Prices
At the beginning of May, prices tended to recover from the historically low levels they experienced in the week of April 20th . Prices have been showing an upward trend since May 1st , once the crisis of the negative values of the WTI was overcome and the production cut of 9.7 million barrels of oil per day, agreed by OPEC+, came into effect.
The WTI and Brent price markers closed on Friday, May 8th , at $24.75 and $30.33, respectively; in the European markets, an increase of 25% and 13%, respectively, from Monday, May 4th .
The WTI recovery is 51% compared to the prices on Monday April 27th , the week closes with a significant recovery after the fall of April 20th that was quoted in negative, mainly by the high levels in the Cushing Oklahoma storage, which were at 81% capacity.
However, since March 6th , the prices of both WTI and Brent have lost 41% and 42% of their value, respectively.
Both markers have had an atypical distance, which on Wednesday, May 6th , was located at $5.73 per barrel difference, considering that, generally, both have a strong positive correlation, which is according to the Energy Information Administration (EIA) less than $0.90 per barrel. This gap is mainly because WTI, being the marker for the US zone, continues to be affected by storage capacity restrictions in Cushing Oklahoma.
Despite the recovery shown this week, the WTI remains below $25/barrel and the Brent remains around $30/barrel, values considered by many analysts as low at the beginning of the crisis, the worst scenario for the price of oil in the middle of the second quarter of the year still impacted by the collapse of prices in April.
On the other hand, the prices of the OPEC basket have shown a significant recovery of 70%, starting on April 28th , when its price went from $12.41 a barrel to $22.40 on Wednesday, May 6th .
OPEC Basket Price as of May 01, 2020
Production
OPEC+.
The cut of 9.7 million approved by the group of producing countries takes effect starting on the first of this month until July 1st .
It is the responsibility of the OPEC Secretary-General and the OPEC+ Ministerial Follow-up Committee to verify strict compliance with the agreed cut, an issue that is not always easy for oil-producing countries, both because of the characteristics of their crudes and because of their capacity to administer the cut. Normally, what happens is that the cut begins to occur gradually, so it will be necessary to monitor at what time exactly the agreed volume cut is effective in May.
In a press release on Friday, May 1st , the Algerian Minister of Energy and President of the OPEC Conference, Mohamed Arkab, called on OPEC members and countries participating in the OPEC+ Cooperation Declaration to fully implement the agreements reached during the special session.
The countries that have so far officially announced the cut are Algeria, Kuwait, Oman, Arab Emirates, Azerbaijan, the Kingdom of Saudi Arabia, and the Russian Federation.
The main OPEC producer, Saudi Arabia, began to implement the agreed cuts with a pumping level of 12 million barrels per day as of April 30th , which will be progressively brought to 8.5 million barrels per day, according to the agreements. For his part, Russian Energy Minister Alexandr Nóvak told the Gazeta.ru news agency on April 29th that none of the country’s companies opposed the cut and added that the cut would be 8.492 million barrels a day.
This week, an official statement from OPEC reported that in the first days of May, Russia’s oil production fell to 8.75 million barrels a day. Thi is very close to the agreed 8.5 million barrels of its normal production which is around 10 million barrels a day.
Non-OPEC+ producers
The Kingdom of Norway declared on April 30th that it will join the OPEC+ countries’ effort to cut production. The Norwegian Minister for Oil and Energy, Tina Bru, declared that the reduction in that country’s production will be 250,000 barrels per day in June and 134,000 barrels per day in the second half of 2020. She announced that its total production in December 2020 will be 300,000 barrels per day, less than expected.
Current price levels leave many oil producers, especially US Shale Oil, Canadian extra-heavy crude and Latin American heavy oil, as well as deepwater oil production in the Gulf of Mexico and Brazil, below their production costs. This is leading to a decrease in oil production, for reasons of the economic viability of certain producers in this price scenario.
