The week closes with a continued downward trend in oil prices and a collapse in demand. The trend began with the collapse of prices following the lack of agreement at the last meeting of OPEC and non-OPEC countries on March 6th. The lack of agreement coincided with the global expansion of COVID-19 and its impact on the world economy.
At the close of the European markets today, WTI closed at $21/barrel and Brent at $24/barrel, indicating a 48% drop from the $51/barrel price at which these markers were quoted prior to the OPEC meeting on March 6th. At today’s close, markers experienced a 5% decline for WTI and 2% for Brent from the week’s close on Monday, March 23rd when WTI closed at $22/barrel and BRENT closed at $25/barrel.
Subjective elements, both economic and political, have dramatically affected all stock markets since the beginning of the pandemic, which has been reflected in a sharp fall in stock markets and oil prices.
The oil market is marked by the volatility and uncertainty affecting the world economy, keeping prices at low levels. The disagreement between the two major producers, Saudi Arabia and the Russian Federation, adds to this situation. The second and third largest oil producers in the worlds are engaged in a declared price war. The Saudi Kingdom blocked the agreement to cut production at 1.5 million barrels per day and, on the contrary, announced it will increase its production to maximum capacity levels. Russia previously refused to cut 500,000 barrels per day of production. Some analysts estimate that there will be a «free fall in the price of oil.»
The real economy is also being greatly affected by the COVID-19, tearing down the fundamentals of the oil market, beyond the subjective or speculative elements of the market. The elements that indicate an impact on the economy beyond the stock market sector include massive restrictions on air transport, quarantine measures and restrictions on movement that already affect more than 2.6 billion people in the USA, India, Europe, the UK, and South Africa. This is in addition to the massive closure of the service sector and the cancellation of oil sector projects.
As a result, the main WTI and BRENT markers continue their downward trend, approaching the $20/barrel level, despite a slight reaction to the requests for massive aid for the world’s major economies. Market speculators have migrated to futures oil contracts worth millions. This is similar to the events in 2008, when the US experienced a housing crisis. In that case, speculators artificially raised the price to levels of $140/barrel for six months until the crisis was resolved. At that time, oil dropped to $30/barrel.
The world economy has been greatly affected by the effects of COVID-19, both on the stock markets and on the industrial, services and transport sectors that have affected the large industrialized economies.
Most stock exchanges reflected a significant fall in the face of the pandemic. This was mitigated by the announcement of massive economic aid, like the $2 trillion package to support the U.S. economy. The agreement between the White House and the Senate, which was approved by Congress today, correlated with the measures taken by the Fed.
European countries have been making economic decisions to cope with the crisis. Germany approved a package of 750 billion euros, France approved 345 billion euros, Italy 25 billion euros, and Spain 200 billion euros. The ECB has announced that it will allocate 750 billion euros for the purchase of government debt and private bonds by 2020, which is an increase of 120 billion euros.
China has begun a process of recovery after controlling the spread of COVID-19 in the city of Wuhan, the epicenter of the pandemic. However, despite these announcements and recovery in Asia, stock markets and economic operators continue to record declines and closures. The declines reflect uncertainties regarding the duration and depth of the impact of the pandemic, which continues to expand and hit the world’s major economies.
The industrial activity index in China had an unusual drop of 17% in February. Major vehicle manufacturers including Ford, General Motors, Volkswagen, Toyota, Fiat-Chrysler and Tesla, among others, have announced the closure of their production plants, which should remains in effect at least until April, while waiting to see how the pandemic develops.
Asian countries, led by China, Japan and South Korea, have reacted more effectively to the pandemic and are controlling COVID-19, reviving their industrial and service activity. However, countries of the European Union have lacked a common strategy to deal with the pandemic as seen in internal measures of restrictions and isolation of the population. The lack of cooperation to come to an agreement to approve the so-called «Corona Bono» that would aid european economies in distress by the virus, is seen as a failure of the group. Germany met the agreement with fierce opposition, arguing the «lack of fiscal discipline» of other member countries.
In Europe, a discussion on the «lack of solidarity,» especially in the economic and medical areas towards countries that have been seriously affected by the COVID-19, such as Italy and Spain, will determine whether it is appropriate to maintain it in the European Union. The discussion has been postponed and will be revisited in the political arena once the emergency has passed.
In the United States, the impact of COVID-19 is affecting the pillars on which President Trump has based his strategy for the November election campaign: the economy and employment, putting on the table, as a subject of national discussion, the questioning over the mostly private American health system, a banner of the Democrats.
