The second week of May continues to show a gradual recovery of all oil price markers. The quotations of the references Brent and WTI closed on Friday at $32.50 and $29.43 per barrel respectively, which corresponds to an increase of 27% and 22% compared to Monday, May 8th . This result is especially important in the case of WTI, a marker that reached -$37 per barrel last April 20th , and that at the close of this week is close to $30, a 180% recovery in 26 days.
RECOVERY IN THE WTI QUOTE
This encouraging trend in the price recovery is directly linked to the effect of the oil cut of 9.7 million barrels per day agreed by OPEC+ on April 12th , which came into effect on May 1st , and the announcement made by Saudi Arabia, the United Arab Emirates, and Kuwait of an additional cut to the OPEC+ agreements of 1 million, 100 thousand and 80 thousand barrels per day, respectively, which will come into effect on June 1st , 2020.
However, the prices are still below the values quoted at the beginning of March 6th , when the Brent and WTI, marked $45.60 and $41.14 per barrel. Current prices reflect a difference of 71% and 72% with respect to the values at the beginning of the COVID-19 crisis and the brief and catastrophic «price war» between Saudi Arabia and Russia.
Similarly, the OPEC basket reference (ORB) has steadily recovered during May, going from a price of $12 per barrel on April 28th to $24.93 per barrel on May 14th , a value increase of 47%.
OIL PRICES MAY 20202
On May 1st , came into effect the oil cut of 9.7 million barrels per day agreed by OPEC+. This cut is being adhered to by all the signatory countries of the agreement, according to OPEC Secretary-General Mohammad Barkindo.
Major oil producers, led by both Saudi Arabia and Russia, are giving unequivocal signals of their commitment to production cuts and efforts to reduce the oversupply of oil that has affected the price in the face of the fall since the upsurge in COVID-19, and the containment measures and restrictions on economic activity in the major industrialized countries.
The Saudi Arabian Ministry of Energy announced on Monday, May 11th , that its country will reduce its production by 1 million barrels of crude oil per day, as of June 1st , in addition to the production cuts agreed upon in OPEC+. Therefore, as of June, the country’s cut will be 7.492 million barrels per day, as opposed to 8.492 million barrels per day, which was the quota agreed upon for May and June 2020.
This additional effort was joined by other Gulf monarchies that are part of OPEC: the United Arab Emirates and Kuwait. In this regard, the Oil Minister of the United Arab Emirates announced an additional cut of its production of 100,000 barrels per day starting in June, while the Oil Minister of Kuwait indicated that his country will do the same, cutting an additional 80,000 barrels of oil per day, also starting in June.
This announcement continues to show signs of the internal problems in OPEC. On the one hand, it shows the cohesion and weight of this group of countries in the organization, led by Saudi Arabia, who did not wait until the next meeting of the group in June to make their announcement of additional cuts. Whit this decision they are making clear that they are not willing to enter into any negotiations or discussions within the group with countries that are unable or unwilling to make additional cuts. Moreover, the announcement reflects the Kingdom of Saudi Arabia’s commitment and close ties with the US, making additional efforts to recover price levels to keep oil production and the US economy afloat.
On the other hand, the Saudi Press Agency published last May 13th , the joint release between Prince Abdulaziz Bin Salman, Minister of Energy of the Kingdom of Saudi Arabia and the Minister of Energy of the Russian Federation, Alexander Novak, in which they ratify the commitment of their nations to achieve market stability and accelerate the rebalancing of the oil market. Also, their confidence that their partners within OPEC+ are aligned with this purpose.
The political message of this declaration by the Oil Ministers of these two major producers is evidently aimed at reassuring the market and future operators, as well as making it clear to the whole sector that the «price war» between the two producers has indeed come to an end.
Oil production in the United States has been among the most affected since the price began to fall in early March. While at the end of February this year the information from the EIA showed an oil production of 12.83 million barrels per day, making the country the first producer in the world, the information for the second week of May shows a production of 11.66 million barrels per day, a drop of 1.17 million barrels per day in two and a half months.
OIL PRODUCTION IN THE USA
The EIA estimates that by December 2020, the US oil production will fall by 1.13 million barrels per day, to average 11.10 million barrels per day, a drop of 2.13 million barrels from December 2019.
