As of today, Friday, May 29th , the oil price references closed higher, with the Brent at $37.84 a barrel and the WTI at $35.49 a barrel. May closed as well as a month of oil price recovery, where the Brent has had an increase of 41.4 % and the WTI an increase of 78.8 % compared to the prices of Monday, May 4th of $26.75 and $19.84 per barrel, respectively.
BRENT INCREASE (May)
WTI INCREMENT (May)
This price recovery is more of a «rebound» in oil prices after the falls suffered since the beginning of March, when the spread of COVID-19 caused a collapse in oil demand, coinciding with the «price war» between Saudi Arabia and Russia, which flooded the market with an over-supply that was immediately reflected in the drop in price and the increase in inventories.
The market reacts positively to the start of the oil cut of 9.7 million barrel per day agreed by the OPEC+ countries and which came into effect on May 1st , as well as to the announcements by the Persian Gulf countries: Saudi Arabia, Kuwait and the Arab Emirates of additional cuts to those agreed in OPEC+, the cuts announced by Norway, and the fall in North American production, both from USA and Canada.
The reduction of the excess supply of oil as well as the gradual recovery of the demand expected during the second half of the year with the beginning of the lifting of transport restrictions and the reactivation of the economy, particularly in China and Asia, must be accompanied by the “drainage” of the large inventories of crude oil and products to, subsequently, focus on the recovery of the oil prices before the onset of the crisis.
The closing prices of May for Brent and WTI are still 38% and 31% below their values at the beginning of March, when Brent and WTI were trading at $52.5 and $46.78 per barrel, respectively.
The market considers, and all of the available information indicates, that the production cuts agreed by the OPEC+ countries have a high percentage of compliance, thus being reflected in both the drainage of floating storage as well as price recovery.
OPEC´s countries and their partners are jointly monitoring the effects of production cuts.
We will have to wait for the monthly report from OPEC or the OPEC+ Monitoring Committee to have official information on the compliance with the agreed cuts, but the recovery of the price during the whole month of May has consolidated as a trend and at the same time is as a reflect of the fact that the oversupply of oil in the market is starting to decrease.
In addition to the OPEC+ cuts that began on May 1st, additional cuts of one million, 80 thousand and 100 thousand barrels per day were announced by Saudi Arabia, Kuwait and the United Arab Emirates, respectively, which will be effective from July 1st .
Compliance with the cuts, the additional cuts, as well as the prospects for recovery in global oil demand, will be central to any further decisions on whether or not to adjust the cuts agreed by OPEC+ during the next meeting to be held on 9-10 June.
The messages of political cohesion between the two major oil producers within OPEC+ continue to dispel any doubts in the market as to the commitment at the highest level to stabilizing the oil market.
Thus, on May 27th, 2020, according to the Kremlin, Russian President Vladimir Putin and Saudi Prince Mohammed bin Salman al Saud held a telephone conversation where they continued their discussion on developments in the global energy market and pointed out the importance of joint efforts to reach agreements in the OPEC+ format on reducing oil production in April. They agreed on closer coordination on this issue between the Russian and Saudi Arabian energy ministries.
This week the Saudi news agency SPA reported that Iraq’s energy minister Ali Allawi met with his counterpart, Prince Abdulaziz bin Salman of Saudi Arabia, and later reported that they were satisfied with the effects on the market and his response to the production cuts. This message is important because Iraq, being a major producer within OPEC, has been on the sidelines of production cutbacks for many years due to internal problems arising from the war and the prolonged internal destabilization the country has been undergoing.
The most important objective to be achieved by the end of th second quarter of the year, is the achievement of a balance between supply and demand as a consequence of the reduction of excess oil production, with a view to stabilizing the market towards the end of the year.
On May 28th , Russia’s Energy Minister, Alexander Novak, told the TASS network that demand for oil remained low but had increased by 20% in May compared to April. So far, the oil surplus is between 7-12 million barrels per day, but the Energy Minister estimates that the market will readjust due to the increase in demand during June-July.
