Although prices closed last week with a drop of 2% from their peak on Wednesday, August 5, today, Monday August 10, the Brent and WTI markers rebounded, to trade at $45.09 and $2.07 a barrel, respectively.
The behavior of oil price during the week
During the week, prices continue to advance in their recovery, reaching their highest level in the last 5 months, in the context of the relaxation of OPEC+ cuts.
On Wednesday1, August 5, the Brent and WTI were quoted at $45.17 and $42.19 a barrel, respectively; the highest price since the beginning of March, when they began their rapid decline.
On Friday2, August 7, the Brent was at $44.40 per barrel, while the WTI was at $41.53 per barrel; a recovery of 66% and 101%, respectively, in relation to the May 1 quotation, when the OPEC+ production cut agreement began to be implemented.
The terrible explosion3 that occurred on Tuesday, 4 August, in the port of Beirut, the capital of Lebanon, caused a sudden increase in the price of the Brent, which was above $45.36 a barrel on Wednesday, 5% (+2 d/b) up from $43.30 a barrel before the incident.
On Wednesday, August 5, the OPEC basket4 surpassed $45 per barrel; its last5 quote on Friday, August 7, was $44.87 per barrel, a 3% increase over Monday, August 3, and a 147% recovery over May’s prices.
BASKET PRICE OPEP
The price of WTI in a volatile recovery
On August 10, oil prices in the U.S. market showed $42.07 a barrel, the second highest price since the beginning of June, despite the fact that its price on Thursday6, July 30, fell by more than 3%, when it stood at $39.92 a barrel, as a result of information issued7 on the same date by the U.S. Department of Commerce on the historic fall of -32.9% per year in the United States’ economy.
Despite the instability that has marked the behavior of this marker in the first half of this year, with a historical collapse in April (when it was quoted at -37 dollars a barrel), the WTI reached this week the price levels of the beginning of March, at the start of the COVID-19crisis.
WTI REGAINS ITS STABILITY
The Asian market
On the other hand, Middle East crude oil markers prices dropped as a result of weakening demand in Asia, related to the rapid spread of the virus in India, severe flooding in China that forced the refining giant Sinopec to suspend operations, and the expectation of reduced oil imports from China due to logistical restrictions on the handling of oil tankers.
An August 5, report, published8 by S&P Global Platts, notes that in light of weakening market fundamentals in Asia, the contango structure in the Dubai market persists. Dubai crude oil showed a downward difference of 0.29 dollars per barrel in its prices between September and August, and 0.27 dollars per barrel between October and November. This phenomenon usually drives the trend of increasing storage in the oil market.
Last Friday, August 7, Saudi Aramco made its nominations for the Asian market, with discounts of 30 cents per barrel for the Arab Light crude oil, which places it at 90 cents above the Oman-Dubai reference index.
EXPECTATIONS OF A FALL IN THE PRICE IN ASIA FOR SEPTEMBER
The physical market in Asia is also likely to be affected by the rise in official prices in Saudi Arabia, as Kuwait, Iraq and the United Arab Emirates usually follow Aramco’s prices.
Crude oil prices rose on Monday, August 10, in reaction to statements9 made this Sunday by Saudi Aramco‘s CEO Amin Nasser, who predicts that demand for oil in Asia is returning to pre-COVID-19 pandemic levels.
Furthermore, the International Monetary Fund (IMF) published10 its External Sector Report 2020 on August 4, where it estimates that, due to the effects of the COVID-19 crisis on the economy and world oil demand, oil prices will remain 41% lower in 2020 than in 2019, i.e., 40 dollars a barrel.
As of August 1st, the production cuts’ loosening agreed upon by the OPEC+ countries signatories of the April agreements11, came into effect, with the group of countries increasing their production by an additional two million barrels of oil over the production cut levels that were in effect between May and July, of 9.7 million barrels per day. Starting in August, the new level of production cuts by the countries in the group will be 7.7 million barrels per day.
