million barrels per day. However, it suffered a 20% drop during May.

ESTIMATED OIL DEMAND IN CHINA

A recovery in oil demand is expected in the second quarter of 2020, according to this week’s analysis by the Energy Information Administration (EIA). This recovery is due to the gradual revival of economies, as well as of air transport worldwide. Cuts in oil production play an important role as well since they will allow the reduction of the oversupply of oil in the market.

The recovery of global demand for crude oil will be slow and with many uncertainties especially with Coronavirus spreading in Latin America and Africa. Furthermore, the possibility of a «second wave» is cause for alarm in the large countries that have already been hit by COVID-19 or that are emerging from the «peak» of its impact. Therefore, even if some restrictions are removed, precedents such as that of China suggest that normalization will be slow while we wait for new periods of quarantine.

Furthermore, the impact on the global economy with a fall of 3.4%, in addition to the slow restart of the large industrialized economies make it possible to predict a slow recovery throughout this year and in 2021. The manufacturing activity, mobility, the interruption of supply chains and trade, the bankruptcy and financial issues of enterprises will make the recovery of the economy slow.

BALANCE BETWEEN SUPPLY AND DEMAND

The cuts in oil supply to the market are beginning to restore the balance of oil demand. These cuts comprehend the OPEC+ cuts and other voluntary and involuntary cuts in oil production.

OIL CUTS vs. FALL IN DEMAND

The International Energy Agency (IEA) forecasts that from May 1st, the production of the OPEC+ countries will fall to 24 million barrels per day in June. This is due to the production cut agreed by these countries. According to their agreement, there will be an increase in production starting on July 1^st. The IEA estimates that this increase in production will be up to 28.5 million barrels per day during the second half of 2021.

CHANGE IN GLOBAL OIL PRODUCTION (2015-2021)

On the other hand, Rystad Energy considers that May will be an important month for the market. It will have an adjustment in the balance between supply and demand of crude oil which reported 26 million barrels per day in April. By contrast, they estimate that by May the production will be reduced by half with 13 million barrels per day. This will allow the progressive release of storage, which will be adjusted so that demand increases progressively and the reduction of oil production has an effect from the first of May.

This agency forecasts that the supply of crude oil will be of 92.8 million barrels in May. The supply will be 91 million barrels a day in June – respectively 6 and 8 million barrels less than the supply in April. On the other hand, the agency estimates that demand will increase to 79.2 million barrels per day in May and 85.1 million barrels per day in June after reaching a low of 71.8 million barrels per day in April. However, it stresses that storage will continue to be a major constraint to the price recovery.

STORAGE

As we have said in previous reports, the increase in crude oil inventories, both in commercial stocks and in strategic reserves, will be an element that will act in favor of keeping oil prices down. All of the first and second quarters of the year, with an emphasis between  March and April, the market was flooded with cheap oil. This cheap oil went directly to the storages causing a severe restriction in their capacities. This resulted in price alterations as happened last April 20^th  when the WTI reached negative values when it monopolized about 81% of the Cushing Oklahoma’s storage operational capacity. This situation caused traders to detach themselves from oil contracts one day before their expiration date. There was nowhere to store oil. It was necessary to pay for someone to take volumes of cheap oil that were not in demand. 

The process of «draining» the oil into inventories or storage will begin as the supply of oil is reduced, as it has happened since May 1^st. The draining process will also begin to happen as the demand for oil is restored. The increase in the demand for oil is currently starting to happen in China and is expected to continue happening towards the second half of this year.   

Inventory levels in commercial storage in OECD countries have given them 23 days of coverage above the average of the last five years. The same is happening in US commercial storages where 15 days of coverage are reported above the average of the last five years. Not much information exists on the level of commercial stocks in China and India as well as other countries. However, it is estimated, or there have been indications, that they were at maximum levels. One of the major indications of this phenomenon has been the increase in floating storage, i.e. the use of oil tankers as storage. This has considerably increased freight and transport costs. Consequently, they will be the first to «drain», which will constitute a clear indicator that oil demand is increasing.