WORLD OIL PRODUCTION COSTS
The Executive Director of the International Energy Agency, Fatih Birol, said in an interview on April 22nd that the U.S., Brazil, and Canada have lost more than 2.2 million barrels per day of oil production in April. This was an expected situation, as we pointed out in our previous newsletters, due to the impossibility of sustaining the oil production levels of these countries with the current prices, or below $30 per barrel, particularly because of the impact on producers in North and Latin America.
Oil production in the US has been hit particularly hard by the fall in oil prices. According to market analysts’ estimates US oil production needs WTI prices above $25.
USA OIL PRODUCTION
2018-2019 vs. 2020
The US Energy Information Administration (EIA) reports that US oil production has fallen from 13 million barrels per day at the end of March to 11.5 million barrels per day on May 1st , a loss of 1.5 million barrels per day of oil in just one month. The same agency forecasts that US oil production will be at a level of 11 million barrels a day.
Drilling activity in the US continues to decline, falling in two months, March and April, by more than 50% of active drills.
On the other hand, American oil producers, large and small, continue to shut down activities, closing down thousands of wells and shale oil production areas. In the US alone, it is estimated that production will fall by 600,000 barrels between May and June, according to the Rystad Oil Energy AS.
U.S. OIL PRODUCTION CUTS
(MAY-JUNE 2020)
Everything indicates that the undeclared objective of the price war between Russia and Saudi Arabia is finally being fulfilled amid an unprecedented crisis in the oil market: the departure of significant volumes of oil production from the United States.
The characteristics and age of conventional wells, as well as the costs and complexities of shale oil fields, and their production using horizontal drilling and fracking, complicate the recovery of production that is closing in the United States, both technically and financially.
On the other hand, small and medium-sized shale oil producers in the US, with high levels of debt and little financial capacity of their own, are likely to have a very difficult time recovering from an oil market collapse for a long time. Everything seems to remain in the current low price situation, especially because of the uncertainty regarding the recovery of the world economy, oil demand and high inventories of cheap oil.
OIL INVENTORY LEVELS IN THE U.S.
It should be considered, as an additional factor, that according to the Energy Information Administration (EIA), the restrictions on available storage capacity in Cushing Oklahoma remain at levels close to 81% of its operating capacity; as of May 5th , it reached 65.4 million barrels of stored oil, an increase of 16.2 million barrels over the previous month, when prices collapsed on April 20th .
With this situation in Cushing Oklahoma and the absence of significant demand allowing inventories to drain, some traders and stock dealers fear a similar event with futures contracts for June. They do not rule out another WTI collapse, probably not on the same dimensions as last month. The decline in the volume of oil available in the market, but of such proportions that, in any case, will keep WTI and therefore Maya Crude, the marker for Latin America’s heavy crudes, at levels too low to cover production costs.
FLUCTUATION IN THE PRICE OF MAYA OIL
January – May 2020 (dollars/barrel)
Demand
As reported in previous bulletins, the effects of COVID-19 on the world economy have directly affected the demand for oil worldwide, with a drop that is estimated at 9.3 million barrels per day by 2020, according to the International Energy Agency. In April, the drop in demand has been the most pronounced, with an estimated drop of more than 29 million barrels of oil per day, an unprecedented figure of 30% compared to March levels.
COLLAPSE OF WORLD OIL DEMAND
The recovery in global oil demand has a direct correlation as a marker of the performance of the world economy. It is followed both by uncertainty regarding the real possibilities of stopping the COVID-19 pandemic that, to date, continues to spread throughout the world, with 3 million cases and 276 thousand deaths.
On the other hand, measures to contain and restrict movement, travel, and transport, as well as the closure of factories and large manufacturing and service centers, in the large industrialized economies, continue to be the fundamental factor in the fall in economic activity and therefore in global demand for oil.
Although some Asian countries, such as China, Korea, and Japan, seem to be better managing the spread of the pandemic in their countries, the economic recovery is still very slight, after a first quarter of historical setbacks. An example of this historical setbacks is China, where, for the first time since 1976, the Asian giant had a 6.8% drop in GDP.
