Oil prices regained again this week their upward trend, after the occasional decrease they experienced on the June 8-13 week.
OIL PRICE (June 2020)
At the closing of markets on Friday, June 19, the Brent and WTI markers closed at prices of $42.2 and $40.67 a barrel, respectively, which was an increase in 9% and 14% regarding their lowest price reached the previous week, when they were quoted on Friday, June 12, at $38.51 and $35.62 a barrel, respectively, reflecting the market concerns at both the statement of the President of the US Federal Reserve and at the report of the Organization for Economic Cooperation and Development (OCDE) about the recovery of the economy, in the face of the Covid-19 expansion in the US, as well as new on a Coronavirus outbreaks in China.
BRENT PRICE (June 12-19 2020)
WTI PRICE (June 12-19 2020)
Although the price trend is upward, after the entry into force of the production cuts agreed by OPEC+, the current price values are still far from the ones existing at the beginning of the year, when the Brent oil marker was quoted at $67 a barrel and the WTI was quoted at $61 a barrel, a 36% and 34% above present values, respectively.
BRENT PRICE VARIATION (January-June 2020)
WTI PRICE VARIATION (January-June 2020)
The OPEC price basket, as of Thursday, June 18, rebounded to $37.70 a barrel, a 7% recovery from the beginning of the week, and a 146% recovery from April prices, when it was quoted at $17.66 a barrel.
OPEC PRICE BASKET
AVERAGE MONTHLY PRICE (JUNE 2019- MAY 2020)
Both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) agree to estimate a sustained recovery in the oil price during the second half of 2020, as a result of OPEC+ production cuts and the progressive recovery in demand, as restrictions on movement are loosened and economic activity in the industrialized countries is restored.
The June Monthly Oil Market Report (MOMR) of OPEC, notes that “the physical market fundamentals improved significantly” so it will continue to «gradually improve» towards the second half of the year, leaving behind the catastrophic effects of Covid-19 on the economy, which affected the supply-demand balance in the first and second quarters of this year.
OPEC notes in its report, as an indicator on the positive perception of the oil market, the increase in the futures contract prices and long-term positions for Brent and WTI, with 21% and 28%, respectively, for May 2020, and thus carrying the futures market structure from the March-April “super contango” to a much more “flattened” contango structure in the three main markets, “suggesting that supply-demand fundamentals are gradually returning to balance.”
OIL PRICE “FLATTENED CONTANGO” STRUCTURE
Furthermore, the International Energy Agency (IEA), in its June Oil Market Report (OMR), considers that even though oil prices remain affected by market uncertainty, further stabilization could be achieved in the second half of 2020 due to a reduced supply and the slow recovery of demand.
However, even if the recovery experienced so far and the positive perspectives for the end of 2020 are considered, the current quotes of oil price markers are still way below 2019 levels, when Brent and WTI markers were quoted at $65 and $57.13 a barrel, respectively, which represented $21.60 and $14 below the average price in June 2019, i.e. 33% and 29% of their respective values.
BRENT PRICE VARIATION (JUNE 2019 – JUNE 2020)
WTI PRICE VARIATION (JUNE 2019 – JUNE 2020)
As we mentioned in our last week’s Newsletter, OPEC+ countries’ strong commitment to production cuts and oil market regulation seem to clear supply-side doubts regarding oil price recovery. The uncertainty now focuses on when demand and oil prices will recover to pre-Covid-19 pandemic levels; this will depend on the performance of the industrialized countries’ economies in Europe, Asia, and of the US.
May’s Production Cuts
According to the OPEC’s June Monthly Oil Market Report, world oil production in May had a reduction of 10.04 million barrels a day, to place oil production at 89.89 million barrels a day, which is a 9.18 million barrels a day decrease when compared to 2019.
The greatest contribution to this supply reduction is due to the high level of compliance by OPEC+ countries with the production cuts of 9.7 billion oil barrels a day. The 10 Non-OPEC countries signatories to the OPEC+ Declaration of Cooperation (DoC) contributed, according to preliminary data, with a reduction of more than 2.95 million barrels a day of oil production, while the 10 OPEC member countries participating in the DoC cuts reduced their production by approximately 6.25 million barrels a day. The total cut in the OPEC+ countries oil production was 9.20 million barrels a day, with a compliance level of 94.8%.