On March 26, the US Labor Department reported that a record 3.28 million Americans have applied for unemployment benefits in the past week. These numbers do not include informal or undocumented workers who, in many segments of the economy and states of the Union, are key factors in their economy.
Hence President Trump’s insistence on agreeing to large economic aid packages for the country, such as the agreement obtained with the Senate and approved today by Congress for $2 trillion, in addition to his declaration to lift movement restrictions in the country by Easter. These declarations have provoked positive reactions on Wall Street. However, they have also raised important questions from governors and Democratic leaders, such as the governor of New York State, where there are more than 39,000 cases, 7% of the total worldwide. Another concern is how the approved aid, directed to U.S. citizens, will determine the fate of informal workers and immigrants.
Meanwhile, COVID-19 cases already exceed 542,788 worldwide, with 24,350 deaths, according to data from the John Hopkins Hospital’s CSSE. Today, March 27, the United States reported more than 85,990 cases, surpassing China with 81,894 cases and Italy with 80,589, while Spain has 57,786 cases, and Germany 47,278 cases.
The Oil Demand
In early March, before the OPEC meeting and the expansion of COVID-19, OPEC estimated the increase in oil demand at 900 thousand barrels a day by 2020; then, immediately after the failure of the OPEC+ meeting, OPEC reduced its estimate of increased demand by only 60 thousand barrels a day for the whole year.
By March 11, the U.S. Energy Information Administration, or EIA, estimated that by the first quarter of 2020, global demand would fall by 900,000 barrels per day compared to the same period in 2019. At the same time, the International Energy Agency, IEA, reported in its Oil Market Report this March, that oil demand estimates were reduced by 1.1 million barrels from its initial estimates of increased oil demand for 2020, with a fall of 2.5 million barrels for the first quarter of the year.
However, as of March 27, after all the effects that the pandemic has had on the world economy, international agencies, companies and traders estimate that, in the worst case scenario of the spread and impact of COVID-19 on the world economy, there will be an unprecedented drop in the demand for oil in 2020. The International Energy Agency warns that it could fall by 20 million barrels a day, coinciding with other estimates such as those made by the CEO of the VITOL group and by the trader Transfigura.
The International Energy Agency reports, in its OMR, an increase above the average levels of the last 5 years of 2.9 million barrels in the commercial inventories of the OECD (Organization for Economic Cooperation and Development) countries, which implies a coverage of 63 days, with an increase in floating storage of 1.9 million barrels per day, up to 80 million barrels per day.
On the other hand, the EIA (American Energy Information Administration) forecasts an increase of 1.7 million barrels per day due to the fall in demand.
The oil market is still over-supplied with oil. There is an excess of at least 2 million barrels of oil that OPEC+ could not withdraw from the market, an excess that is rapidly increasing due to the fall in consumption and which is migrating towards commercial inventories or the strategic reserves of industrialised countries that are taking advantage of a period of «cheap oil» to increase their volumes, as information from China indicates.
The most relevant, however, in the area of production, has to do with the announcements made by the Kingdom of Saudi Arabia that it will flood the market with additional oil volumes, from the 9.7 million barrels a day it produced before the OPEC+ meeting to its maximum capacity of 12.3 million barrels a day of production. Saudi Aramco announced that it has been instructed to increase its production capacity to 13 million barrels a day. On the other hand, the Russian Federation has increased its production by an additional 300,000 barrels days, compared to its pre-March production levels.
It is necessary to wait until the end of the month to average the production of the OPEC and non-OPEC countries for the month of March and to be able to determine with certainty the market situation, to which the price will surely react.
Another important element to evaluate will be the behavior of the production in the US, which was at a level of 13 million barrels the day before the OPEC+ meeting and the fall in the price. According to Russian spokesmen, they expect that American shale oil, produced by fracking, being more expensive than Russian and Saudi oil, will start to come out of the market. This low price scenario will affect the production of the most expensive fracking and small and medium independent producers in the United States.
The U.S. administration has announced its interest in seeking a top-level agreement with the Saudi Kingdom to try to agree on measures to stabilize the oil market, as a State Department spokesman said this week. The next weekly bulletin will provide a strategic analysis of these alliances between the world’s major oil producers and the role of OPEC in the international oil market.
On the other hand, the U.S. Department of Energy announced the impossibility of acquiring oil from shale to feed its country’s strategic reserve, in view of Congress’ refusal to make funds available to support an initiative by President Trump to provide economic support to U.S. oil producers in the face of collapsing demand and prices. Similar production cost problems are being experienced by producers of extra-heavy oil from Canadian oil sands, with no initiative announced so far by the Canadian government to protect their production.
