Oil prices rebounded in the second week of November, driven by a surprising announcement last Monday, November 9, made by the pharmaceutical company Pfizer, regarding the results of the trials that show a 90% effectiveness in the vaccine against COVID-19, as well as the possibility that, by the end of this year, it will be available for application.
The announcement affected the Brent and WTI markers, which rebounded 8% and 9% to trade at 43.11 and 40.29 dollars per barrel, respectively, during the week, their highest values since the beginning of September when prices marked a decline as a result of the relaxation of the OPEC+ cuts that took effect in August.
OIL PRICE BEHAVIOR
(October – November 2020)
During September and October, prices showed a downward trend due to the increased supply of oil, the expansion and impact of COVID-19 in the U.S., as well as the magnitude of the «second wave» that has affected the large European economies.
At the end of October, the Brent and WTI indicators were down, at $38.97 and $36.81 per barrel respectively, their lowest values since June, after European countries announced new mobility restriction measures to mitigate the expansion of the «second wave» of COVID-19.
However, as of November, this trend has been reversed and the markers have traded higher, once again reaching values above $40 per barrel.
The factors that have driven this price recovery are linked to subjective elements, market perceptions that are very sensitive to announcements, or events that may foresee the recovery of the economy in an environment of permanent uncertainty due to the propagation of COVID-19, as well as the possible recovery of the economy and the world demand for oil.
Pfizer’s announcements created expectations about the beginning of the end of the pandemic and coincided with the preliminary results of the U.S. elections which, throughout the week indicated a win1 for the Democratic candidate Joe Biden, who has promised to return to the Paris agreement on Climate Change and prioritize the use of clean energy, supporting the recovery of prices in the face of the prospect of a reduction in oil production in the U.S.
However, the positive expectations in the market were dispelled by the more cautious opinions of health experts and market analysts, who see the availability of a vaccine against COVID-19, as only the beginning of a recovery process that will extend throughout the year 2021.
The International Energy Agency (IEA), highlighted in its November report2 that, despite the appearance of a vaccine at the end of this year, world oil demand will not recover in the short term, given the complexity of the situation created by the fall of the world economy throughout 2020. Likewise, OPEC, in its November MOMR, estimates that other factors besides the direct effects of the pandemic, such as debt and the exhaustion of fiscal and monetary stimuli, will further slow down the possibilities of a recovery in world oil demand.
Hence, after the markers reached last November 11, values of 44.83 and 42.59 dollars per barrel for the Brent and the WTI respectively, the highest prices since August, prices went down again, although they remained above the threshold of 40 dollars per barrel.
At the close of the European markets today, Friday 13th November3, the prices of Brent and WTI were quoted at 43.05 and 40.46 dollars a barrel respectively, a rise of 10.4% and 9.9% compared to the closing prices of October.
PRICE OF OIL
The OPEC Crude Oil Basket fell on November 2nd to $35.89 barrel4, a similar average to that of June, however, the Crude Oil Basket started the month of November with an upward trend. On November 12, it registered a value of 42.97 dollars per barrel5.
PRICE OF THE OPEP BASKET
World oil production for October was 86.04 million barrels per day, an increase of 0.6% – 500 thousand barrels per day -, compared to September, according to data from secondary sources published in OPEC’s MORM6 in November, and an additional 2.37 million barrels per day compared to the end of July, an increase corresponding to 2.8%.
The production of the OPEC+ countries participating in the cutbacks agreements, for October was 37.17 million barrels of oil per day, 43.2% of world production.
WORLD PRODUCTION AND OPEP+
(January – October 2020)
According to the information published in the OPEC MOMR of November 11, production from members corresponding to October, was 24,386 million barrels per day, an increase of 1.3% for September, which represents 322 thousand barrels per day of oil. This was due to the increase of 494 thousand barrels per day in the joint production of Libya, Iraq and Nigeria. On the other hand, the UAE, Angola and Venezuela combined, decreased their production by 153 thousand barrels per day.
OPEC countries subscribing to the OPEC DoC+ agreement
The OPEC-10 group, the OPEC countries that apply cuts in their production quota: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iraq, Kuwait, Nigeria, Saudi Arabia, produced 21.67 million barrels of oil per day in October, representing 58.3% of the OPEC+ group’s production. The OPEC-10 production cut, in the tenth month of the year, was 5,013 million barrels of oil per day, complying with 103% of the cut agreement agreed in OPEC+.
PRODUCTION RANKING OPEP COUNTRIES
Saudi Arabia, with a production of 8.956 million barrels of oil per day, maintained the same level as the previous month, representing 36.7% of OPEC production, 41% of OPEC-10 production and 24.1% of OPEC+ production. Meanwhile, the Persian Gulf monarchies and Iraq had a joint production of 17,518 million barrels of oil per day, representing 80.8% of OPEC production and 47.1% of OPEC+.