Among market operators there is concern about this new level of cuts; it has been pointed out that oil demand has probably not recovered enough to absorb this additional production. In addition, inventories remain well above the average levels of the last five years, giving 35 days of coverage, when they are normally kept around 25 days of coverage, so fears persist that the market will again be affected by overproduction of oil, thus making it difficult for the price to recover
However, the leading OPEC+ countries, Russia and Saudi Arabia, which have borne the brunt of the cuts per country (2.5 and 4 million barrels per day, respectively), have insisted on relaxing these cuts, demanding the countries «lagging behind» in fulfilling with the May-July agreements, mainly Nigeria and Iraq, comply with their «compensation» commitments for the not cut volumes, which would take 850 thousand barrels of oil a day out of the market, placing the real volume12 of additional oil in the market at 1.5 million barrels a day, as a result of the relaxation of the OPEC+ cuts.
On the other hand, in addition to the income needs faced by OPEC+ countries, due to the double impact that the COVID-19 pandemic has had on them (both because of the collapse of oil prices and the effect on the world economy), Russia and Saudi Arabia are not willing to give up their market spaces again in the face of an eventual recovery in demand, and are therefore placing their production even at discounts with respect to market prices, as has happened this week with the Asian market and which we pointed out above.
Saudi Arabia, Kuwait, and the United Arab Emirates have assumed the de facto leadership of OPEC. The production of these countries, plus Iraq, covers 72% of the organization’s oil production.
The rest of the members who counterbalanced and gave equilibrium to the organization face severe problems with their oil production due to sanctions and war, as in the case of Iran and Libya, or the thundering collapse of the national oil industry as a result of successive internal political purges, as in the case of Venezuela. Moreover, important countries of the organization such as Algeria, Nigeria, and Iraq are limited in their protagonist role by problems of internal political order (Algeria) and the lack of control of their own oil industry and even of their territory (Nigeria and Iraq). The rest of the Organization’s new members have a low production capacity that limits their lead role within the decisions of the organization.
Thus, the Persian Gulf Monarchies and Iraq have now the greatest cohesion and weight in OPEC’s decisions, even more so after the 2019 Qatar’s departure13, which is why they coordinate actions in the international oil market according to their group interests. This position of strength is used by the Saudis to exercise the de facto leadership in OPEC decisions, favoring their political positions and international alliances in defense of their geopolitical interests in the Persian Gulf and in the Middle East.
Saudi Arabia’s Energy Minister, Abdulaziz bin Salman, has been exerting significant pressure on Iraq, the second largest OPEC producer, to comply with production cut-off compensations for its delay in meeting the 3.79 million barrel per day quota cut, which it was entitled to under OPEC+ agreements.
Saudi Arabia and Iraq issued a joint statement14 on August 6, following a telephone call between the oil ministers of the two countries, in which Iraqi oil minister Ihsan Abdul announced that his country would cut 400,000 barrels between August and September, in addition to the commitment to cut 850,000 barrels each month.
These additional cuts, agreed to compensate for the barrels not cut between May and July, allocate to Baghdad a de facto production quota of 3.3 million barrels of oil per day, a figure lower than the last production reported to OPEC in June of 3.716 million barrels of oil per day.
In the aforementioned joint statement, Ministers Abdulaziz Bin Salman of Saudi Arabia and Ihsan Abdul Jabbar of Iraq agreed that compliance with the cuts established by OPEC+, as well as the compensation regime, are essential to improve the stability of the oil market and «will send a constructive signal to the market.»
However, it should be noted that, in recent years, Iraq has claimed that because of its internal political situation and the reconstruction of its economic fabric, after a complicated period of conflict and sanctions, the country should have been exempted from these restrictive production measures; in fact, there are reports of protests in the Iraqi capital over the failure of electricity supply in a summer of high temperatures.