WTI prices in this first quarter of the year have not given economic support to production activities, showing a 52.8% decrease in the number of active drills in the country, falling from 753 active drills in February to 355 active drills in May. To this reduction in drilling activities, it must be added the natural decline of mature fields in traditional oil areas in the US and the hierarchical closure of less productive and more expensive wells.
Shale Oil’s production is at the limit of its possibilities of covering its production costs with current WTI prices. In April, according to information from FracFocus, there has been a 50% reduction in activity with respect to the beginning of the year, while Halliburton and CalFrac have reduced their fracking equipment by 75% and 70% in the same period.
The increase of WTI above $30 a barrel and the financial support of the US government to small and medium producers in the management of the debt, could safeguard the activity of Shale Oil. However, given the characteristics of these crude formations and the age of the traditional oil areas, American producers will have to mitigate the damages that could be caused by the lack of well work in the period of low prices. This is why estimates of the drop in production extend beyond 2020. In its latest report, the EIA estimates that the drop in US production will extend to 2021, to a level of 10.9 million barrels a day, which again makes the country a net oil importer.
Other producers Non-OPEC+
In the rest of the non-OPEC+ countries, the most important reductions are in Canada, with a 420 MBD drop; Brazil with a 100 MBD drop and Norway with a voluntary reduction of 300 MBD announced by the Energy Minister Tina Bru, effective from June.
OPEC ESTIMATES THE DECLINATION OF NON-OPEC PRODUCTION TO 2020
Including the production cuts agreed by Russia, OPEC estimates that the production of non-OPEC countries will fall by 3.5 million barrels a day by 2020, which would put the production of these countries as a whole at 65 million barrels a day of oil.
The estimated oil demand for 2020 continues to be going downward according to all sources, mainly due to the fall in fuel consumption caused by the massive restrictions on movement, travel, and industrial activity in the world’s major economies in a bid to try and control the spread of the Covid-19 disease. This has led to a deterioration of the world economy, which is now in recession with an estimated fall of 3.4% in 2020.
DROP IN GLOBAL OIL DEMAND
The drop in commercial activities worldwide has impacted the most industrialized countries, consequently impacting mass consumption. In the countries which are part of the Organization for Cooperation and Development (OECD), the fall is estimated at -6.1%. In terms of GDP, the Euro Zone is seeing an estimated fall of 8.0%, 5.2% in the USA, 5.1% in Japan, and 8.5% in the United Kingdom.
The U.S., the world’s leading economy and the largest consumer of oil, continues to be deeply affected by coronavirus. With 1.47 million cases and 88,237 deaths, it is the most affected country in the world. On the other hand, besides the contraction of the economy estimated at 5.2% and the fall of the oil production at 1.3 million barrels per day, the fall of the manufacturing and services indexes, and widespread unemployment have also marked worrying values for the country’s economic performance in 2020 and its capacity to recover in the short term.
According to the Institute for Supply Management, the PMI Manufacturing Index fell from 49.1 in March to 41.5 in April, while the service sector’s index fell from 52.5 in March to 41.8 the next month.
FALL IN THE ACTIVITY RATES OF
U.S. MANUFACTURING AND SERVICES
Unemployment claims for the week ending on April 28th have reached 33 million people, and the unemployment rate is standing at 14.7%, compared to 3.6% at the beginning of the year.
In two and a half months, the American economy has lost an entire decade’s worth of efforts in terms of fighting unemployment. However, this index does not reflect the depth of the real damage caused to the labor force, since undocumented immigrants, for instance, do not turn to this type of assistance, nor do the unemployed who – for various reasons, including mobility and travel restrictions, or the closure of companies due to COVID-19 – are not seeking employment at this time.
It is estimated that the Chinese economy, instead, will have a moderate growth of 1.3%, after the 6.8% fall it experienced in the first quarter of 2020. India expects a fall of 0.2%, while Brazil and Russia are looking at a fall of 6.0% and 4.5%, respectively.
Out of all the countries affected by COVID-19 since the beginning of the year, only China has begun to restore its economic and commercial activities. Some countries in Europe are slowly trying out measures to relax confinements and restrictions on economic activities, although the fear of the so-called «second wave» of the virus, which is apparently common for this type of pandemic, is tangible.