In the case of the UAE, its October production was 2,441 million barrels of oil per day, meeting 126% of its cutback commitment, adding 149 thousand barrels to its cutback quota as compensation. In September, it had also made an additional cut of 75 thousand barrels of oil per day.
OPEC countries exempted from production cuts
Iran, Libya and Venezuela are the OPEC countries that do not participate in OPEC+ production cuts. Among these three countries, 2,779 million barrels of oil per day are concentrated, of which Iranian production of 1,958 million barrels per day, represents 70.5%.
Since January 2020, Iran has stabilized its production, with 1,958 million barrels a day in October. Iran’s production has been affected by the sanctions imposed7, since August 2018, by the US government so that its production has fallen from 3.8 million barrels a day in July 2018, to the current values with a loss of 51%.
However, the U.S. election result could mean that the new democratic administration will resume the nuclear agreements with Iran, known as the Joint Comprehensive Action Plan8 (P5+1), signed9 by the Obama administration in July 2015, which revoked10 U.S. sanctions in January 2016. If this is the case, and the new US administration lifts the sanctions, Iranian production could quickly recover one million barrels a day. This already happened between the years 2016-2017, after the P5+1 nuclear agreement, which allowed for the lifting of the sanctions imposed by the US and Europe against Iran.
Venezuela, the country with the largest oil reserves in the world, continues to be immersed in serious management problems due to government intervention and the militarization of the national company PDVSA, which has caused the operational collapse of the oil industry, deeply affecting the production and refining of oil. As of October, OPEC reported a production level of only 367 thousand barrels per day of oil, a drop of 2,648 million barrels per day in seven years, equivalent to 87.8% with regards to its production of 3,015 million barrels per day in 2013.
The situation is completely different in Libya, where October production was 454 thousand barrels of oil per day, an increase of 299 thousand barrels per day, which represents a 190% increase over September production.
OIL PRODUCTION IN LIBYA
(January 2020 – March 2021)
The agreement signed on September 11 of this year between the National Accord Government (NAG) based in Tripoli, the Libyan National Army, and the Eastern Parliament in Tobruk, together with the ceasefire12 announced by the parties in October, unblocked the oil fields and facilities. This allowed the National Oil and Gas Corporation of Libya (NOC) to resume activities and operations, especially in the Sharara13 field, the largest oil field in the country, which produces 300,000 barrels of oil per day.
From September 18 to October 31 of this year, when the unblocking of the oil fields and facilities began, Libya’s production increased by 350 thousand barrels of oil per day, an increase of 468% over the 80 thousand barrels produced in May, its lowest level for the year.
As of November 7, Libya’s production stands at 1,036 million barrels of oil per day, according to NOC14. The increase and stabilization of oil production in Libya took the market and OPEC+ ministers by surprise. Their strategy is to make production cuts more flexible in a market that continues to show signs of returning to the scenario of oversupply of oil, high inventories, and low demand, which was observed during the first half of 2020.
The nine non-OPEC producing countries that are signatories to the OPEC DoC+ agreement and participating in the production cuts are: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Oman, Russia, Sudan and Southern Sudan. They produced 12.78 million barrels of oil per day in October, 34.4% of OPEC+. The production cut of these non-OPEC countries was 2,635 million barrels of oil per day, meeting 93.7% of the OPEC+ quota.
PRODUCTION NON-OPEC COUNTRIES SIGNING THE OPEC+ DoC AGREEMENT
According to the data from the Russian Ministry of Energy15, for October, the oil production of this country increased by 50 thousand barrels a day for a total of 9.17 million barrels a day, which represents an overproduction of 170 thousand barrels a day regarding its quota, with 91% compliance with the OPEC+ cut.
The Russian information agency Interfax16, on Monday, November 3rd, notified in a meeting held between high executives of the oil companies of Russia and Minister Novak, that they had discussed future oil scenarios in which the Russian position of supporting the extension of the current production cuts up to three months would be ratified. This will be discussed in the next meeting of the OPEC+ JMMC, on November 17th.
On Tuesday, November 10, Russian President Vladimir Putin appointed Nikolai Shulginov17 as Minister of Energy, while former Minister Alexander Novak18, who led the complex oil market scenario during the COVID-19 crisis, was promoted to Prime Minister for the energy sector.
Joe Biden’s recent election in the U.S. may modify the current Trump’s policy of focusing on the development of all fossil fuels and curb expectations of restoring the country’s oil production to pre-COVID levels, given the Democratic Party’s programmatic commitment to the Paris Agreement on Climate Change19 and the promise not to issue new permits for oil and gas exploitation on federal land, as well as the end of state subsidies for fossil fuels.