According to Bloomberg and according to data obtained from freighter tracking companies and estimates from consulting firms, including Rystad Energy AS, Petro-Logistics SA, Rapidan Energy Group, and JBC Energy GmbH, production in OPEC countries increased15 in July to 23.43 million barrels per day, once the Gulf countries (Saudi Arabia, United Arab Emirates, and Kuwait) restored production that had been limited by the additional cuts made.
OIL EXPORTS OF THE GULF COUNTRIES (2017-2020)
We will have to wait for the next meeting on August 18, where the joint OPEC+ Monitoring Committee will follow up on developments in the global oil market, including the issue of each country’s cuts and the level of compliance with the quotas corresponding to each one, as well as the fulfillment of compensation commitments by the so-called «lagging» countries.
Russia’s production in July 2020 totaled 290.5 million barrels of oil, an average of 9.37 million barrels per day, according to data published by the Russian Ministry of Energy16, representing a month-on-month increase of 3.8% (+40,000 barrels per day) in comparison with June production, and a 16% year-on-year cut (-2.13 million barrels per day) in comparison with July 2019 production.
Oil exports in the same period in 2020 showed a monthly fall of 5.2% (-400 thousand barrels per day) and 25.2% (-1.38 million barrels per day), compared to the same date in 2019. In contrast, refining for domestic consumption grew by 7.7% in July 2020, compared to the previous month.
Minister Alexander Novak announced17 at the beginning of August that July oil production maintained the levels of June, under the OPEC+ cut agreement, and recalled that Russia’s compliance in June was 99%.
The Russian minister stressed the work of Russian oil companies because «they are reducing their production in accordance with the OPEC+ agreement.»
According to different agencies19, Norwegian oil exports for September 2020 will drop by 261 thousand barrels of oil per day, a third of them in the Johan Svedrup oil field, located in the North Sea, placing them at 1,287. This drop is due to the production cut of Equinor, operator of the giant field, in line with the announcements of the country’s authorities to support, on a voluntary basis, the cutback efforts of OPEC+
NORWAY CRUDE LOAD FOR THE ATLANTIC BASIN (March 2018 – September 2020)
Oil load data from the Atlantic Basin producers for September will be 5.75 million barrels of oil per day, the lowest recorded since production began in 2012. The cut in the oil load by Norway corresponds to the producers of this basin.
In June20, Norway had announced that, in order to help stabilize the market, it would cut oil production by 132,000 barrels per day in the second half of 2020.
Mexico’s oil production by 2020 will be 1.8 million barrels per day, according to a memorandum21 from the Mexican government on August 4; this exceeds the 1.758 million barrel per day cap agreed with OPEC+.
However, according to the same memorandum, the current demand situation -especially domestic demand- and the variation in oil prices, led the Mexican authorities and PEMEX to change the production target of 2.4 million barrels by 2024, and reduce it to 2.2 million barrels per day.
The National Hydrocarbons Commission (CNH) published22 on August 4, 2020, the consolidated oil reserves for January 1st, 2020, with 23.09 billion barrels between proven, probable, and possible reserves, presenting a decrease of 8% compared to the 25.1 billion barrels of oil consolidated and published in October 2019. However, the consolidated figures show an increase in proven oil reserves: from 7.9 billion barrels in 2019 to 8.1 million barrels in 2020.
On the other hand, President López Obrador decided23 not to call for new auctions after the end of the bidding rounds called by the CNH, although the concessions given in those rounds will be respected. The Mexican president made his intentions clear for the national oil company to be the operator in the fields not awarded in the CNH rounds, by stating that «the oil potential left out of such concessions can only be exploited by PEMEX.»
The U.S. Energy Information Administration’s (EIA) weekly report24, «This Week in Petroleum», dated August 5, places U.S. production at 11 million barrels per day, a drop of 15% from its record production of 13.1 million barrels per day on 13 March 2020.