The gradual “draining” of the storage will be reflected in the first instance in floating storage as demand is restored. However, when the oil production strats to increase again these volumes will compete with the cheap oil that is drained from the inventories. This situation will cause the price to remain low.

During OPEC or OPEC+’s next meeting it will be necessary to evaluate a strategy to drain the inventories and reduce the days of coverage together with a simultaneous increase in production levels. The low existing demand will need to be satisfied with the inventories’ cheap oil and the new production levels.

The oil producing countries need to be able to restore the balance between supply and demand in order to recover the price. The objective should be recover the price at the levels we saw at the beginning of March.

Close coordination between oil producing countries will be essential. They will have to make a sacrifice in maintaining the quota system or reducing their production levels despite their own financial needs. This is essential to restore and defend the price until the market is completely stable.

OPEC and the International Energy Agency will issue their respective monthly reports with updated data on the levels of storage worldwide. Therefore, these reports should be expected to continue monitoring this aspect.

The US Energy Information Administration has been issuing a weekly report on the behavior of commercial inventories in the US since the beginning of the COVID-19 crisis.

The weekly report of the Energy Information Administration (EIA) of May 20th indicates a decrease of 5 million barrels in U.S. storage from the previous week, excluding strategic storage. This positions the storage at 526.5 million barrels. The values indicate that the days of coverage continue to be above the average of the last five years although a slight drainage has been noted. This drainage  will have to be monitored if it remains as a trend in order to estimate its behavior towards the closing of this year.

OIL INVENTORY LEVELS IN THE USA

Floating Storage

The volume of crude oil in floating storage reached 200 million barrels of oil in the first quarter of 2020 according to a report by the Frontline Group published on May 20^th, 2020.

On the other hand, the Energy Trade Agency reports that by March more than 70 VLCC (Very Large Crude Carrier) vessels of between 1-2 million barrels of oil capacity were chartered for these purposes. However, the Agency is beginning to notice a slight reduction after last week Vortexa Ltd reported that storage was reduced from 176 to 155 million barrels on May 15^th. Even so, the volume stored by May 15^th would be double that recorded in early March.

Bloomberg news agency reports that more than 10.8 million barrels are stored in the North Sea area which is a record number.

Mexico is positioned as the country with the largest volume of floating storage

in the Alphatanker report of the first quarter of 2020 published on May 20^th. The country has 32 MR2 tankers anchored in the ports of this country which reserve an estimated 11 MB of products, mainly gasoline. The main reason behind this is the fall in domestic demand for refined products.

On the other hand, the cost of chartering oil vessels increased from $50,000/trip to $350,000/trip since April.

There is also a large amount of crude oil on ships en route to their destinations, which can take more than 45 days. Such is the case of Saudi Arabian ships, with the oil produced in March bound for the east coast of the USA, in the Gulf of Mexico. There are more than 20 VLCCs with oil from Saudi Arabia that are expected to arrive at the end of June to the US coast in the Gulf of Mexico. This is based on the information available on the monitoring of marine transport.

VENEZUELA

The OPEC reported in April that, according to secondary sources, the Venezuelan oil production is at 622,000 barrels per day. This constitutes a drop of 2,378,000 barrels per day compared to December 2013 – a drop of 79.2% in 7 years. There is a severe fuel shortage crisis as well.

There is neither gasoline, nor diesel, nor gas.

The collapse of the national refinery system and gas processing plants has left the country with no fuel for the domestic market.

PDVSA has not been able to satisfy the domestic demand for fuel oils. There is no gasoline, diesel, or liquefied petroleum gas, which are essential to supply the domestic demand for fuels. This is despite the fact that the entire country is in quarantine and there is an economic activity fall of 63% between 2015-2020 before COVID-19.

It is estimated that the demand for fuel in the country is currently around 120 thousand barrels per day. This represents a drop of 81% or 546,000 barrels compared to 666,000 barrels per day in 2014 reflecting the collapse of the economic activity in the country.