On the other hand, in the large Non-OPEC producing countries that do not participate in OPEC+ production cuts, such as the US and Canada, the oil production fell by 800 MBD in May.
OPEC countries that do not participate in production cuts –Iran, Venezuela and Libya– reduced their oil production altogether by 50 MBD, mainly due to the sustained decline in oil production in Venezuela (-54 MBD) and Libya (-1 MBD), while Iran rose production just by 5 MBD.
COUNTRIES’ CONTRIBUTION TO OIL PRODUCTION CUTS (MAY 2020)
Thus, from the May 10.4 million barrel cut in oil production, the countries participating in OPEC+ cuts contributed with 91.6%, while the fall in production in the US, Canada and Venezuela amounted to 850 MBD, only the 8.4% of the total amount.
Evidently, the May oil price recovery is due to the massive reduction in supply and the efforts of the OPEC+ countries, led by Saudi Arabia and Russia, which confirms one of the fundamental principles set at OPEC’s creation: the right of producers to intervene in the oil market to administer their exploitation of oil and thus preserve and obtain a fair value for a non-renewable and depleted natural resource: oil.
According to the June MOMR, OPEC countries’ production for May reached a total of 24.195 million barrels a day, indicating a total cut of 6.30 million barrels of oil a day for that month.
OPEC CRUDE OIL PRODUCTION (MBD)
(Based on Secondary Sources- May 2020)
Among the OPEC member countries it can be highlighted the contribution of the following countries in the oil cuts: Saudi Arabia (3,160 MBD cut, 50% of the total amount); United Arab Emirates, (1,364 MBD, 22% of the total); Kuwait (921 MBD, 14%); Iraq (340 MBD, 5%); Algeria (188 MBD, 3%), and Nigeria (185 MBD, 3% of the total cuts). The rest of the member countries participating in the cuts -Angola, Congo, Equatorial Guinea and Gabon- contributed with 2% of the total.
It should be noted that Venezuela, a country that does not participate in the cuts agreement, fell however in its oil production by 54 MBD.
Other OPEC+ Countries
The Non-OPEC countries that are signatories to OPEC+’s Declaration of Cooperation (DoC), i.e., Russia, Mexico, Kazakhstan, Oman, Azerbaijan, Malaysia, Bahrain, South Sudan, Brunei and Sudan, cut their production by 2.95 million barrels a day, according to the June MOMR; this reduction corresponds to 30% of the cut agreed by OPEC+.
The contribution to the 2.95 million barrels a day oil cut made by these countries can be split as follows: Russia, with a cut of 1.96 MBD (66% of the total amount); Kazakhstan, with 0.38 MBD; Azerbaijan, with 0.11 MBD; Mexico, with 0.37 MBD, and the rest on Non-OPEC DoC signatories, with 0.013 MBD.
REDUCTION OF OIL SUPPLY (MAY 2020)
The OPEC+ DoC signatories Iraq, Kazakhstan, Nigeria and Angola, among others, were unable to fully meet the agreed production cuts.
It must be taken into account that not all countries can handle the agreed production cuts with the same efficiency. This happens not only because of the governance situations of the oil industry which vary from country to country (such as problems related to territorial control or to the control of their oil production due to the presence of transnational corporations), but also because of the complexity in the different types of oil production in each country, particularly for the heavy and extra heavy crude oil producers. Besides these issues, there could be political and social problems that may prevent governments from managing the oil cuts and the fiscal sacrifices those cuts entail.
But this time a new modality has been introduced by OPEC+ to follow-up the oil production cuts agreements as per the DoC, which consists of a «compensation agreement» of the missing volumes of cuts. Thus, countries that have lagged behind the implementation of the agreed cuts have made a commitment for production compensation, by distributing until September the remnant of the cuts they should have made.
According to a statement by Iraq’s Oil Minister Ihsan Ismaeel, the country’s exports for July will be reduced by 780 thousand barrels a day, as compensation; while in the case of Kazakhstan, the compensation cut will be 15,000 barrels a day in July and 50,000 barrels a day in August and September. Regarding Nigeria and Angola, they have not made any commitments yet.