President-elect Joe Biden is expected to keep his promise20 to prioritize the development of clean energy, cease support and encouragement for oil and coal production, and the development of oil transportation infrastructure projects, which are questioned for their environmental impact, such as the Keystone XL pipeline.
There is an expectation in the oil sector that the new Democratic administration will be more prone to environmental controls and legislation, as opposed to the deregulation of the activity that characterized the Trump administration.
Nevertheless, last October, during his campaign in Pennsylvania, Biden stated21 that he will not regulate fracking, although he does plan to ban new permits for oil and gas drilling on federal land and offshore.
The president-elect announced, on October 28th, in his first position regarding energy policy, the figure of 400 billion dollars for the development of renewable energies.
On the other hand, the new administration is expected to be consistent with the stance the Democrats have taken throughout this year by repeatedly opposing in Congress the approval of federal resources to subsidize and support U.S. oil producers. They have defeated several attempts by the White House and the Secretary of the Treasury, Steve Mnuchin, since the beginning of the year, aimed at increasing the number of loans to small and medium-sized enterprises in the sector – established within the Economic Assistance, Relief and Security for the Coronavirus Act (CARES) – to refloat U.S. shale oil producers given the overwhelming debts of the sector, the economic non-viability of production, and the collapse of prices as a result of the fall in oil demand.
It will have to wait and confirm if the new administration, in a highly polarized political context and with the Congress under Republican control, will be able to save the U.S. oil sector, particularly independent shale oil producers, from bankruptcy. Also, whether the new Energy Department authorities will use funds to acquire U.S. oil production for the country’s strategic reserves as a way to subsidize the country’s oil production, as the Trump administration did earlier this year.
On the other hand, the concept of «energy independence» has been a banner and claim of all U.S. administrations since the Arab oil embargo of 1973, so it remains to be seen if the new Democratic administration succeeds in maintaining this strategic objective of the country with an energy policy based on the development of clean energy.
It is possible to verify that since the «Shale Boom» (the peak in the exploitation of shale oil,) which began in 2006 during the second mandate of Bush Jr. Not only did it not stop during the eight years of the Obama administration (2009-2016), but it had an increase of 3.5 million barrels per day and reached record levels, starting with 5.3 MMBD of crude oil to close at 8.8 MMBD, in 2016.
U.S. OIL PRODUCTION
Paradoxically, it was during the Democratic administration of President Obama when the production of shale oil boomed, without the federal government issuing environmental regulations, despite the serious questions and indications of environmental damage caused by fracking.
Since Donald Trump took office as president in 2017, oil production increased by 4.2 million barrels per day, from 8.8 million barrels per day to 13 million barrels per day by February 2020, placing the US as the largest oil-producing country, above Russia and Saudi Arabia, an enviable strategic position. Giving it up will undoubtedly have its political and economic costs.
Energy policy will be one of President-elect Joe Biden’s challenges, and he is testing his leadership by having to decide between political-economic pragmatism and the voter’s programmatic platform that gave him a difficult victory in this difficult election.
Oil production in the US, for the week of November 6, was 10.5 million barrels of oil per day, according to the EIA report22 of November 12, which represents a drop of 600 thousand barrels for the weeks of October 23 and 30, as a consequence of the passage of Hurricane Zeta that affected the production of 6.36 million barrels in the Gulf of Mexico between October 26 and November 4, according to information published by the Office of Safety and Environmental Compliance23.
According to the EIA, crude oil production in the country currently averages over 11.4 MMBD in 2020.
However, the same agency proposes a slight reduction in this amount for the second quarter of 2021 (about 11.2 MMBD), because the new drilling activity will not generate enough production to compensate for the decreases in existing wells.
The EIA, in an estimate that does not take into account the new energy policy with the Democratic win, expects drilling activity to increase in 2021, which will contribute to local crude oil production reaching 11.3 MMBD in the fourth quarter of 2021 (11.1 MMBD on average in 2021).
US Drilling Activity
Drilling activity in the US has shown a progressive increase since September 18, with the incorporation of 57 oil platforms, for a total of 236 drills as of November13, according to a report by Baker Hughes.24
According to the OPEC and Rystad Energy report, 457 shale wells started operations in October, adding activity in 35 more wells than those that started the previous month. On the other hand, 274 shale wells were drilled and 415 shale wells were completed, 12 and 2 less than the previous month, respectively.