On the other hand, on May 25th , an official statement by the Norwegian Minister of Energy, Tina Bru, ratified that the production cut announced by her country will begin in June, with a reduction of 250 thousand barrels per day, increasing by 134 thousand barrels per day in the second quarter, to reach a total of 300 thousand barrels per day by December.
Norway, the main oil exporter in Europe with a production of 1,859 thousand barrels per day, announced last April 30th , a voluntary cut of 300 thousand barrels per day for this year to contribute to the stabilization of the market and the recovery of the oil price, joining the efforts of the OPEC+ countries.
In this week’s report, the U.S. Energy Information Administration (EIA), reported again a decline in oil production, recording 11.4 million barrels of oil per day as of May 22nd , a drop of 1.7 million barrels per day, 13%, from the 13.1 million barrels produced on February 27th of this year, before the onset of the crisis.
In the previous week’s bulletin (link), we referred to the drop in production in the United States, as a direct consequence of the collapse of WTI, the benchmark for American crude, given the high production costs of both traditional areas and shale oil. The recovery of the latter has become a strategic problem for the U.S. due to the difficulties associated with its recovery, both financial and technical, considering the complexities and characteristics of its production areas.
As indicated in the previous bulletin, drilling activity has fallen by 56% over a two-month period, from 772 active drills to 339 active drills.
DROP IN DRILLING ACTIVITY IN THE U.S.
Shale production depends largely on new drilling, which immediately generates high volumes and degrades over time. Such is the United States’ dependence on new drilling that 55% of the country’s shale production comes from wells drilled in the last 14 months, according to ShaleProfile.
Therefore, the gradual reduction of new drilling and cancellation of underground activities in these sands will greatly affect the recovery capacity of Shale Oil production in the short term.
According to estimates by the energy magazine «World Oil», oil production from US shale fields will probably fall by more than a third this year to less than 5 million barrels per day, according to the data company ShaleProfile Analytics.
A Bloomberg study of US shale oil production companies estimates that well cuts will depend largely on WTI prices, which need to be more than $20 a barrel. The study reported that companies like Parsley Energy Inc. and Centennial Resource Development Inc. informed that they stopped drilling and fracking, while others, like EOG Resources Inc. and Diamondback Energy Inc., expect to continue drilling new wells but in a very small number.
The variation of the WTI Nymex marker has a different impact on North American crude oil producers, as this marker is specific to a given geographical area as well as to particular chemical characteristics, and therefore does not fully represent crudes of other qualities.
The rest of the crude oil markers used in North and Latin America are related through the WTI Cushing price index formulas. This explains the variation of prices used in the area and the greater impact that some producers have suffered from the fall of WTI affecting their drilling operations to a greater extent, as is the case with shale oil or production in Latin America.
NORTH AMERICAN CRUDE OIL PRICES
(March to May 2020)
The economy and global demand for oil continue to be strongly impacted by the COVID-19 pandemic.
As of Friday, May 29th , 5.8 million cases have been confirmed globally, with 360,000 confirmed deaths and 2.4 million people recovered. The peak of infections is in the United States, with 1.76 million confirmed cases and 103,000 deaths, making it the country with the highest number of confirmed deaths, 63% more than the United Kingdom, with 37,837 deaths.
The second country with the largest number of cases is Brazil with 441,000 confirmed cases, while the European countries most affected by the pandemic: Italy, Spain, and France passed the peak and entered the decline curve of infection, with 232,248; 238,564; and 149,668 cases and 33,229; 27,121; and 28,714 deaths, respectively.
Speaking at a panel organized by the United Nations on Thursday, May 28th , entitled «Financial Devastation,» the director of the International Monetary Fund, Kristalina Georgieva, said that the agency expects the global economy to shrink by more than 3% by 2020, an outcome worse than that in 2008 and 2009.