Some countries in Europe, such as Italy and Spain, seem to be emerging from the peak of deaths due to Covid-19 and gradually beginning to relax measures to restrict internal movements and restart industrial activity. The entire Euro Zone continues to have significant restrictions on movement and transport, both internally and intra-regionally.
The industrial activity index of the two largest economies in the area, Germany and France, fell by 9.2% and 16.2%, respectively. The Director of the ECB, Christine Lagarde, stated that a fall of 15% is estimated in the European economy for 2020.
In the United States, the pandemic continues to take its toll with 78,328 deaths, which has meant a slowdown and setback for the economic performance of the world’s main economy. The increase in unemployment in the country, which, according to the report of Friday May 1st from the U.S. Department of Labor in April was 20.5 million people. This represents a level of 14.7%, the highest since the Great Depression of 1930, demolishes, in just one month, all the progress in employment obtained in a whole decade.
These elements, in addition to the loss of 1.5 million barrels of oil production in the country, which returns the country to the status of oil importer, and the general decline of the entire economy, are direct effects of the spread of the pandemic that could have political consequences in the United States, just seven months before the presidential elections of November this year.
The International Monetary Fund, in its World Economic Outlook report of April 14, estimates that the Gross Domestic Product of the world economy will fall by 3%, assuming that the pandemic will be brought under control in the second half of this year and that the measures to restrict movement around the world are gradually lifted. This is a scenario that seems too optimistic in light of the development of the pandemic and its expansion in North America, Latin America, and Africa.
The recovery of global oil demand will be directly proportional to the recovery of the world economy and the speed of its recovery. The recovery of oil demand will depend on the possibility of restoring industrial, manufacturing, travel and transport activity, solving financial problems, debts and company bankruptcies, as well as restoring all of the supply chains of goods, services, and inputs for the reactivation of large industrial and manufacturing complexes, and lifting internal and inter-country restrictions to restore the consumption of fuels for terrestrial, maritime, and air transport, which are the major demanders of oil products.
A clear indicator of these factors is the fuel consumption and activity of the refining sector. According to the latest EIA report from May 1st , U.S. fuel consumption for the month fell by 40%, an unprecedented situation for the oil market.
The report notes that demand for oil in the U.S. and European refining systems fell by 10% in the period March-April 2020. In more specific data from the Energy Information Administration (EIA), U.S. refinery feedstocks entered 12,976 million barrels per day as of May 1, a reduction of 4 million barrels per day from the same date in 2019, as reflected in the graph below.
In the case of China, which was the first economy affected by the containment measures, and the world’s largest oil importer, according to the International Energy Agency’s (IEA) April report, it recorded a 22% reduction in oil demand for April compared to March 2020. The IEA estimates a reduction in demand in Asia of 0.6 million barrels per day and Europe of 0.9 million barrels per day.
Storage
This sustained fall in demand, as well as the reduction in crude processing globally, has pushed crude oil storage to the limit. In the United States, crude oil storage, according to data from the Energy Information Administration (EIA) as of May 1st , reached 532,221 million barrels per day, which corresponds to 42 days of supply, coverage, as shown in the following graph.
DAYS OF COVERAGE FOR OIL SUPPLIES
STORED IN THE UNITED STATES
The Energy Information Administration (EIA), in its April report, states that U.S. crude oil inventories increased to 532 million barrels per day, reaching the highest average of the last 5 years for this time of year.
The high levels of trade inventories in both the countries of the Organization for Economic Cooperation and Development (OECD) and the trade inventories of major consumers such as China and India, together with the inventories of strategic reserves in the large industrialized economies, will be a factor affecting the price of oil in the coming years.
When inventories of cheap oil are built up, i.e. when storage levels are full of cheap oil with so many days of supply coverage, there will be market manipulation by existing stocks when demand begins to be restored and oil pumping resumes. That is, the market will be supplied by the cheap oil accumulated in the inventories, so producers will have to continue to restrict their oil production, i.e., supply, until the inventories drain to the averages of the previous five years.
This indicates that the low oil price scenario will remain for at least two years, and may even remain for a longer period. Everything will depend on how much of the more expensive oil production can sustain their supply, that is, they will be able to recover their production levels after the market stabilizes.