There are 8 consecutive weeks where the operations in onshore fields add up to active oil platforms since the Lower-48 (the 48 states south of Canada) reactivated the activity in the closed wells in those oil fields, which prevented the US oil activity from falling below 10 MMBD and recovering to establish itself to 11 MMBD, a figure estimated as stable within the EIA projections.
Despite this recovery, the number of active drills is 448 units below the number of drills that were active in November 2019.
DRILLING ACTIVITY IN THE U.S.
The political transition: from Trump to Biden
While awaiting the formality of certifying the remaining states to complete their respective counts, Joe Biden is the President of the United States for the new, four-year term beginning January 20, 2021.
This, although President Trump does not accept the results and claims to be the winner of the election, insisting that he was the subject of massive electoral fraud by the Democrats. With this assertion, he has filed lawsuits and refused to facilitate the transition in the White House.
President-elect Joe Biden and Vice President-elect Kamala Harris are challenged to manage the country’s economic recovery from the effects of COVID-19.
The United States is, so far, the most affected country in the world, with 10.6 million positive cases and 243,000 deaths, where the pandemic caused the fall of the US economy by 32.9% for the second quarter of the year and 14.7% unemployment25, figures not experienced since the times of the Great Depression (1929-1933).
The new administration will have to resolve these challenges in a highly polarized political environment and a president who refuses to accept his defeat and questions the US electoral and judicial systems, which has paralyzed timely decision-making and adds to the serious difficulty of a divided country to cope with a crisis of enormous dimensions like the current one.
Besides, in the absence of final results for the legislators, Biden may have to deal with a Congress that is highly polarized or controlled by a Republican Senate majority, so his room for maneuvering to implement his plans may be limited or demand significant political concessions.
On November 7, after the electoral projections were broadcast by various news networks in the country giving Biden the victory, through the web portal «Build back better,»26 the main lines of the policy of the new Democratic government were presented.
According to the information that can be collected from the site, there is talk of a program that places the focus on the pandemic as the primary step in solving the employment crisis. The plan focuses on measures such as raising the national minimum wage to $15 per hour, packages of assistance for businesses and small businesses, support for local governments to protect essential workers (teachers, firefighters, etc.), as well as more extensive unemployment insurance to protect those affected by closures during the pandemic, among others.
The markets’ reactions to Joe Biden’s arrival at the presidency were positive, both locally and internationally, due to the perception by economic agents that he would have a less conflictive administration than Trump.
End of the trade war?
Biden’s victory also presupposes that the US will return to respect for trade agreements and WTO rules, leaving behind the confrontational trade policies that have characterized the Trump administration.
An agreement with China that puts an end to the trade war between the two countries, as well as an end to the imposition of tariffs on European production, will pave the way for the recovery of the world economy.
The return to the Paris Agreement
Biden confirmed that under his mandate he will return to the Paris Agreement27, the global commitment reached in 2015 for the reduction of greenhouse gas emissions, from which Donald Trump had withdrawn the United States.
Within the same, it committed the United States to reduce greenhouse gases by up to 28% by 2025, respect to 2005 levels, which will mean a substantial change for Trump’s policy of stimulating the exploration and exploitation of hydrocarbons.
Some financial and industrial sectors have expressed concern that Biden could go further, because in February 2019, Democratic Representatives in Congress, Alexandria Ocasio-Cortez and Edward Markey, proposed an initiative called the «Green New Deal»,28 which sets forth a comprehensive plan to address climate change by aggressively reducing the use of fossil fuels in the country, as well as seeking to create new jobs in the renewable energy industries.
However, Biden has already expressed that he does not share this approach of his fellow party members. In return, he proposes29 a $2 trillion federal investment in research on environmental technologies over the next 10 years, with a view to a zero net emissions scenario by 2050, as established in the Paris Agreement. The investments coincide with his economic plan to create jobs in the manufacture of products with so-called «green energy.»
Other aspects of the new government’s environmental policy will include: maintaining the proposal (also handled by other developed countries) to eliminate fossil fuel subsidies, a carbon-free energy sector by 2035, modernizing US buildings and infrastructure, proposing zero-emission public transportation options by 2030 as well as incentives and tax credits for businesses, among others.
The nuclear agreement with Iran.
Reestablishing this agreement is a sensitive issue in US domestic politics, due to the powerful Israeli lobby and that of the Gulf monarchies in Washington. Given the Republican control over Congress, if the Biden administration reestablishes the P5+1 agreement, signed by the Obama administration in 2015 within the framework of the diplomatic agreements reached with the UN, this would mean lifting or relax the US sanctions against Iran. This would mean into a recovery of Iran’s oil production and a greater supply of oil on the market, which would force OPEC+ to review its strategy of cuts or redistribution of production quotas to include Libya and Iran.