This week, United States’ exploration and production companies showed in their financial statements the effects of this year’s price collapse, announcing capital expenditure cuts in 2020, as well as for 2021. With respect to Shale Oil production, an analysis25, by Bloomberg, indicates that companies are focusing their already dwindling budgets on minimizing the production decline, which is characteristic of the shale industry (wells start in abundance but quickly turn to poor results), in addition to cutting costs as much as possible.
Shale Oil producers, such as Diamondback Energy Inc. and Concho Resources Inc., are analyzing how to reinvest cash flow and maintain production levels; an unexpected way of looking at this business in the future, considering that the objective in recent years was to increase production. The companies may be speculating with the cut in their production to justify other ways of generating cash flow, in a market that has been very volatile this year. It is clear that they intend to maintain the low production levels of 2020 during the next year.
During the announcement of the second quarter’s financial results, Callon Petroleum Co. reported that they intend to reduce their production by 100 thousand barrels a day in view of price projections.
The IHS Markit firm estimates that US oil production will fall to about 10.1 million barrels a day by 2020 (20% below starting year levels), only to increase by 350,000 barrels a day next year, in light of reduced exploration and high levels of losses recorded by oil companies.
FALL IN U.S. PRODUCTION
While the American giants, Chevron and ExxonMobil, put the brakes26 on their plans to increase production in the Permian Basin and to reach one million barrels of shale oil by 2025. Faced with the demand affected by the pandemic and the fall in oil prices, U.S. companies seem to find it more profitable to reduce capital expenditures on production from shale wells, where oil occurs in large quantities at the start of production and then dries up quickly, leaving them abandoned. Therefore, companies estimate to lower their shale well production by 2021. In the case of Chevron, it expects to reduce production by 7% next year, while Exxon does not expect to increase it beyond the 345 thousand barrels a day it currently produces.
An August 7 Argus publication states that exploration in the United States has fallen to a 15-year low, leading exploration companies to preserve dividends to keep investors who, the agency says «…are fed up with poor returns«.
The number of active oil drills in the United States continues to decline. This week27 the North America Rig Count, from the Baker Hughes drilling company, stands at 176 units. After the relative stability of July, the decline that has characterized in the United States this oil production marker since the beginning of the COVID-19 crisis, persists in August, and continues to lag behind the 682 active oil drills in March 2020.
ACTIVE DRILLING IN THE U.S.A.
On the other hand, the Baker Hughes August report shows that the count of active drills at international level has revealed a strong fall, to the point of returning to 2003 levels in July; the biggest reduction was seen in the count of drills in the nations of the Middle East, basically due to the cuts made by the countries of the region in the framework of the OPEC+ agreements.
WORLDWIDE DRILL COUNT
(2001- July 2020)
As of August 10, the World Health Organization (WHO) 28 reports that the number of people infected by COVID-19 is 19.9 million cases worldwide, leaving a balance of 732,000 people dead, while the number of people recovered is 12.1 million
The United States continues to lead the list of infections with 5.13 million people (26% of the global contagions), an increase of 4% from Monday of this week. The number of people who have died from the virus stands at 165 million (23% of the global deaths from COVID-19).
The second country with the highest number of infections is Brazil, also in the Americas, with 3.04 million people infected and 101,000 deaths. It is followed by India, with more than 2 million cases and 44 thousand deaths. Completing the list of the 10 countries with the most cases of coronavirus infections are: Russia, South Africa, Mexico, Peru, Chile, Colombia and Iran.
The International Monetary Fund (IMF) published last Tuesday, August 4, its External Sector Report29, which refers to the fall in the prices of the main raw materials in the second quarter of 2020, and to oil prices. This implies a direct impact on the current account balances for this concept for the producing countries which, along with the fall in oil demand estimated at 8% regarding 2019 levels, it will be a substantial loss for some exporting economies.
COMPARISON OF COMMODITIES AND OIL PRICES (2008 VS. 2020)
The impact on the trade balance of commodities exporting countries is expected to fluctuate between 7% and 3% of GDP, similar to the effects of the global economic crisis of July 2008. However, the IMF considers that the effects of the COVID-19 crisis are still very tentative, due to the high level of uncertainty and the particularities of each country.