It will be interesting to monitor the behavior of North American (US and Canadian) oil production in this price scenario.
The Venezuelan oil industry continues to be shaken by the devastating effects of the mismanagement of the Maduro government and its manifest inability to run Petróleos de Venezuela, PDVSA.
After six years of a campaign – led by Nicolás Maduro himself – of successive and bloody interventions, political raids, displacement of technical and managerial staff of the company, which have left a regrettable balance of more than one hundred prisoners and the death of a former president of the company in government custody. These arrests and arbitrary actions against PDVSA management and workers, who have been denied the right to a defence, have been the result of the government’s use of the justice system to achieve political objectives, in this case, to gain total control of the company.
PDVSA, militarized today, is demoralized, dismantled in its operational capacities have suffered a process of massive deterioration in the economic and labor conditions of its workers, which has produced an exodus of more than 30 thousand workers as of 2014.
Today, PDVSA is the object of a new political intervention by the government, which appointed a «Restructuring Commission,» headed by the country’s Vice President of Economy and the top military chiefs, all of whom have been sanctioned by OFAC and accused of serious drug trafficking and corruption by the US Department of Justice. In the intervening Commission there are also 5 government ministers, none of whom has any knowledge of oil matters.
It is in the midst of this situation of absolute weakness and dysfunction of the oil industry that the country, shaken by the worst political, economic and social crisis in its history, must face the collapse of oil prices and the world economy, in addition to the appearance of COVID-19.
PDVSA has been experiencing a permanent drop in its oil and gas production (90% of the country’s gas is associated with oil) as of 2014, a trend that has worsened since the militarization of the company in December 2017. In a period of 6 years, PDVSA fell in its production from 3 million barrels per day to 714 thousand barrels per day, at the end of February 2020, which means a loss of 2.3 million barrels per day.
During the month of March, Venezuela’s already dwindling oil production fell by around 200 MBD, reaching an average volume of around 550 MBD, data that will be confirmed at the end of the month.
The greatest decrease in volume was seen in the Orinoco Oil Belt, the largest oil reservoir on the planet, recording a production of only 200 MBD. This oil province, in the southeast of the country, was producing 1,300,000 barrels of oil per day at the end of 2013, 43% of the production at that time. The remaining 350 MBD of crude produced in March were extracted from the badly treated fields of Lake Maracaibo and the fields of Northern Monagas.
It should be noted that the accident that occurred on March 20 at the Carito flow station in Monagas state, where an explosion and fire were recorded as a result of the lack of maintenance and the lack of technical expertise, on which the management of the country’s main industry relies, directly generated a loss of 30 MBD of crude from the Carito fields in the Punta de Mata Division in the east of the country, and indirectly about 50 MBD of extra heavy crude from the Orinoco Oil Belt because it did not have its natural diluent.
The extra-heavy crude upgrading complex in Jose, in the northeast of the country, is still mostly inoperative, so the extra-heavy crude cannot be stripped of its naphtha, producing for export a crude of very low quality and price. Only the upgrader of the joint venture, Petropiar, with Chevron, is operational, processing around 120 MBD per day.
Exports and Marketing.
Venezuelan exports have been declining due to the collapse of oil production which, far from being a temporary issue, has become a complex problem in the industry under the successive leadership of the company during the last 6 years, more than 7 boards of directors, with internal directors unaware of the technical and managerial complexities of the oil business. Although, at the end of 2013, the country exported 2.5 million barrels of oil per day, today, less than 600 thousand barrels are exported, most of these volumes committed to loan repayments to China and Russia.
On the other hand, the fall in prices has brought the recovery of heavy crudes to levels below 10 dollars a barrel. Mexican Maya crude, the marker for heavy oil in the Atlantic, is selling at $13 a barrel. Venezuelan Merey crude has been sold at $7.8 a barrel, according to Reuters reports.
PDVSA’s crude oil trading activity was dismantled and the export volumes were handed over to the Russian companies Rosneft Trading and TNK Trading International, which, during the last 9 months, had been in charge of transporting and marketing around 90% of the Venezuelan crude oil exports. The rest has been handed over to private operators close to the government, the most notorious of which is the company Libre Abordo SA, a recently created company with no previous experience, which obtains oil as a form of compensation for imports to triangulate in other destinations.