To date, the pandemic has caused 53 million infections worldwide30 with 1.3 million deaths and 34 million recoveries. Although the largest containment measures have been announced in Europe, the United States31 remains the most affected country, currently with 10.6 million cases and 243,000 deaths. It is followed by India32 and Brazil33, with nine and six million infections, respectively. In France34, there are 1.9 million cases and 43,000 deaths.
On November 9, the American pharmaceutical company Pfizer35 announced that its experimental vaccine against COVID-19 is 90% effective according to the first data of its clinical trials. This is well above the 50% minimum required by the U.S. Food and Drug Administration (FDA) for the Coronavirus vaccine. According to the World Health Organization, there are currently 47 other vaccines against COVID-19 also in the process of clinical evaluation36.
Pfizer, together with the German research house BioNTech, confirms they have obtained successful results with the vaccine, without causing inconveniences during the trials with volunteers. This is the reason they hope to request authorization for its use at the end of this month.
Both companies have a $1.95 billion contract with the United States for the government to distribute 100 million doses of the vaccine before the end of the year. They also have supply agreements with the European Union (300 million doses), the United Kingdom, Canada, and Japan.
It remains to be established, given the limited doses available, what will be the criteria for its application. Presumably, priority will be given to vulnerable people and health personnel. Although Pfizer and BioNTech began producing it before the announcement to be ready once FDA authorizes them to market it, they are expected to produce 50 million doses this year, targeting 25 million people. By 2021, 1.3 billion doses of the vaccine are projected to be produced.
Other considerations about the Pfizer vaccine are that it is not yet known how long its effectiveness against infection lasts and that, for its use, it must be stored at approximately -75 degrees Celsius (50 degrees cooler than other vaccines), which poses a serious challenge for its distribution in the short term.
European Central Bank Forum
On November 11th and 12th, the European Central Bank (ECB) held its annual Forum on Central Banking, as an online event. It brought together central bank governors, academics, financial market representatives, among others, to exchange views on current policy issues and long-term issues.
This year’s theme was «Central banks in a changing world37«. The need for central banks to continuously adapt to dynamic national and international circumstances was discussed. Central issues for the ongoing review of the ECB’s monetary policy strategy were also discussed, including the consequences of recent trends in (de)globalization, the impact of COVID-19 on European and global economies, the macro-financial implications of climate change, and the challenges posed by low-interest rates. Other aspects of the strategy review were also addressed, such as the implementation of the ECB’s Price Stability Objective, monetary policy instruments, and communication.
Panel between the FED, ECB and BoE representatives
Within the framework of this event, a panel discussion was held between the president of the ECB, Christine Lagarde, the president of the United States Federal Reserve (FED), Jerome Powell, and the governor of the Bank of England (BoE), Andrew Bailey.
The three representatives shared their considerations on the economic situation in the context of the pandemic and the expectations for a recovery in the short term.
They agreed38 that the world economy is still going through a difficult time. Although the announcement of the Pfizer vaccine gave some positive perspective, there is uncertainty about the production and distribution of the vaccine. This week the stock markets reacted positively after the announcement by the US pharmaceutical company about the COVID-19 vaccine.
In this sense, the Eurozone will probably enter a recession again this quarter, so the ECB is considering a new stimulus package for December, probably through its emergency bond purchase program for the pandemic and through more favorable loans for the banking sector.
The president of the ECB also announced a project to launch a digital euro, as a complement to the cash issue. The results of the ECB’s consultations on the digital currency would be ready in early 2021 and the project may take between two and four years to materialize.
Lagarde added that he is aware that the Central Bank in China has already started its digital yuan project, but that in the case of the digital euro, it may take longer not only because of the technology involved, but also to comply with anti-money laundering and terrorism financing prevention rules.
The OPEC, in its November MOMR report, reviews the global oil demand downwards, estimating that the contraction will be even greater than that predicted in the October report, with an average of 90.01 million barrels per day by 2020, mainly due to the increase in COVID-19 cases worldwide that leads to the intensification of restrictive mobility measures in the main economies.
For its part, the EIA in its Short-Term Energy Outlook (STEO) report39 of November 11, estimates that oil consumption in October stood at 95.3 million barrels per day, and projects world demand at 92.9 million barrels per day, a decrease from its October estimates.
The IEA40 also reduced its forecasts for global consumption in 2020 to 91.3 million barrels per day.
As far as 2021 is concerned, the IEA considers that demand will not see a significant recovery until the end of that year, so they have lowered their estimates to 97.1 million barrels per day, as they anticipate that the results of possible vaccines against COVID-19 will be seen at the end of the year.