The IMF considers that, so far, the main factors that will affect the trade balance of the economies at a global level are: the economic contraction, the financial hardening, the fall of prices of raw materials and the reduction of tourism.
THE IMPACT OF THE CRISIS ON THE POOREST COUNTRIES
The COVID-19 crisis is already showing its effects in the poorest countries. In Africa, more than 1.49 million people have been infected30 by the virus, according to data published on August 10 by Johns Hopkins University. Latin America, on the other hand, surpasses Europe and has reached31 the figure of 213,000 deaths this week, with more than 5 million cases.
The Economic Commission for Latin America and the Caribbean (ECLAC) estimates, in its report32 dated July 15, that by 2020 poverty and extreme poverty in Latin America will rise by 7% and 4.5%, respectively, to close the year with 37.3% of poor people in the region, and 15.5% of extreme poverty. For the World Bank, extreme poverty in the region will grow33 by 7% in 2020, while 110 million people will see their daily income fall below $5 per day. According to the African Development Bank, the GDP for the region could fall by 6.1%; therefore, they estimate that 49 million people could reach levels of extreme poverty.
Latin America and the Caribbean
The economy is entering a stage of regionalization. This is how ECLAC understood it in the report presented by the COVID-19 Observatory on August 4, 2020, revealing that in the period January-May 2020, international trade in Latin America and the Caribbean (LAC) showed a year-on-year contraction of -16.1% in the value of exports, while in imports the contraction was -17%; the values in exports of LAC goods to the United States fell by -22.2% year-on-year, and to Europe by -14.3%. Inter-bloc trade in LAC had a year-on-year fall of -23.1% and -25.1% in exports and imports, respectively.
Energy accounts for 14.7% of total LAC exports: 11.2% oil, 2% oil derivatives, 1% natural gas, and 0.5% coal, which were all affected by low market demand and declining oil prices. ECLAC estimates an annual contraction of -40.2% for the barrel of oil in 2020, which generates a projection of 37 U.S. dollars.
DECLINE IN OIL EXPORTS IN LATIN AMERICA AND THE CARIBBEAN
The value of energy exports fell by 25.8% year-on-year in the period January-May 2020, while energy exports for the interregional market fell by -28% in value. Similarly, fuel imports demanded by LAC fell by 34% when compared with the previous year, while the tourism sector fell by -49.5%. By 2020, ECLAC forecasts that LAC’s international trade will fall by -23%. Export goods will show a -23% drop in value (the largest since 1938) and import goods would fall by -25% in value.
EVOLUTION OF EXPORTS OF GOODS FROM LATIN AMERICA AND THE CARIBBEAN (1930-2020)
For ECLAC, regional integration is a priority, and this must include the recovery of the Union of South American Nations (UNASUR). Mercosur, the Pacific Alliance, the Andean Community of Nations, the Central American Common Market, and Caricom must have a common agenda to facilitate trade, cooperation policies, and new labor relations in the region, with a new digital common market, which will allow the strongest economies to help the hardest ones hit. The region’s productive chains can place their product in the Latin American market, which generates more equal conditions for the commercial-dependent relationship that the ones LAC has with the large markets represented by the United States, China, and Europe.
The marked geo-economic division of Africa (with the differences between the countries of the north of the continent and the 49 countries that make up the region south of the Sahara), does not prevent a global and common appreciation of the challenges faced by the African continent, where poverty reaches34 more than 416 million people, nearly 35% of its population. Africa’s economy will contract between -2.1% and 5.1% in 2020 as a result of the effects of COVID-19, mainly due to the disruption of domestic production and supply, as well as external demand; this coronavirus crisis is the first economic recession for this region since 1995, when extreme poverty was 58%. Public debt and indebtedness have increased in the region, putting at risk progress in building good jobs. Oil-producing countries Nigeria, South Africa, Angola, Equatorial Guinea, Algeria, Libya, will see a drop of -7% or more, according to World Bank estimates.