On the other hand, the impact of the coronavirus on the European economy will be even greater than expected. At least this is what the president of the European Central Bank (ECB), Christine Lagarde, has said, and she has assured that the forecasts of contraction for the Eurozone range from 8% to 12%, compared to 5% in the previous less negative scenario. «I think the soft scenario, with a 5% fall in GDP in 2020, is already outdated».
Unemployment in Europe has skyrocketed as a result of the current COVID-19 crisis. According to the estimates of the European Commission, the countries most affected have been Spain, Italy, and France.
COUNTRIES MOST AFFECTED BY UNEMPLOYMENT IN EUROPE
The US economy, with an estimated fall of 20-30% for the second quarter of this year 2020, continues to face problems for its reactivation, being the country at the peak of the COVID-19 and facing severe problems with real rates of its impact on employment and industrial activity, despite massive economic aid packages of more than $6 trillion, approved by both the White House and the Congress of that country.
This week the U.S. Department of Labor, according to its weekly report of May 28th , received 2.12 million new applications for unemployment assistance; the cumulative number of applications this week is 41 million. Labor Secretary Eugene Scalia estimates that the unemployment rate could reach 20% by 2020.
While the Economic Commission for Latin America and the Caribbean (ECLAC), in its study published on May, 16th , estimates that the contraction of economic activity in the region will be 5.2% by 2020, the unemployment rate will be 11.5% with an estimated 37 million unemployed in the region.
The only economies that appear to be on the road to recovery are the Asian economies, led by the recovery of economic activity in China, the world’s second-largest economy, and the main oil importer in the world. China has an estimated growth of 1.8% for this year, after the peak of the pandemic, and is beginning to recover from its effects on the economy.
RECOVERY OF THE CHINESE ECONOMY,
AFTER THE IMPACT OF COVID-19
Despite signs of recovery in the Chinese economy, government authorities did not make forecasts or set targets for this year’s economic performance, as Prime Minister Li Keqiang pointed out in his message to the National People’s Congress on May 22nd .
CHINA’S ECONOMIC RECOVERY
While India, the third-largest oil importer in the world, continues to face containment measures for its 1.3 billion people and a decline in its economy, the report of the Central Statistics Office (CSO), published yesterday, May 29th , showed the growth forecast confirming the downward trend, with a significant decline from 6.1% growth in 2018-19 to the 4.2% expected by the end of 2019-20.
All the specialized agencies and organizations agree on estimating that the drop in world oil demand had its peak during the first quarter of the year, especially during March and April when it fell by more than 20 million barrels per day – an unprecedented situation caused by the rapid spread of coronavirus and the impact of COVID-19 on the world’s major industrialized economies. A gradual recovery in demand is expected in the second half of the year, as restrictions on movement and travel are relaxed or lifted altogether, and industrial, manufacturing, and trade activity is resumed.
The US Energy Information Administration (EIA), in its Short-Term Energy Outlook report issued in February – before the beginning of the COVID-19 crisis, estimated an average annual demand of 101.7 million barrels per day. However, at the end of the second quarter of the year, and after the drop in demand seen in March and April, the EIA estimated, in its report dated May 12th , that demand would fall by -9.1 million barrels per day, predicting that the average world demand for oil in 2020 would be of 92.6 million barrels per day, a reduction of 8.1 million barrels per day compared to the average demand of 100.1 million barrels per day in 2019.
Whereas OPEC, in its latest market monitoring report dated May 13th , estimates that oil demand will have a slow recovery, reaching 92.82 million barrels per day by the end of this year, as reflected in our latest report.
The International Energy Agency (IEA), in the «Global Energy Review 2020» published at the beginning of May, estimates that the fall in demand for crude oil will be of 9.3 million barrels per day, bringing it to 92.4 million barrels per day.
Asia and China
Oil demand from Asian economies is showing signs of a slow recovery led by the Chinese economy, with a recovery in consumption in the region evidenced by the activity of the refining sector and the price of products.