ANNUAL VARIATION IN DEMAND
WORLD OF OIL
Both OPEC and the IEA estimate that the demand reduction will be the result of low consumption in the countries belonging to the Organization for Economic Cooperation and Development (OECD), for the rest of 2020 and during 2021. This is mainly because of the measures announced in November by European countries (France, Germany and the United Kingdom), which decided to increase restrictions given the rapid spread of the pandemic, a decision that will directly affect regular fuel consumption.
The increase in demand will come from non-OECD countries. Both organizations (OPEC and IEA), agree that economic growth is higher than expected in China in this last period of 2020, due to industrial revival and control of the pandemic, and that this will continue in 2021, in addition to the growing expectations of India that will also favor the demand in this period.
Refining activities in the US remain at the lowest levels of the last 5 years, with a reduction of between 13% and 17% in their activities since April, which continues in light of the advances of COVID-19. The low consumption of gasoline and distillates, as well as the reduction of exports, climate events and seasonal factors, have influenced a reduction in imports from this country.
U.S. REFINING ACTIVITY
AVERAGE OF 4 WEEKS
(2015 – November 2020)
US oil imports41, according to EIA data, as of October 30, registered 5 million barrels per day, similar to 1984 levels, and the lowest level in 2020.
IMPORT OF CRUDE OIL FROM THE U.S.
AVERAGE OF 4 WEEKS
However, according to EIA’s weekly report, published on November 12, oil imports as of November 6 increased slightly to 5.3 million barrels per day.
In a communiqué from the Ministry of Commerce, November 2nd, it was announced that China increased42 its quota of crude oil purchases from abroad by 20% for the private refining companies in the country known as «teapots,» which is equivalent to 823 thousand barrels per day. This happened after the data published by the General Administration of Customs of China showed a 15% inter-monthly fall43 in China’s oil imports in October, with a record 10,06 MMBD, due to an excess in the inventory of state refineries.
Thus, Chinese imports are again on the rise after the record levels reached by the country during the first half of the year, where millions of barrels of cheap oil were acquired to build up inventories in the country.
According to the IMF, the world’s second-largest economy is expected to grow by 1.9% by 2020. That would make China the only major economy to grow this year, also leading the increase in oil demand seen in Asia during the third quarter.
On the other hand, the Chinese refining sector continues to expand. On November 1st, a new distillation unit of 200 thousand barrels per day was inaugurated at the Zhejiang Petrochemical refinery. Additionally, the independent Shenghong Petrochemical Group refinery is building the largest crude oil distillation unit in China, which will begin operations in the fourth quarter of 2021 and will incorporate refining units with a capacity of 320 thousand barrels per day by 2022.
Crude oil inventories are above the average of the last five years, according to preliminary EIA data,44 storage in OECD countries and the US recorded, in the third quarter, 4,656 million barrels, 10.6% higher than the average recorded in 2019.
According to OPEC’s MOMR, corresponding to November, commercial oil inventories in OECD countries are at 3,179 million barrels at the end of the third quarter, of which 1,539 million barrels correspond to crude oil and 1,639 million barrels to products. This storage level is 6.67% higher than the average for the last five years.
In the projections of the STEO report of EIA, it is estimated that commercial storage of the OECD will maintain the upward trend until 2021, with an increase of 2% over the levels of 2020.
For its part, the IEA believes that the low demand, resulting from the economic crisis generated by the second wave of the pandemic in Europe and the United States, will not change until the fourth quarter of 2021, so high inventory levels will continue.
In terms of days of coverage, OECD inventories, at the end of September, stood at 71.7 days. This is 9.4 days (13%) above the average for the last five years. In the regional context, Europe and Asia are 18.0 and 5.6 days above their averages for the last five years, respectively.
COMMERCIAL OIL INVENTORY OECD COUNTRIES
Current storage levels are 15% higher than those reported for the same period in 2019. The total OECD inventory is 4,731 million barrels, an increase of 5% from the high levels of the first quarter.
According to the EIA’s forecasts, in its STEO45 report, the commercial storage of oil and products in the US will fall by the 4th quarter of 2020, to 1,419 million barrels, of which 472.8 million barrels is crude oil.
According to the same report, the average commercial oil and product storage for 2020 and 2021 will be 1,353 million and 1,315 million barrels, respectively, an increase of 16% and 14% over the average of the last 5 years.
Oil storage for 2020 and 2021 will be 472.8 and 466.4 million barrels respectively, an increase of 6% and 4.5%, compared to the average of the last 5 years.
As of November 12, commercial oil storage rose, according to the weekly report of the EIA, to 488,706 million barrels, although strategic reserves dropped to 638,706 million barrels.