At the same time, in Latin America and Africa, the virus continues to spread so the actual impact remains to be seen; South Africa, Mexico, and Brazil are particularly being hit hard by the pandemic.
SLUMP IN OIL DEMAND
In its May 13th report, the OPEC forecasts that this year oil demand will fall to 9.07 million barrels per day worldwide, compared to the average 91.10 million barrels per day originally expected. Particularly in the Americas and Europe, where demobilization measures have been implemented in the transport sector, OPEC estimates a reduction in demand to 5.19 million barrels per day in 2020.
The International Energy Agency (IEA), in its May 14th report, adjusted its April estimates when it had predicted a drop in demand of 9.3 million barrels per day, now estimating a reduction to 8.6 million barrels per day, basically due to the relaxation of mobility restrictions following the reactivation of some industrial sectors.
OPEC expects demand in non-OECD regions to fall by 3.88 million barrels per day, a downward revision of its previous estimates, given the strict containment measures and restrictions adopted by several governments, which are aimed at halting the spread of COVID-19.
Oil storage and inventory buildings in industrialized countries experienced rapid growth in the first quarter of the year, with the use of floating storage.
However, it is expected that, with the entry into force of OPEC+ cuts and the fall in production in non-OPEC countries, they will allow these inventories to begin to drain, starting with the floats, as these are the most expensive. This is already happening.
In its latest Monthly Oil Market (MOM) report, OPEC estimates that OECD commercial reserves increased by 57.7 million barrels in March, with a coverage of 86 days – this is 25.1 days of coverage over March 2019, and 23.8 days of coverage over the average in the last five years (2015-2019).
INCREASING LEVELS OF OIL STORAGE IN OECD COUNTRIES MARCH 2020
In light of the unprecedented drop in oil demand, the International Energy Agency (IEA) in its May 14th report predicts that world oil inventories will reach the highest level in the last 40 years, at a rate of 2.6 million barrels per day.
The IEA indicated that inventories in OECD countries increased to an average of 9.1 million barrels per day until April, and it estimates that in the first half of 2020 it could add 1.6 billion barrels to global inventories, so they will be at capacity.
Foreseeing the collapse of operational storage capacity in the United States, the Energy Information Administration is conducting weekly reports on inventories; on May 8th it highlighted a modest inventory drain of 0.7 million barrels, for a total of 531.5 million barrels, which maintains levels above the average of the last five years, with an increase of 59.4 million barrels compared to 2019.
TOTAL U.S. OIL STORAGE
The high levels of crude oil inventory built up in the first quarter of the year, due to the collapse of demand and the overproduction of cheap oil that flooded the market especially during April, has constituted a destabilization factor of the oil market, which has kept the price at a historically low during this period.
The high levels of inventory and the fact that storage reached maximum levels of operating capacity has caused the use of floating storage, which has exponentially increased the rates of transport or leasing of ships, as well as the phenomenon of falling prices to negative levels. All this as happened last April 20th when WTI reached negative levels after contract holders canceled their positions due to the impossibility of storing in the Cushing Oklahoma storage center used for WTI NYMEX contract transactions in New York.
On the other hand, the large volumes of crude oil stored will cause it to be drained gradually as demand recovers. These volumes of cheap oil in storage will compete with oil production, as production and supply levels are restored from July when the OPEC+ cut will be from 9.7 million barrels of oil per day to 8.0 million barrels of oil per day.
This oversupply of cheap oil will keep the price of oil at levels below those before March. At the same time, it will be a fundamental aid for the reactivation of industrial activity, manufacturing, and transport by accessing a primary energy source at a low cost.
The oil market will follow this behavior towards stabilizing the fundamentals of the market to the extent that OPEC or OPEC+ can continue coordinating its production policies to restrict supply, and to the extent necessary to recover the price of the natural resource.
How long will this process last? How quickly will the effects of the COVID 19 be overcome, the restrictions lifted, and the economy recover? How long will it take to restore the levels of demand necessary to have the same levels of consumption as at the beginning of this year? How many producing countries will be able to resist and manage the effects of this oil crisis? How will the world economy be affected and what will be the main sources of energy that will be maintained as the engine of its reactivation and sustainability over time?