FUEL PRICE INCREASE DUE TO RECOVERY OF DEMAND IN ASIA
The Valora Analitika Group said this week, in a publication dated May 27th , that the energy sector consultant, Wood Mackenzie, estimates that China’s oil demand will be of 13 million barrels per day by the second quarter of 2020, which, although it is 2.5% less than the same period in 2019, represents an increase from the first quarter, when it fell to 16%.
According to the Energy Information Administration, the volume of demand as of May 22nd in this month registered 16.1 MBD, which reflects a 10% increase compared to the demand of 14.5 MBD registered on April 24th . However, the consumption of 20.4 MBD registered in February is still not recorded, so that currently the U.S. demand is around 26% below its normal levels.
U.S. OIL DEMAND
As we have mentioned, the high inventories of oil and built products during the first quarter of the year, especially in March and April, will begin to drain, with abundant cheap oil, as the oversupply of oil decreases and demand begins to be restored. Due to its high costs, this drainage process will begin with floating storage, as the first resource to supply the market.
In the previous bulletin, we reported that according to the Frontline Group, the volume of crude oil in floating storage reached 200 million barrels of oil in the first quarter of 2020. A very high number reflecting the crisis of onshore storage in the face of oversupply of oil.
The oil analysis firm Vortexa said this week that 25 million barrels of oil in floating storage were drained into Asian markets, given the revival of demand in China and India.
INCREASED FLOATING STORAGE
The Kpler oil agency data highlights that floating storage in Asia decreased from 35 million barrels on May 23rd to 29 million barrels three days later. The main factor, apart from the reactivation of demand, is also the reduction in the world’s oil supply.
In the case of the maritime sector, Alphatanker, in its Monthly Monitor, points out that the boom period in the storage of VLCCs (Very Large Crude Carriers), vessels with a capacity of between 1-2 million barrels of oil, is coming to an end. The reason is that there has been a sharp fall in the contracts for these vessels compared to previous weeks, what is a clear indication of their declining use as floating storage.
Alphatanker stresses that the release of the floating storage is a gradual process, which could take from June, six to nine months.
This week, oil stocks have shown signs of relief with the return of demand mainly in Asia, where containment measures and restrictions in the region would be eased, as well as in Europe.
Oil stocks in Asia are beginning to be released, and refineries in China, Korea, Japan, and India are resuming operations as the region’s economy slowly reactivates. A report from Bloomberg news agency highlights that the area’s storage facilities are beginning to be released and that the volumes located in floating storage are the first option for the refiners.
At the same time, it is important to take into account that South Korea, because of the largest storage capacities in the region due to its strategic location, has become a commercial crude oil storage site in Asia.
In the week to May 22nd, the crude oil inventories increased by 7.9 million barrels, to 534.4 million barrels, according to the Energy Information Administration’s (IEA) weekly report.
The days of coverage of the U.S. inventory is at 41.7 days, a slight increase of 0.5 from the previous week, its trend since April 17th , when it was at 38 days of coverage storage. This is progressively increasing. To date, the days of storage coverage are 48% higher than in 2019 when they were less than 28 days of coverage.
The increase in US strategic reserves reached a historic volume of 534 million barrels, largely due to oil imports of 2.1 million barrels per day. Analysts had expected storage to decrease by 1.9 million barrels the previous week.
OIL INVENTORY LEVELS IN THE USA
The country remains in the grip of deep economic, political, and social crises that began long before the emergence of the COVID-19 pandemic.
With the country under total confinement, there are reasonable doubts that the government is concealing information regarding the country’s pandemic impact, just as it has concealed the country’s epidemiological, economic, and social indices.
This week, Johns Hopkins University issued a report on the situation of the COVID-19 in the country, estimating that the cases reach 30,000, according to their records.
Dr. Kathleen Page, a researcher at Johns Hopkins University, said the report was made after interviews with health personnel in the country, where the serology tests performed have a high margin of error, in addition to the fact that the health system does not have the minimum requirements to manage the health crisis, so they warn that the pandemic can escalate exponentially, without the government or the health system having the capacity to deal with a situation like this.