An article published by S&P Global Platts on Friday, 19 June, highlights that additional compensation cuts could reach 1 million barrels in July, August and September, considering the plans presented by Iraq, Kazakhstan, Nigeria and Angola.
In any case, the next OPEC+ Joint Ministerial Monitoring Meeting scheduled for 22 June, 2020, plans to monitor compliance with the global oil supply and agreements.
American oil production continues its downward trend, which started with the collapse of the oil prices in March and the WTI collapse in April.
The US Energy Information Administration (EIA) informs in its June 12 report that US oil production is 10.5 million barrels a day, a 600 MBD drop if it is compared to the previous week, when oil production closed at 11.1 million barrels a day of. The decrease in oil production in the US has been 2.5 million barrels a day, a 19% drop regarding the 13,025 million barrels a day produced on March, 2020.
U.S. PETROLEUM PRODUCTION January-June 2020
According to the June MOMR, the number of active drills in the US has fallen in 690 units -which is 71% less than 2019- and by June 12, 2020 the country has 279 operational drills. Oil drilling rigs fell by 589 units (74% less than last year), and now there are 199 active drills. American operators have decreased their activity in 484 drill rigs since March 13, which evidently has an effect in both the drilling of new wells and the completion and maintenance of the existing ones. This situation is having effects not only in the oil production decrease, but also in the possibility of recovering or compensating for the natural decline of Shale Oil production.
NUMBER OF ACTIVE RIGS AND THE DROP IN THE US OIL PRODUCTION
According to Baker Hughes’ North America Rotary Rig Count published on June 19, the number of active rigs in the United States decreased this week from 279 drills on June 12, to 266 on Friday, June 19, which represents a reduction of 13 drilling units that keeps on the downward trend of the past 15 weeks. Regarding the amount of rigs according to their use, Bake Hughes Rig Count shows that those rigs intended for oil extraction fell from 199 on 12 June to 189 a week later, the lowest number since August 2005.
ACTIVE RIGS IN THE US
January 2016-June 2020
The current number of operational drills (266) is also a downward record when compared not only to the same period in year 2019 (969 drills), but to the lowest number ever registered by Baker Hughes since 1987 (505 rigs in May 1999).
HISTORY OF ACTIVE RIGS IN THE US
January 1973-June 2020
The US operating rigs index has an additional implication related to the amount of drilled or finished wells, considering the characteristics of the production of Shale Oil.
In addition to its extreme reliance on hedge funds, Shale Oil production has a drilling scheme according to which the operators, on the one hand, leave uncompleted wells, expecting better market conditions, and, on the other hand, must maintain a steady pace of completion of new wells to compensate for the natural, and faster, decline of this type of crude oil.
In its June MOMR, OPEC mentions that since March, at the start of the oil price crisis, Shale Oil producers in the US have chosen to complete wells, from the inventory of the ones that are already drilled but not completed, because of the financial impossibility of drilling new wells; therefore, an optimization of drilling costs is being developed to protect Shale Oil production from the current fall of the value of WTI. This is a very particular maneuver for this kind of oil production; hence its ability to react quickly to changes in the market.
According to data issued by the World Health Organization, Covid-19 deaths amounted to 450,000 worldwide as of Friday, June 19.
The region that is the most affected by Covid-19 nowadays is the Americas, with a total of 4,163,813 confirmed cases, of which more than half are located in the United States (2,172,212 confirmed cases), followed by Brazil, with 878,142 cases.
A month ago the US government ordered the progressive unlocking of some sectors of the American economy; as a consequence, some states in the south and west of the country have seen a sharp increase in cases.
In this context of increase in contagions, Alabama, Arizona, California, Florida, Nevada, North Carolina, Oklahoma, Oregon, South Carolina and Texas have recorded their highest averages since the start of the pandemic.
Regarding Europe, the contagion curve has been flattened and several European countries have gradually transitioned their process of normalizing public life, so they estimate that on July 1st they will open their international borders.
In the case of the United Kingdom, 301,815 Covid-19 cases are currently being handled. However, health authorities have decided to reduce their alert level from 3 to 4, as a result of a recommendation from the country’s medical advisers, who say that the level of contagion is not as high and is not increasing exponentially.