DISTRIBUTION OF REFINING PRODUCTS

Venezuela produced 1,072 thousand barrels of fuel per day according to data from PDVSA’s audited reports, at the end of 2014. This allowed the country to meet the internal demand of 666 thousand barrels a day and export 406 thousand barrels per day.

PRODUCTION OF THE REFINING SYSTEM VENEZUELA ISLA

Today, the national refining system is practically paralyzed with minimal operating levels. The Paraguaná Refining Complex, the Palito Refinery, and the Puerto La Cruz Refinery are in a technical standstill as a result of government intervention, the persecution and imprisonment of managers and workers. The government imposition of managers without technical credentials nor the necessary expertise to operate these large and particular refinery complexes is another cause of the technical standstill. Additionally, budgets for investments, maintenance, costs, and expenses of the refineries were diverted and cut since December 2014, which led to a rapid decrease in operating capacities.

COLLAPSE OF THE NATIONAL REFINING SYSTEM

The government is apparently trying to reactivate some refineries. The first announcements or rumors have revolved around the reactivation of gasoline production at the El Palito refinery. However, according to the workers’ leaders, the attempts have been unsuccessful and they have been cannibalizing parts from other complexes (of different technologies and configurations) to use there instead.

An attempt has also been made to reactivate the Paraguaná Refinery Complex, using parts, inputs, and personnel from the Islamic Republic of Iran. Again, the most absolute secrecy surrounds this operation. This secrecy has given much room for lucubration and hypotheses regarding the true objective of the Iranian presence in PDVSA’s facilities. It is the first time this has happened in the Venezuelan oil industry.

The reality is that the technical and managerial personnel with the expertise and knowledge are either imprisoned or persecuted by the government, eager to intervene and militarize the industry. This is the case of Engineer Jesús Luongo, a professional with a long career in the oil industry, who pursued postgraduate studies at the IFP in France. He was responsible, along with Iván Hernández – one of the assets of our oil industry -,  for reactivating the Paraguaná Refining Complex after it was completely paralyzed during the oil sabotage between December-February 2002-2003. Today, the former is still in prison and without trial, whereas the latter left the company during one of the persecution raids that began in 2014. The same happened to the former minister and president of PDVSA, Engineer Nelson Martínez, who had all the qualifications and professional experience needed, and was responsible for the reactivation of the El Palito refinery. He was imprisoned by the government and left to die in custody. These are criminal and illegal actions by the government which, ultimately, are reflected in the operational collapse of the company.

These Venezuelan refinery complexes work with technology licensed or owned by international companies such as Exxon, Shell, Texaco. This is done by design since they were built more than 60 years ago and required inputs and expertise that normally exist in the country, or can be acquired in the international market. This was done when the U.S. imposed sanctions on PDVSA in 2010, restricting our access to technology packages from U.S. companies. It is important to point out that during my tenure at the head of PDVSA between 2004 and 2014, our refining system never collapsed, nor was there ever a lack of gasoline or fuels that the country requires.

FUEL PRODUCTION IN THE COUNTRY 2001-2020
NATIONAL REFINING SYSTEM

The government is importing volumes of gasoline and other fuels from different sources and companies, using traders to circumvent the sanctions imposed by the United States. This is undoubtedly a problem derived from the government’s inability to manage PDVSA. The government is not able to guarantee the supply of the internal market of fuels and the needs of the population for gasoline, diesel, and gas. Our company and our refinery system are designed to supply all the country’s energy capacities and export the surpluses. The company operated this way until 2014.

The loss of CITGO

We have pointed out in opinion articles that the loss of the CITGO refinery complex in the USA was a disaster foretold.

We have already explained how this complex acquired between the mid-1980s and the 1990s was the product of a strategy called «internationalization» of PDVSA. This strategy was nothing more than taking assets from the oil industry out of the jurisdictional control of the Venezuelan state with the manifest objective of «processing Venezuelan crude», which did not happen.