The Venezuelan economy suffers a strong recession, falling to unprecedented levels of -64%, accumulated throughout the past 6 years, with hyperinflation estimated at 1,000,000%, international reserves are at only 6.3 billion dollars, the lowest level in the last 30 years and the destruction of the monetary sign, the bolívar.
The official exchange rate is 200,000 bolivars to the dollar, which puts the monthly minimum wage at $2.5 per month, equivalent to $0.08 per day, the lowest in the entire region, even below Haiti and Cuba, and below the UN-defined extreme poverty line of $1.9 per day.
This economic debacle has caused a dramatic deterioration in the quality of life of the population, with acute shortages of food, medicines, basic services, such as water, electricity, transport, communications, fuel, and employment, leading to an exodus estimated by the UN at 5 million Venezuelans since 2016.
The report of the Economic Commission for Latin America and the Caribbean (ECLAC) on the impact of the COVID-19 in Latin America, presented on April 21st , places Venezuela, with the largest drop in GDP, of -18 %, the worst performance in the whole region.
The Venezuelan oil industry is in the worst situation in its history, since the government began, starting in 2014, to politically persecute its directors, managers, and qualified workers, exiling and putting in prison more than one hundred managers and workers, handing over the management of the company to seven successive Boards of Directors composed by personnel without qualifications or knowledge, or without the possibility of making decisions on the management of PDVSA, and then, starting in 2017, handing over the management of the company to the military sector.
In these six years, the industry has been subject to successive interventions, suspension of investments, and diversion of budgetary resources essential for the maintenance and operation of its core processes of oil and gas production, processing, refining, and export of oil and products.
The last OPEC report, corresponding to April, positions Venezuela’s oil production at 622 thousand barrels per day, equivalent to the production levels of 1945, a drop of 2.4 million barrels of oil per day with respect to the closing of 2013 of 3 million barrels per day and a collapse of the Venezuelan refining system. This means that the internal demand for fuels cannot be met, nor can products be exported.
Fuel production in the national refining circuit reached 3,011 million barrels per day by the end of 2013, of which 703 MBD were available to meet domestic fuel demand and 2,425 MBD were destined for export. Currently, the refining system is technically paralyzed, with production far below 10% of its capacity, so PDVSA has not been able to meet the internal demand for fuel, estimated at only 120 MBD of fuel due to the strong economic recession.
In addition to the problems of the deterioration of infrastructure, installations, and abandonment of drilling and underground activities that have resulted in the collapse of 79% of the country’s oil production, there is the issue of the departure of important operators from the country, such as Rosneft and Chevron, the latter forced to cease operations in Venezuela due to the sanctions imposed by the US government.
In addition to the departure of the operators, international oil service companies, such as Halliburton, Schlumberger, Baker Hughes, and Weatherford have also left the country due to the non-renewal of operating licenses issued by the U.S. Treasury Department in the context of U.S. sanctions against it.
The departure of these operators and service companies, however, could not be assumed by PDVSA, due to the dismantling of its own operational capacities, which were decimated by government interventions and the departure of more than 30,000 workers as of 2014.
In situations of sanctions, such as those suffered by the company in 2010 from the United States itself, or the sabotage of the oil industry in December-March 2003, PDVSA was always able to successfully confront them, due to its operational and managerial capacities and the mobilization of the workers, as well as the creation of new oil subsidiaries as of 2008, such as PDV Marina, or PDVSA Oil Services, which allowed PDVSA to handle more than 70% of its exports or more than 60% of the drilling and oil services activities in the country.
The impossibility for PDVSA to manage its production volumes, having abandoned its fleet of transport vessels or having let its operational capacities deteriorate over the last six years, has made it difficult for the Venezuelan terminals to vacate their storage volumes.
According to information released by Reuters, Merey’s inventories at the Jose export terminal increased by 2 million in 20 days, when it went from 7.2 to 9.6 million barrels, leaving availability for just 318,000 barrels.