Both Russia and Saudi Arabia will likely take advantage of the changes that have occurred in the market due to the Covid-19 crisis, with the high levels of existing storage, to keep prices below the production costs of oil from shale and other producers with higher costs, to finally obtain a strategic advantage from this fortuitous circumstance of the oil market.
Venezuela
The country continues to be shaken by an unprecedented political, economic, and social crisis, compounded by the operational collapse of PDVSA and the collapse of the oil market.
On April 23rd , government special forces repelled an attempt by a group of armed men to land in the country, including two American mercenaries, in what some sectors of the opposition from abroad claimed was operation «Gideon». Although it was not a major armed action, nor anything that compromises the country’s security, it will nevertheless have strong political implications. This since the organizers of the operation are demanding from abroad the fulfillment of a contract signed by the team of collaborators and advisers closest to Juan Guaidó, self-proclaimed president of the country, where it is not even clear if he knew of, and authorized with his signature, the $223 million contract, based on which the American contractor «Silvercorp» would enter the country to capture or «discharge» government leaders, including the president Maduro.
Likewise, throughout the week, there were strong acts of violence in Petare, popular neighborhoods of Caracas, east of the capital city, where groups of armed criminals have been fighting for six days with weapons of war for the control of the territory. It was only on Friday, May 8th , that the government’s special forces intervened, reporting murders and executions of residents of those slums.
REFINING
The shortage of gasoline and diesel continues to be total in the country. Even with the strict containment measures decreed by the government, the oil industry has not been able to produce, nor guarantee the supply of fuels for the reduced internal demand. The Armed Forces took control of all fuel distribution systems in the country and there is strict rationing.
The government’s attempts to reactivate the national refining system, with a processing capacity of 1.3 million barrels per day and which in 2013 produced 3,011 MBD, of which 703 MBD were destined to fully satisfy domestic fuel demand and 2,425 MBD for export, have failed miserably.
Neither the “El Palito Refinery” nor the “Paraguaná Refinery Complex”, where the government has been making attempts to put these refineries into operation, even with the help of the Islamic Republic of Iran, have yet been reactivated.
The government has managed to introduce some shipments of fuel, using private traders and operators for this purpose. However, the shortage situation persists in the country and the import of this product does not mean a structural solution to the problem, which has its origin in the operational collapse of PDVSA and its refinery system.
PRODUCTION
The oil industry continues to present severe operational and functional problems that have prevented it from facing the global race to keep operations and production capacities afloat in a scenario of low prices like the current ones.
In addition to the suspension of operations of Chevron, a minority partner in the Joint Ventures Petropiar and Petroboscán, which together produce 27% of the country’s oil, due to the restrictions imposed by the U.S. sanctions to operate in Venezuela, the departure from the country of Rosneft, a minority partner in the Joint Ventures Petromonagas, PetroVictoria and PetroMiranda, which together have contributed 24% of the country’s oil production.
To date, Rosneft has not informed to which Russian company has transferred its assets and production rights in the country, rights, and assets which, as indicated in the Organic Law on Hydrocarbons, must be authorized by both the National Executive and the National Assembly.
Both foreign companies, partners of PDVSA’s Joint Ventures, are fundamental to maintaining oil production in the country. These joint ventures together contribute 448 MBD, 68% of Venezuela’s reported production for March of 660 MBD of oil.
In addition to the suspension of operations and departure of these companies, the fact that, also due to U.S. sanctions, the service companies Halliburton, Baker Hughes, GE Company and Weatherford International Public Limited Company are prevented from operating in Venezuela, which makes it even more difficult to maintain or recover oil production in the country.
As we indicated in the bulletin on April 24th , the Organic Law on Hydrocarbons stipulates, and this is reflected in the Contracts of Joint Ventures signed between CVP and the minority partners, contracts approved by the National Assembly at the time that, if the minority partner is unable or unwilling to continue the development of the Joint Ventures production plan or is not interested in accompanying the CVP in any further development of the reserves over which the Joint Venture, CVP, has exploitation rights, it can advance the operations itself, i.e., with its own efforts.