It is important to note that the system of control of Venezuelan oil exports is currently dismantled. The main export terminal, Jose, is completely militarized and there is no record of sales, volumes or prices. On the other hand, the sales price control office of the Ministry of Petroleum in the city of Vienna was closed, so there is no way to register, nor verify, the sales prices of Venezuelan oil. We will do a special inquiry on this subject in future bulletins, since there have been reports of massive discounts on the sale of Venezuelan oil.
A serious problem that is afflicting the country’s population, affected by a serious economic crisis and the quarantine ordered by the government in the presence of COVID-19, is the shortage of fuel, gasoline, diesel and gas for domestic consumption.
There is no gasoline, not even in the capital city, Caracas. The new military authorities in PDVSA ordered the closure of the fuel stations and put them under military control of the different Integral Defence Zones of the country, ZODI.
However, it has been denounced that there is a growing black market for the sale of gasoline where the «pimpineros» sell a 20-liter container of gasoline for $45, which puts the price of each liter at $2.25, in a country where the minimum wage is only $3.3 at least and whose inhabitants in the interior of the country have had to resort to firewood due to the shortage of Liquid Petroleum Gas for domestic consumption.
The Refining System.
The Venezuelan refining system, with a processing capacity of 1.3 million barrels per day, is practically paralyzed. The system composed of the Paraguaná CRP (Amuay-Cardón) Refining Complex, in the northwest of the country, is operating at only 20% of its capacity, the El Palito Refinery, in the center of the country, is stopped and the Puerto La Cruz Refinery, PLC, in the northeast of the country, is also paralyzed.
A permanent campaign of persecutions, displacement and arrests of the technical-operational and managerial staff of the national refining system, in addition to the diversion of resources needed for operations and maintenance work, spare parts and supplies during these 6 years, have led to a gradual shutdown of these facilities of great operational complexity, where staff of very low technical level have been put in charge of them.
At the end of 2013, the Venezuelan refinery system processed 962,000 barrels of oil per day. In the CRP, 656 MBD, in PLC, 177 MBD and in El Palito 129 MBD, supplying the internal market with 612 thousand barrels of gasoline, diesel and fuel a day, exporting 350 MBD from our national circuit. These numbers do not include the production of asphalt in Bajo Grande, nor the international circuit, the Caribbean and Citgo. In addition, in the national system, 91 thousand barrels a day of Liquefied Petroleum Gas were produced for domestic gas.
Today, March 27th, PDVSA is not capable of supplying even the reduced internal demand estimated at 120 MBD, as a result of the 63% accumulated fall in the economy. This is not only due to the collapse of the National Refining system, but also to the US sanctions and the lack of income that make it difficult to import fuel.
In recent days it has been made public that the new authorities in PDVSA are taking equipment and spare parts from the Paraguana Refining Center (CRP), to put some units of the El Palito Refinery into operation, with the aim of producing at least 40 thousand barrels of gasoline per day.
El Palito, in essence, is a gasoline mixing and distribution center that is generated in CRP. With the Catalytic Cracking Unit operational, 91 octane gasoline could be produced, but the facilities are very deteriorated and lack the technical personnel capable of making it work.
On the other hand, the usual crude oil diet of this refinery came from the Barinas-Apure basin, where, in 6 years, its production has fallen from 100 MBD to only 10 MBD, so they will eventually be sacrificing the Mesa-30 crude from northern Monagas, which is used for dilution in the Orinoco Oil Belt, to process it at El Palito.
At the close of this Bulletin, the figures for deaths from COVID-19, which has hit Italy and Spain hard, are given. Likewise, the number of cases on the American continent, especially in the United States, continues to increase exponentially. All indications are that the pandemic, and its devastating effects on the economy, will continue for some time, beyond the spring, and that economic recovery will be slow, probably beginning in the middle of the year.
In Venezuela, yesterday, in an unprecedented action, the U.S. Department of Justice charged high-level government officials, including the President of the Republic, the President of the National Constituent Assembly, the President of the Supreme Court of Justice and the Minister of Defense, with drug trafficking, terrorism and corruption. In the most important cases, rewards were even offered for their capture.
These actions, without entering into an assessment of them, definitely change the political scenario in the country, seem to remove the possibilities of a political solution to the country’s crisis and probably radicalize the positions of the government. All of this will affect the performance of the economy, the oil sector and the government’s almost non-existent capacity for action to deal with the progressive deterioration of the country in all areas of national life and, of course, it restricts the government’s capacity for manoeuvre in the economy and oil fields to the maximum.