Last week there was a new outbreak of Covid-19 in Beijing, in the Xinfadi market, so the authorities have decided to take extreme measures to prevent the spread of this new focus.
According to the Epidemiology Head at the Chinese Center for Disease Control and Prevention, Wu Zunyou, the upsurge «is controlled». He also said that new confirmed cases will be seen in the coming days; however, spread of the virus is under control, so the curve will flatten gradually.
World Health Organization reported they were following the situation in China closely, out of fear for a Covid-19’s «second wave»; therefore, the WHO will be sending experts in the coming days.
In a virtual forum organized by the European think tanks GLOBSEC, Bruegel and the Montaigne Institute on Monday, June 15, the Director of the International Monetary Fund, Kristalina Gerogieva, called on the world’s countries rulers to continue injecting funds into their economies and not to come back early to austerity measures, after the intense crisis generated by Covid-19. The IMF is set to publish its new global growth forecast on June 24.
Additionally, Christine Lagarde, President of the European Central Bank, warned the European Union countries that the worst is yet to come, as far as unemployment is concerned.
The financial institution estimates that the unemployment rate in the euro zone could be 10% by the end of this year, a figure that in the case of Spain could be twice as high.
At the same time, in the US, the latest data from the Department of Labor show that although applications for unemployment assistance for the week ended June 13 were 1,508,000 -a decrease of 58,000 applications on June 6, which is the eleventh consecutive weekly drop in this index since March 28- the unemployment rate of 13.3% remains a very high percentage when compared to the 3.5% rate US had in February 2020.
DECREASE IN UNEMPLOYMENT ASSISTANCE
APPLICATIONS IN THE US
Taking into account the reference to applications for unemployment assistance since March 21, it shows that the unemployed in the United States amount to 45,738,000 people. Analysts and media outlets in the US point out that according to this figure, 1 in 4 workers have lost their jobs during the pandemic, and that the amount of approximately 37 million Americans who were left unemployed during the Great Depression of the 30s of the 20th century has been surpassed.
Regarding the world economy, the OPEC Monthly Oil Market Report in June notes that the key reasons for the fall of the economy during the first and second quarters of 2020 can be directly linked to the disastrous effects of Covid-19 and the crippling of the economic activity in the large industrialized economies, in addition to the massive confinement measures and restrictions that have affected the whole world.
OPEC therefore considers that to the extent that confinement measures and restrictions are relaxed, accompanied by massive fiscal aid and unprecedented monetary stimulus, equivalent to 25% of world GDP, the economy will experience a gradual recovery during the second half of the year, even as financial problems and unemployment will continue to strike its chances of rapid recovery.
ESTIMATES OF THE PERFORMANCE OF INDUSTRIALIZED ECONOMIES 2020
The OPEC, in its June MOMR, estimates that global oil demand will remain downward, with a drop 9.1 million barrels a day, for an average global oil consumption estimated at 90.06 million barrels a day by 2020.
In the Organization for Economic Co-operation and Development (OECD) countries, about 5.2 million barrels of oil a day drop in demand, compared to year 2019, is estimated, which reflects the strong impact of Covid-19 on the major industrialized economies of Europe and the US, while for non-OECD countries (including China, India, other countries in Asia, Latin America and the Middle East), the fall will be 3.9 million barrels a day of oil, compared to 2019. If we take from this figure the estimated drop in the demand of China and India, then a relative low weight is reflected in the fall of the demand for oil by countries in Latin America, the Middle East and the rest of Asia.
This scenario takes us back to the point we mentioned in last week’s Newsletter, about the direct correlation between Covid-19 expansion and falling oil demand; a correlation that will change and will cease to be directly proportional, as the pandemic moves from industrialized economies to poorer countries.
On the other hand, the International Energy Agency’s (IEA) monthly Oil Market report for June 2020 forecasts that global demand for average oil stands at 91.7 million barrels per day, a difference of more than 1.1 million barrels of oil from the OPEC estimate.
Even as the destruction of the demand reaches record levels, the International Energy Agency (IEA) highlights that the first quarter of 2020 closed May with a slightly higher demand than expected; IEA raises its forecast of global oil demand for 2020 by 500 kb/d, due to both a demand recovery in China in March-April and a stronger-than-expected increase in India’s demand in India in May.