According to a report by Argun Media, this downward adjustment of the strategic reserves is because the US oil companies, which since the beginning of the oil crisis had access to the storage spaces provided by the DOE for the surplus production until March 2021, have withdrawn 51 thousand barrels a day during the two weeks of November, a figure considerably lower than the period August-September, when 220 thousand barrels a day were withdrawn from these reserves.
COMMERCIAL OIL STORAGE AND U.S. COVERAGE DAYS
Concerning the days of coverage47, in the September-October period, the trend has been upwards, with 36.6 days on November 6, although in the second quarter the days of coverage had fallen, they are currently only 14% below the 42 days of coverage in August, which is an unprecedented figure, and 21% higher than the average for the last five years (29 days of coverage).
The inventory levels, with an upward trend, although they drained volumes, both on land and floating, in the third quarter, is a sign that after the relaxation of OPEC* cuts in August, the increase in production of some OECD countries. In Libya, the market is well supplied and will probably move towards a scenario of over-supply, with excess supply, especially since the expected recovery of the economy did not take place towards the fourth quarter of the year. On the contrary, given the expansion of COVID-19 in the United States and the impact of the «second wave» of the virus in the main economies of Europe, analysts and economic agencies now estimate that the recovery will continue throughout 2021, although the COVID-19 vaccine will arrive at the end of this year, either from Pfizer or from any of the other 47 alternatives that are under analysis by the WHO.
These elements that affect the market fundamentals, as well as the projections of OPEC, IEA and EIA, regarding a lower demand than expected in 2020 and 2021, must be carefully evaluated in the next OPEC+ ministerial meeting on November 30 and December 1, due to the new flexibility of the cuts that, according to the DoC48 agreements of last April, must come into effect as of January 2021.
The last report issued by OPEC registered that during October the production in the country, according to secondary sources, was 367 thousand barrels per day, a drop of 7% compared to September when, after an adjustment made by the Organization, the production was 392 thousand barrels per day.
PRODUCTION OPP COUNTRIES
(2018- October 2020)
Even though Venezuela did not participate in the OPEC+ production cuts agreements, signed in April of this year, the country’s production has fallen from 730 million barrels a day in January, to current values, a loss of more than 360 thousand barrels a day, a drop of 50% in this period.
However, this year’s drop in production reflects the collapse of oil production experienced in the country since 2014, following successive political interventions and the militarization of the sector.
The national oil production has lost 2,648 million barrels of oil per day in 6 years, a drop of 87.82% in comparison with the 3,015 million barrels per day in 2013.
VENEZUELA’S OIL PRODUCTION
(2013 – October 2020)
The collapse of Venezuela’s oil production has taken away from the country any influence on the international oil market and within OPEC. The country, which in 2008 occupied the 5th place as a producer in the ranking of the Organization, today has descended to the 10th place, only above Congo, Gabon and Equatorial Guinea, which, added to a weak representation before the organism, has placed the founding member country and once an important factor in the internal political balance of the OPEC in a null role, on the margin of the decisions and discussions of the organism.
The Orinoco Oil Belt
The country’s strategic advantage is that, despite the bad business management and political problems affecting the oil sector since 2014, Venezuela has the largest oil reserves on the planet, 316 billion barrels, with 235 billion barrels certified by Ryder Scott between 2007 and 2012 with the participation of more than 20 international companies, estimating an average recovery factor of 20%. This certification was made within the framework of the Policy of Full Oil Sovereignty49 and the Orinoco Magna Reserve Project.
The Venezuelan oil sector, with the existing hydrocarbon reserves and the infrastructure developed spanning more than 100 years of activity throughout the territory, in a different political environment and within the framework of a policy of sovereign reconstruction of the country and a program of intense work, will be able to reestablish the operational capacities of the state-owned company PDVSA and reactivate the most important sector of the country in the short term, as was done after the oil sabotage of 2002-2003.
After 100 years of oil exploitation in the country, the resource base is still substantial, both in the traditional areas and in the Orinoco Oil Belt where, with a POES (Original In Situ Oil) of 1.2 trillion barrels of oil, the largest reserves of heavy and extra-heavy crude oil in the world are concentrated, which, by 2013, already contributed to the country’s production of 1.3 million barrels of oil per day.
The control and exploitation of the immense resource base represented by the Orinoco Oil Belt, the last great oil province in the world, has historically been disputed by transnationals against the Venezuelan State.
During the years of the «Oil Opening» (1986-1999) the transnationals tried to pass off these immense resources as «bitumen», for which they used PDVSA to convince both the political and governmental sectors, as well as public opinion, that these hydrocarbons had neither value nor a future, as well as limited technical-economic possibilities for their extraction and commercialization.