These are the great doubts and uncertainties that the leadership of the sector will have to manage in order to re-establish the equilibrium of the international oil market. It remains to be seen what role the OPEC and OPEC+ countries will play in this process and who will take the lead in stabilizing the international oil market. This will redefine the strategic map of the sector at the world level.
The OPEC Market Monitoring report, issued on May 13th , reflects a drop in the country’s production from 38 MBD to 622 MBD, which represents a drop of 2 million 378 thousand barrels per day compared to the 3 million barrels per day of oil production at the end of 2013, 79.2% over a 7-year-period. This level of production positions Venezuela as eighth among the 13 OPEC countries, surpassing only Libya, Gabon, Equatorial Guinea, and Congo.
The operational collapse of PDVSA and the oil industry in the country is still reflected in both the continuous fall in oil and gas production, as well as in the impossibility of supplying the domestic fuel market, which is suffering from a prolonged shortage of gasoline, diesel and gas, on a national scale, including Caracas, although the entire country is in a total quarantine ordered by the government since March 17th .
Repeated announcements and attempts to reactivate the national refinery park, with a processing capacity of 1.3 million barrels of fuel per day, have been unsuccessful. A secrecy, characteristic of the government, surrounds all these attempts. No authority reports on the real situation of the operations, nor there is a plan presented to begin to resolve the problems derived from the collapse of PDVSA, after six years of successive interventions, seven Boards of Directors, the persecution and imprisonment of managers and workers, and the diversion of funds from the company’s operating budget and investments.
On May 12th , the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury issued a license that authorizes the oil company Rosneft to «make the necessary arrangements to leave its operations in Venezuelan territory, valid until the 20th of the current month.”
On Friday, May 15th , the oil giant Rosneft reported in Moscow that it had concluded its exit from Venezuela by transferring its rights and assets in the country to the Russian company Roszarubezhneft.
The strange thing about this operation is that this company, which is 100% owned by the government of the Russian Federation, is a Russian company that provides security services.
This fact, unprecedented in the country, clearly indicates that there is no intention on the part of the Russian government to operate, maintain and increase oil production in some of the best fields in Venezuela, located in the Orinoco Oil Belt. This security company, with no previous experience or capabilities in oil activities, has become a partner of PDVSA in the mixed companies PetroMonagas, PetroVictoria and PetroMiranda, in areas of complex operations, both in the production of extra-heavy crude, in the south of the State of Monagas, and the operations of the upgrader located in the north of the State of Anzoátegui, in the east of the country. These areas, as of March, were operating with a production of 81 MBD, that is, 24% of the dwindling national production.
The areas in which Rosneft operated comprise 784 billion barrels of oil from proven reserves and in the case of PetroMonagas, these were the areas in which ExxonMobil operated under the former Cerro Negro Orinoco Oil Belt Association Agreement, subject to Decree 5,200 of 26 February 2007 on the Nationalization of the Orinoco Oil Belt.
However, as we have mentioned in previous Bulletins, this operation of transferring assets and rights from Rosneft to the security company Roszarubezhneft is illegal in light of the provisions of Venezuela’s Organic Law on Hydrocarbons, where it clearly states, in Article 33:
«The constitution of joint ventures and the conditions that will govern the performance of primary activities will require the prior approval of the National Assembly, to which end the National Executive, through the body of the Ministry of Energy and Petroleum, must inform it of all the circumstances relevant to such constitution and conditions, including the special advantages provided for in favor of the Republic. The National Assembly may modify the proposed conditions or establish those it deems appropriate. Any subsequent modification of such conditions must also be approved by the National Assembly, following a favorable report from the Ministry of Energy and Petroleum and the Permanent Commission on Energy and Mines. Joint ventures shall be governed by this Law and, in each particular case, by the terms and conditions set forth in the Agreement that the National Assembly may issue under the law, based on the report issued by the Permanent Commission on Energy and Mines, whereby it may approve the creation of the respective joint venture in special cases and when it is in the national interest. Additionally, the provisions of the Commercial Code and other applicable laws will be applied.
In other words, any change in the participation or shareholder composition or PDVSA’s partner companies in the Mixed Companies must be approved by the National Executive, through the Ministry of Petroleum, as well as by the National Assembly.