The CITGO refinery system became an excuse to send oil at discounts of up to 40% to Venezuelan territory. Those assets became «hostages» in foreign territories of the international companies that came to the country in the framework of the “Oil Opening” in the Orinoco Oil Belt Association Agreements.

During the period between 2004-2012 some refineries, terminal and pipeline systems were sold. These revenues were reported to the National Executive, partially compensating the State for the heavy losses suffered by the country’s income when, at the worst moment of the economic crisis of the 80s and 90s, PDVSA made millionaire investments abroad. During this time PDVSA also granted massive discounts that affected our oil revenues in the period when the economy was most in need.

In 2014, we proposed from PDVSA the government to initiate a process of bidding and receiving offers to sell the Citgo refineries, tying the operation to long-term contracts for the supply of Venezuelan oil to maintain this market niche. This was proposed given the national situation of the dangers that threatened the economy and the complications in international politics. Although offers of up to 15 billion dollars were made (resources that would have been used to create a fund to prevent the economic crisis and stabilize the economy) the operation was discarded by the government and could not be carried out.

On the other hand, the government of Nicolas Maduro has been negligent in handling international lawsuits and litigations, which have been filed against the Venezuelan state. This has especially happened in the non-oil area.

It is the case of a lawsuit filed in the United States by the Canadian company Crystallex, a company whose rights in the country were revoked in 2008. They were revoked for not producing a single gram of gold in the immense gold reserves of Las Cristinas. This lawsuit prospered mainly due to the mishandling of a case that was clearly favorable to the interests of the country.

However, on November 21^st 2017, the national government announced and signed a compensation agreement with Crystallex for an extraordinary amount of $1.4 billion. This decision was made in favor of a company that not only did not comply with its production commitments but did not produce anything and did not make any kind of investment in the country.

To have an understanding of the disproportion of this amount, let us consider that after the ruling of the arbitration tribunal of the International Chamber of Commerce, the Venezuelan State compensated Exxon Mobil with 800 million dollars for its investments in the Cerro Negro project of the Orinoco Oil Belt. This happened after the nationalization of the Orinoco Oil Belt in 2007.

The government agreed to this amount in 2017, without evaluation, without discussion, without a valuation process or «due diligence.» Even so, the government only paid the first installment of the total amount committed to Crystallex before courts in the United States. Therefore, the Canadian company introduced a lawsuit requesting the auction of CITGO, and from there, the amount promised by the Venezuelan government was collected.

On May 18^th, the U.S. Supreme Court ruled in support of Judge Leonard P. Stark’s decision in the Delaware District Court to continue the trial for the auction of CITGO’s assets in favor of Crystallex.

The U.S. Supreme Court ruling immediately produced an order by Judge Stark, issued on Friday, May 22^nd. The order was to move forward with the auction process for CITGO’s assets. Crystallex must now obtain a license or authorization from the U.S. Treasury Department. The authorization would be in order to sell CITGO’s refineries and obtain the remaining payment committed by the Venezuelan government.

If Judge Stark’s decision to auction CITGO goes ahead and Crystallex obtains a license from the Treasury Department to proceed, the Venezuelan opposition would lose the control it currently has over this PDVSA asset in U.S. territory and the country. This is regardless of who might seek to exercise its legal representation before the U.S. They would lose an asset that in 2014 alone was valued at $15 billion.

This is a process full of irresponsibility, irregularities, and arbitrariness. It is an exact reflection of the dysfunctionality of the Venezuelan government and state institutions. This dysfunctionality continues to generate space for all kinds of irregularities and for the country to be subject to reckless lawsuits and actions by adventurers. There is no national strategy or institutional order to face the country’s challenges abroad.

This type of action, in addition to the sale of Nynas, the exit and transfer of assets and rights of Rosneft to another Russian entity and the process of handing over PDVSA carried out by the government, are a sign of the country’s institutional weakness. These signs continue to strike at Venezuela’s only chance of emerging from the deep political, economic and social crisis in which it is immersed: Full Oil Sovereignty.