This situation forced Petrosinovensa, the joint venture between PDVSA and CNPC, to halt its operations for the second time in the month, on Sunday, May 24th . At present, just few crude oil improvement plants are in continuous operation.
We will have to wait for the next OPEC report, to review the country’s production in this adverse scenario.
The government has finally recognized that, given the inability to resume operations of the national refining system, after its unsuccessful attempts with both the El Palito refinery and the Paraguaná Refining Complex, it must import gasoline.
It’s not the first time the government has done this. Since 2018, fuel imports to the country have been increasing, as the national refining system continued to deteriorate, preventing the supply of fuel to the domestic market.
This business was under the control of traders close to one of the power groups within PDVSA that managed to bring in volumes of fuel until this year. With Quevedo’s departure and the installation of the Restructuring Commission, headed by the current Vice President of Economy and Minister of Oil, an agreement was established with Iran for the supply of fuel to the country, in addition to the supply of inputs and technical personnel for the national refining system.
Iran, an OPEC member country that has suffered the imposition of strict economic sanctions on its oil industry for many years, nevertheless has the capacity to meet its internal demand and to export fuel.
Within the framework of this alliance, of which nobody knows the terms and conditions, Iran agrees to the sale of fuel to the country. It is not known at what price it was transshipped, but it has been sent to Venezuela in 5 ships with fuel and additives.
After an intense campaign of propaganda and intrigue on the part of the government, seemingly to analyze the seriousness of the situation related to the operational collapse of PDVSA and the Venezuelan refinery system, the ships finally arrived in the country, without any setback or problem.
The first vessel, called Fortune, with a volume of 270,000 barrels of fuel, unloaded on Sunday, May 24th . Later, the Forest, Faxon, and Petunia tankers arrived, the first two with 275,000 and 268,000 barrels of fuel respectively, and the last one unloaded at the El Palito refinery with 365,000 barrels of alkylate fuel.
The volume of imported Iranian fuels amounts to approximately 1.17 million barrels, equivalent to one day of fuel production in the country back in 2013, and is enough for 9.8 days of national demand, if the strict quarantine measures imposed on the country get lifted, considering that national consumption only amounts to 120 thousand barrels per day.
But the government has already announced that this fuel will be available only for «authorized vehicles», which suggests that, since distribution is under the control of the National Guard, the fuel black market will continue to thrive. Currently, one liter of fuel sells for up to $2 on the black market.
On the other hand, the government has also announced its intention to charge fuel on the domestic market in dollars at international prices.
The importation of fuel and the collapse of the national refining system seem to have provided the government with an opportunity to advance in its plan to sell fuel to the domestic market at international prices, eliminating fuel subsidies, which used to be a traditional advantage enjoyed by the Venezuelan people as oil owners.
With its economy adjustment plan in line with the IMF’s adjustment recipes, but unable to reach agreements with the IMF, the government is making progress in its shock policy aimed at eliminating subsidies to fuel, gasoline, diesel, and gas.
Beyond any punctual adjustment in fuel prices, it seems that the government will be willing to sell fuels at international prices, preparing the favorable conditions for the privatization of the sector, as proposed by the PDVSA’s Restructuring Commission.
The tariffs currently discussed by the government range between US $0.50 and $0.70 per liter, equivalent to $20-30 for a 40-liter tank, which is the equivalent of 10-15 minimum wages for an average vehicle in the country.
There is no technical, economic, or political justification for this situation nor the national government’s claims since the Venezuelan people are being made to pay for the government’s inability to run PDVSA. On the other hand, it is an absolutely regressive and anti-popular measure to impose an absurd extra cost on the internal fuel market in a country in a severe economic crisis, an impoverished people, and with all kinds of deficiencies.
The government and its economic program are absolutely contrary to President Chavez’s oil policy and to the system of economic and social guarantees and competitive advantages that the economy and the citizens of our oil-producing country, the country with the largest oil reserves on the planet, have always enjoyed.