The IEA estimates that after this 8.1 MBD drop in demand during 2020, oil production cuts and the slight recovery in demand will have a positive effect in the market and could give a more optimistic outlook with a recovery of 5.7 MBD in 2021.
Despite these recovery estimates, the prospects for recovering of demand for oil still rank below the demand that existed at the end of 2019.
OIL DEMAND ESTIMATE BY THE END OF 2021
In both the OPEC MOMR report in June and the International Energy Agency’s Oil Market Report (OMR), the information on commercial storage in OECD countries is available only until April 2020, which -in this context of instability and uncertainty in the oil market- is not of any use to monitor the drainage of high levels of inventories built during the months of March-April of this year, since the entry into force of the OPEC+ production cuts in May and so on to June.
The only reliable source, regarding the behavior of commercial inventories, is the US Energy Information Administration (EIA) and its weekly report on oil inventories.
In its weekly report, the EIA reports an increase of 1.2 million barrels, for a total of 539.3 million barrels, exceeding by 15% the average of commercial storage levels over the past 5 years.
OIL STORAGE US 2020
Regarding coverage days, this week continues the downward trend, with a slight decrease of 0.5 days, to record 40.04 days, which is 12.74 days above the average of the last 5 years (27.3 days of coverage) recorded by the Energy Information Administration.
Total oil storage, including the US Strategic Reserve, totaled 1,191.010 million barrels per day, an increase of 104 million barrels since the week of March 6, 2020; this reflects the increase from the administration’s decision to acquire volumes of North American oil to help its oil-producing sector.
The EIA estimates that by June commercial storages will drain at a rate of 1.9 million barrels a day, 300 MBD above the 1.6 million barrel-day inventory drainage rate that the agency had considered in its May report.
As we have already mentioned in previous Newsletters, the drainage of high floating crude oil inventories is a clear sign of the balance of supply-demand in the oil market, since the high costs of chartering vessels does not make economic sense for market operators to keep them as storage; so these will be the first volumes to enter the market, as supply is reduced and demand increased.
After historically high levels of 181 million barrels of oil in floating storage were reached on the May 15 week this year, they have begun to drain, falling to 178 million barrels on May 22 and 164 million barrels on May 29.
These levels of drainage from floating storages are an unequivocal sign of the effect in the balancing of the market resulting from the OPEC+ cuts that were implemented starting May 1st.
After the drainage of floating storage, the drainage of the excess in ground inventories will necessarily be the next step, in order to reach levels of oil volumes and days of coverage within the average of the last 5 years, which would be a clear sign of market balance and recovery of both the demand and the price of oil.
To a large extent, this scenario depends on the ability of OPEC+ countries to maintain their policy of oil production cuts and that the economy -hence oil demand- will also begin its recovery during the second half of this year.
Collapse of oil production
The June OPEC Monthly Oil Market Report shows a 57 MBD drop in Venezuela’s oil production by May, falling back to 570 MBD levels.
This information reflects the collapse of the oil production in the country, with a drop of 2.445 million barrels of oil a day, an 82% decline compared to the production of 3,015 million barrels by year 2013.
It must be highlighted that in this report, both the secondary sources and the direct communication from the country agree to present the same number of production declining; both sources traditionally differ, especially since some agencies used as secondary sources have erroneously never considered the improved oil of the Orinoco Oil Belt as oil production, but as “synthetic crude”.
The current oil production levels place Venezuela in what is considered an absolute lack of relevance and political weight within OPEC, up to the point that the country no longer participates in the production reduction agreements in defense of the price.
RANKING OF OPEC PRODUCER COUNTRIES (MAY 2020)
The oil production profile in Venezuela has shown historically a behavior in line with the development and exploitation of its oil resources.
Venezuela’s current production level of 570 MBD is equivalent to that of the country in 1943, a 77-year decline in its production capacities.
EVOLUTION OF THE VENEZUELAN OIL PRODUCTION
Generally speaking, we could say that between years 1914-1969 it was experienced the boom in the development of the Maracaibo Lake oil basin, during the concessional period, until the climax of its production in 1970 and the subsequent decline by exhaustion to the levels of 1.6 million barrels in 1986.