With this provision, the legislation protects the Venezuelan State from the possibility that the minority partner or partner B, of the Mixed Enterprise, might transfer or transfer to another company or legal entity different from the one approved in the Joint Venture Contract, precisely to companies without competence or capacity to operate the areas granted in exploitation rights by the Venezuelan State. On the other hand, the legislation protects the State from the possibility that partner B or a minority partner may transfer the oil reserves or exploitation rights to others since the former are property of the Venezuelan State and are non-transferable and non-seizable, while the latter are granted only to the company or minority partner of PDVSA in the Joint Venture.
The Rosneft operation, in the manner intended, is not only illegal but constitutes a fraud against the law.
The sale of Nynas.
Similarly, on May 11th , the Office of Foreign Assets Control (OFAC) from the United States Department of the Treasury notified that general license 13E for the Swedish company, Nynas AB, was revoked, regarding the «Authorization of certain activities in which Nynas AB participates» and issued General Licenses 3H and 9G, authorizing transactions related to the provision of financing and other operations with certain bonds and certain securities in order to suspend the blockades for this company and operate in Venezuela. This basically for the sale of its assets and closure of operations since, among other things, the license does not authorize transactions with a company that is majority-owned by PDVSA.
Immediately, on May 12th, Nynas AB reported that PDVSA had sold 35% of its shares, which transferred to an independent Swedish “foundation”, leaving it with only 15% of the shares. An official of this company informed Reuters that the company did not intend to buy more Venezuelan crude.
Nynas AB Refinery owns and operates a refinery located in Sweden which, based on the segregation of crude from Lake Maracaibo, Laguna, Tia Juana, and Bachaquero, is ideal for the production of lubricants. It has been operating since 1986, with a company between Neste Oil and PDVSA, the latter with a 50% share.
Although the sale of PDVSA assets abroad is not subject to the approval of the National Assembly, this type of operation, which involves the sale of assets or shares owned by the Republic, must be reported to both the National Assembly and the country.
Of course, this type of operation must comply with the due process of asset valuation and competition between different stakeholders to have the best price or value for an asset of the Nation and maintain the best possible advantages for the country, such as long-term oil supply contracts, so as not to lose that specialty market.
However, this is not the case. In the secrecy that now characterizes the management of public affairs, PDVSA sells 35% of its stake in Nynas to a «foundation» set up for this purpose in Sweden. No one in the country has been informed of the details of the transaction, the reasons for it, the amount, who acquires this asset from the country, nor who the partners are. This is the usual illegal action as they have done with the transfer of PDVSA’s participation in the mixed companies of PetroMonagas or PetroSinovensa as well as the creation of a mixed company with a briefcase company, registered in Cyprus, by Spanish and Venezuelan capital of dubious origin, to operate in Junín, one of the best areas of the Orinoco Oil Belt.
It turns out that since then, Nynas has been receiving the oil needed for its operation from the Joint Venture Petrozamora, to which the government has granted additional areas in 2015, areas precisely where this segregation of specialties occurs. So Petrozamora supplied Nynas with oil that Nynas was unable to pay for the American sanctions.
In the end, what is apparently happening in this mysterious sale by PDVSA of its stake in Nynas is that the debt has been capitalized in favor of Petrozamora’s partners, Russian and Venezuelan capital, obtaining 35% of the company. In this way, with PDVSA’s complacency, these economic groups have become more active in the industry of capital triangulation operations, with their backs to the country. It will be up to the competent bodies to investigate and demand accountability from PDVSA’s managers, in this case, the company’s «restructuring» board, on this transaction.
All the operations that are being carried out from the government in secret, outside the law and without complying with the mechanisms of accountability, within the framework of the «restructuring» of PDVSA (which is nothing more than the delivery of oil and our main industry), must be reviewed by a patriotic government under the Constitution and the laws to make them adhere to the law, reverse them, and report them to the competent state control bodies.
In the end, it seems that the government is in an unbridled race to grab any resource that will allow it to stay afloat, be it natural resources, oil, gas, gold, as well as assets of the Republic agreed in negotiations like this one. At the end of this political crisis, when constitutional order is restored in the country, all these operations and businesses in the oil sector will necessarily be subject to the scrutiny and the rule of law. It will be a new day, and we shall see.