In this way, and being the country immersed in the economic crisis of the 80s and 90s, with weak governments and given to an open-minded vision that was more transnational than national, they managed to obtain immense fiscal benefits with the reduction of royalties and taxes (they were brought down to 1% in the 90s), to the detriment of the country’s fiscal income, and they achieved control of their operations and commercialization to the detriment of their sovereignty.
Thus, the production of the Orinoco Oil Belt began to develop, masking its natural crude nature, as if it were bitumen, calling it «Orimulsion» and «Synthetic Oil», to the export volumes for which they had the strong support of the IEA. In this way, the production of the area was excluded from the OPEC quotas and the administration of its exploitation by the Venezuelan State.
The Oil Opening of the 1990s was a strategy to develop a volumetric policy in Venezuela, to the detriment of the country and OPEC and its policy of defense of the price and preservation of natural resource, fundamental principles for a policy of Full Oil Sovereignty, which was finally established in the country between 2004-2014.
Today, the Venezuelan government, faced with the failure of its oil management, and after having deeply weakened the state oil company PDVSA, from which more than 30 have come out and 000 technicians and engineers in the period of 2016-2017 -a product of a cruel process of political persecutions and the militarization of the company- the government has dismantled the Policy of Full Oil Sovereignty achieved between 2004 and 2014; a policy that was a determining and key factor to achieve the socioeconomic wellbeing and political governability that the country reached during this period under the government of President Chávez, especially between the years 2004-2012.
The surrender of the Venezuelan oil sector is summarized in the surrender of the Orinoco Oil Belt, «the jewels in the crown,» which is why the current government has privatized PDVSA’s participation in the existing mixed companies to international companies, ceding control and marketing of the oil to the latter.
On the other hand, and with the 2007 Oil Policy and the nationalization of the Orinoco Oil Belt being one of the main flags of Chavism as a political movement, the government has accompanied its strategy of ceding control of the FPO with a political campaign. This is carried out with «experts» and spokespersons from the oil sector, to try to convince the country that the Orinoco Oil Belt does not have the resource base that was certified between 2007 and 2012, recognized by OPEC and other international organizations, including the US Geological Survey50 in its reports. This is why the government argues that its development should be ceded to «others.»
The progressive dismantling of the Policy of Full Oil Sovereignty by the current government has clashed with the limits and reserves established by the current Constitution of 1999, as well as with the legal framework that regulates the sector, in particular, the Organic Law of Hydrocarbons51.
For this reason, in an attempt to give a legal floor to its decisions and attract the participation of foreign capital in the oil sector, the government has issued a series of Decrees and Decisions, all of which continue to be unconstitutional decisions, taken behind the country’s back. This is why they have failed in their attempt to give their new «opening» a legal floor.
In the last attempt by the government, besieged by the lack of legitimacy and without popular support, to give full guarantees to private capital in the country, last October 8, it promulgated the so-called «Anti-blockade Law.» As unconstitutional as the previous attempts that we have analyzed in previous documents, it was approved, in an expeditious manner, by the National Constituent Assembly, and its legitimacy questioned before it ceases its functions in December of this year.
For its part, the country’s political opposition, in control of the National Assembly until December when new parliamentary elections are to be held, is trying to approve, =in an accelerated manner (once again with its back to the country), a «reform»52 of the Organic Law of Hydrocarbons in force, to re-edit the «Oil Opening» of the 1990s that generated so many economic and social problems in the country, by depriving the Venezuelan State of oil fiscal income and the corresponding land income, vital for the Venezuelan economy.
This unconstitutional proposal, which we have analyzed in previous documents, as is the case with the Anti-Blockade Law,53 is also based on ceding control of the management of the country’s immense oil resources to the private sector, leaving the Ministry of Petroleum and the Venezuelan State-owned company -PDVSA- only as regulatory entities and contract administrators.
It is clear that both the political sectors in dispute for power in the country, as well as the transnationals and their interests, hope that from the deep political, economic and social crisis that the country is going through, they can, without caring much about who is in the hands of the government, obtain control of the oil sector of the country that has in its subsoil the largest oil reserves on the planet.
It seems that the political sectors and the think tanks of the various international factors in conflict have learned nothing from the recent history of Venezuela, which shows that control over oil is a historical claim of the Venezuelan people and its exploitation and development in favor of national interests is fundamental for the development of our economy, which is markedly oil-based.
No government aiming to solve the great economic and social challenges in Venezuela can renounce to the oil incomes and land rent since they are the only resources available to re-establish the functioning of our economy and to guarantee the economic and social rights of the Venezuelan people. That is why it is vitally necessary that we recover Full Oil Sovereignty.
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