With the development of the new fields in northern Monagas State and the extra-heavy crude of the Orinoco Oil Belt in years 1987 to 1997, oil production in Venezuela regains its levels up to 3.3 million barrels a day of oil.
After the Oil Sabotage, from 2002-2003, oil production was stabilized by 2.9 million barrels a day and was increased to 3.4 million barrels a day; this production level was kept until the 2008 production cuts agreed at OPEC, and then was stabilized at 3.015 million barrels a day between the years 2009-2013.
2008 PRODUCTION CUT AND
Variations in oil production in the country have always reacted to technical reasons, whether because of the natural depletion of the deposits or the maturity of the fields, or because since 1986 –with the application of the quota system and reductions in production under OPEC’s price defense policy- and specially from year 2000 onward, strict discipline in the compliance with production quota agreements was met, within the framework of the country’s strengthening and commitment to OPEC agreements.
The only time oil production in Venezuela has fallen for political reasons was during the sabotage of the oil industry between December 2002 and March 2003, when PDVSA was sabotaged by the company’s own management that was committed to the destabilization of the country, causing production to collapse to 23 MBD in January 2003.
DEFEAT OF THE COUP D’ÉTAT AND THE OIL SABOTAGE
Oil production recovered at the very moment the then-national government managed to take control of PDVSA and restored production level to 2.9 million barrels a day.
From there on, and after the 2008 cuts, oil production remained stable at an average of 3.015 million barrels a day through 2013.
However, the decline in oil production observed since year 2014 and up to 2020 has no record in the history of the country, nor globally in any country that has no conflict or war; there are not technical reasons or exhaustion of the resource explaining it, either. On the contrary, production collapse occurs when the country has the highest certified oil reserves on the planet, 317 billion barrels of oil, which provides the country with a solid base of oil and gas resources for 300 years of production at a rate of 3 million barrels a day.
The collapse of oil production in this period 2014-2020 can be solely credited to the political intervention of the government on the national company, PDVSA, since the end of year 2014, by removing any possibility of action to the company’s boards of directors, diverting the budgeted resources destined for operations, maintenance and expansion, and by causing a blockade on purpose of all administrative, procurement and management processes of the company; by doing so, the current government greatly limited and reduced, until its collapse, the operational capabilities of the national oil industry.
The intervention of the government and the progressive collapse of the operations of PDVSA, reflected in a deterioration of all its productive capacities, has been accompanied by an intense process of persecution and imprisonment for political reasons of managers and board directors of the company, driving away all the technical and managerial direction and delivering the handling of the industry to people with no experience in the oil sector, without any studies or knowledge relating to oil management, oil’s operational complexities and oil international business.
In order to ensure total control of the company, the current government placed its cronies in managerial key positions, such as in finance and in international trade, so as to make sure that all oil company revenues were transferred to the direct control of the presidency of the Republic, as well as all the processes of contracting and procuring within the company.
Starting in 2017, the government handed over the management and administration of PDVSA to the military sector, which took over all the directorial and management spaces in the company, including the presidency of the company and the Ministry of Oil, which were given to officers with no knowledge of the oil industry.
On the other hand, the deterioration of the country’s economic conditions and the environment of political persecution imposed by the government in the oil sector, has led to the departure of more than 30,000 technicians and professionals from the industry, an unprecedented exodus.
The dysfunctional political and management capabilities of the current government, transferred to the management of PDVSA, has led to the abandonment and deterioration of all the infrastructure, facilities and equipment necessary for the operations of the company, as well as the loss of interaction capacities with the international oil sector, as a direct consequence of the lack of governance in the country.
COLLAPSE OF THE OIL PRODUCTION IN VENEZUELA
Since then, oil production has continued to plummet, with an 82% decline from 2013, until getting this figure of 570 MBD oil production, a figure they cannot hide and which is reflection of the collapse of the Venezuelan economy, in the absence of the oil revenue that is vital to its operation.
The current government, with severe problems of legitimacy and credibility, seeks to justify this collapse of production -inexplicable from any point of view- with political reasons, which are not enough to evade the responsibility the government has, along with the administrators of PDVSA in this period between year 2014 and year 2020, not only in the pushback but in the implosion of the Venezuelan oil industry.