In other words, given the political and economic problems faced by the minority partners, PDVSA, through the CVP, is responsible for taking over operations and guaranteeing oil production in the country. This provision of the legislator foresaw that, under any circumstances, PDVSA should guarantee the continuity of oil production in Venezuela, a strategic and fundamental activity for the economic development and political stability of the country.
In a low price scenario like the one we are seeing, transnational oil companies are beginning to cut back on their operations, costs, and expenditures worldwide. Companies usually categorize wells and production fields according to their economic performance, their national interests, or the operational or political complexities involved in each development. In Venezuela, the transnationals, except for the Chinese National Petroleum Corporation (CNPC), which must guarantee oil supplies to its own country, such as Chevron and Rosneft, will not sacrifice their own production, nor that of their own country to produce abroad, even more so if the political and economic environment is marked by uncertainty, as is the case in Venezuela at the moment.
We will have to wait for the publication of OPEC’s monthly report to have some information on PDVSA’s oil production in April, an extremely complicated month for the entire sector worldwide, which in Venezuela is multiplied by the problems of management and administration that the company has been accumulating since 2015, subject to all kinds of interventions by the government, which has translated into a dislocation of its workers and a collapse of its production capacities.
OPERATIONAL RELIABILITY.
The absence of company management with knowledge of PDVSA’s core activities, both at management and operational supervision levels, has led to countless accidents and episodes affecting oil production operations. In particular in the Orinoco Oil Belt, in the oil production areas in the south of the country, where 53% of PDVSA’s production is currently concentrated.
On April 1st , a fire was reported at the Petropiar improver facility, specifically its tank farm.
On Friday, April 11th , a fire broke out in San Diego de Cabrutica, which spread to the facilities of the Petrocedeño Operating Center (COPEC) joint venture and adjacent areas.
On Sunday, April 26th , a large fire was recorded in the Morichal Operating Center facilities, which was not controlled until the afternoon of Monday, April 24th , affecting once again the crude oil processing of PetroSinovensa, as well as PDVSA’s production in the Morichal District.
Added to this is the widespread deterioration of production infrastructure in the southern areas of the country, causing incidents that force the Orinoco Oil Belt operations to be halted, such as those that occurred this week in the Morichal District, where oil overflows the flow station tanks due to lack of adequate instrumentation and supervision.
Likewise, some production areas have had to stop or recirculate production due to the accumulation of inventories, as happened last April 26th at PetroSinovensa, where the production of Merey 16 and DCO was affected by the high inventories at the TAEJ terminal in the northeast of the country.
OIL SERVICES.
The departure from the country of American oil service companies and drilling rigs once again highlights the importance of PDVSA’s oil service subsidiaries. These began to operate in 2009, when President Chávez approved a plan presented by PDVSA’s Board of Directors, where we proposed actions to achieve independence in certain activities and services that were essential to guarantee oil production activities such as drilling, well services, drilling, transportation, maintenance, among others.
The creation of these subsidiaries, in addition to a need to save and lower production costs, was the most effective way to successfully deal with any scenario of political and economic sanctions or restrictions than our ability to produce, process, and export oil. The idea was to conquer the operational sovereignty of the national oil company of a country that was subject to sanctions and coercive measures, which began in 2010.
In the case of drilling activities, drills, and well services, the subsidiary “PDVSA Servicios Petroleros” managed to acquire in China, between 2011 and 2013, 112 drills for land operations of 350 HP – 3000 HP. Likewise, 167 specialized well services equipment, 92 directional drilling sets, 48 cementing units, 21 continuous pipe equipment, and 6 hydraulic units were acquired between 2012-2013. One would have to ask PDVSA’s managers, in these last five years, where did the equipment go, where are they? At this pressing time, they are fundamental to maintaining oil operations in the country.
Thus, in compliance with the “Plan Siembra Petrolera” and the increase of activities in the Orinoco Oil Belt, with a production of 1.3 million barrels per day at the end of 2013, there were 322 active drills in the country, an increase of 148 units with respect to 2009, which allowed us to maintain our production at average levels of three million barrels per day per year. As of 2014, the projection of planned drills was 377, operating units in the country.
PDVSA’s level of autonomy and operational independence in this fundamental area for oil production reached 49% in 2013, with a projection of 52% by 2014, an increase in our operational sovereignty of 25% with respect to 2009, thanks to the drills and equipment owned by our subsidiary “PDVSA Servicios Petroleros”.
COMMENTARY.
Changes to the Venezuelan oil regime.
Amid this acute political and economic crisis, the collapse of PDVSA and the institutional dysfunction of the State, the government is attempting to bring about a total change in the Venezuelan oil regime that has been in force since the nationalization of 1976 and which violates the provisions established in the Constitution of the Bolivarian Republic of Venezuela and the Organic Law on Hydrocarbons, with regard to the reservation by the Venezuelan State of primary oil production activities in the country, for reasons of national convenience and sovereignty.
On Thursday, April 30, we made public the denunciation of an internal document of the Restructuring Commission of PDVSA, where the reservation to the Venezuelan State on oil activity and PDVSA as an operator, established in articles 302 and 303 of the Constitutional Text, are modified, articles 22 and 57 of the Organic Law of Hydrocarbons in force to cede the areas of oil production and commercialization to private operators. Articles 9 and 10 of the Organic Law on Hydrocarbons have been violated to cede the infrastructure for production, conditioning, treatment, transport, storage, and dispatch terminals, as well as to hand over the assets for refining and processing oil and gas to private operators.
The government’s plan seeks to repeal Decree 5.200 on the Nationalization of the Orinoco Oil Belt, enacted on February 27, 2007, which allowed the Venezuelan state, through PDVSA, to control the largest oil reserve on the planet.
Finally, the current oil tax regime is repealed, reducing to the point of eliminating the royalty on oil, as well as the various oil taxes currently in force. Oil operators would only pay income tax in the country, but at a much lower rate than the current ones.
This action is intended to bring about a “de facto” change in the Venezuelan oil regime, which has been under State control since the 1829 Quito Decree of the Liberator Simón Bolívar until the current one of the Bolivarian Republic of Venezuela.
In its desperation, the government is trying to divest itself of an asset that is the heritage of all Venezuelans: PDVSA, which in 2013 was valued at $226.76 billion. Furthermore, it is renouncing its constitutional responsibilities and depriving the Venezuelan people of oil and oil revenue, the only possibility the country has of overcoming the current terrible economic crisis and beginning its reconstruction.
Those who have stimulated and promoted this plan from the government, do not understand and have permanently underestimated the importance of oil in the country, equally underestimating the political value of the concept of national sovereignty. This is one of the fundamental reasons for the destruction of PDVSA and the collapse of oil revenue.
The international oil companies, in addition to the considerations of illegitimacy of those making the proposal and the illegality of this, must know that a proposal of this type is unviable and unsustainable over time.
Experience in oil-producing countries that have suffered serious conflicts, such as Iraq and Libya, shows that sovereign control of oil is a key factor in achieving stability and reconstruction of the country. Countries cannot be deprived of their fundamental resources.
Likewise, in our own national experience, when the oil opening was imposed on the country between the mid-1980s and the end of the 1990s, which stripped the country of its oil revenues, it was one of the fundamental reasons for the deep economic and social crisis that produced events such as the 1989 “Caracazo” and the military rebellion of February 4, 1992.
If the government or the opposition were to succeed in imposing such profound changes on the Venezuelan oil regime neglecting the country and taking advantage of a situation of political and institutional weakness and a distraction of political and social forces, which would take us back to the concessionary era experienced in the first 60 years of its oil industry. Sooner than later a government will arrive, which only has to be nationalist and attached to our tradition of Constitutional Principles and Venezuelan oil policy, to fully restore full oil sovereignty, as happened in Venezuela, between 2002-2012, under the government of President Chavez.