In India, analysts estimate35that several indicators point, in July, to a stagnation in the pace of recovery of the previous two months. Among the indicators mentioned -pending the RBI meeting this week- are the IHS Markit for Manufacturing Managers Purchasing Index (from 47.2 in June to 46 in July; a value of less than 50 is considered a contraction of the economy); the fall in the collection of the Goods and Services Tax between June and July; the drop in diesel sales by state-owned refineries (-13% from June); the drop in non-food credits; and the Finance Minister’s statements on August 1st, warning that the government «…is cautious about overestimating the ‘green shoots’ of a visible recovery in the economy.»
Cases of coronavirus in Saudi Arabia exceed 280,000; the budget deficit has skyrocketed, and could expand36 to 15% of GDP by 2020; taxes rose from 5% to 15% in April; fuel prices increased by 100%. In turn, the Kingdom invested37 eight billion dollars from the Public Investment Fund (oil revenues) in U.S. stock markets, and in shares of companies such as Disney, Boeing, Bank of America, Citigroup, and Facebook.
On the other hand, immigration represents 38% of the population of Saudi Arabia, being the second country in the world with the highest number of immigrants (13.1 million), according to UN38 figures in 2019. Nearly 10 million foreigners work in Saudi Arabia, representing 25% of the country’s workforce. In this context, more than a million foreign workers have left the country so far in 2020 due to job losses or the prospect of not keeping their jobs in the short term, a figure that is estimated to increase progressively. Meanwhile, hundreds of thousands more made the decision to leave Saudi land before the end of 2020, anticipating the tax that Vision 2030 program may generate39.
Saudi Arabia is facing an unprecedented and unforeseen scenario that is affecting the stability of the Kingdom, and it could get worse if no decisions are taken at the crown level that could make go back two references of the Crown Prince Mohammed Bin Salman, according to analyses40 by Professor F. Gregory Gause III, a specialist in Middle East politics.
According to Mr. Gause, Saudi Arabia is not in a position to implement the Vision 2030 Plan, presented in 2016 by the Crown Prince. The plan was focused in the goal that by 2020 Saudi Arabia would have an economy not dependent on oil, increasing non-oil revenues to 160 billion dollars, eliminating the budget deficit and calling on investors to participate in the model shift from an «oil country» to a «Neom country» (the technological and futuristic city conceived by Prince Bin Salman).
On the other hand, says Gause, the Kingdom must back off in its intervention in the war in Yemen, which has been going on for four years and has made the Saudis to use in defense 9% of the Saudi national budget -the highest military expenditure per capital in the world.
These are definitions that, at present of the Saudi Arabian crown situation, leave little room for decisions among a group of high-ranking princes (as was the case before 2015), leaving the final word to Crown Prince Bin Salman.
Although, earlier this month there were reports estimating that the Chinese economy could be affected by fragile retail sales (which fell by 1.8% in June), the effects of «the worst floods in decades» in at least 27 provinces and regions, because of the rains and the flooding of the Yangtze, Yellow and Huai rivers, and some outbreaks of coronavirus in the west of the country, China’s economic recovery has turned out to be better than expected in the second quarter of 2020. This was expressed by Martin Raiser41, World Bank Director for China, who emphasized that «it is truly faster than we had anticipated in June, when we issued our World Economic Outlook report, and we have updated our forecast accordingly.»
The year-on-year growth of the Asian country’s economy was 3.2% in the second quarter of the year, after a decline of 6.8% in the first quarter. Likewise, Xinhua agency reported on August 7, that the country’s foreign trade has grown by 6.5% year-on-year, since «…exports and imports increased by 10.4% and 1.6%, respectively»; exports would have increased, according to analysts, due to «…the heavy shipments of medical supplies, electronic equipment, and equipment for working from home,» associated with the COVID-19 crisis.
According to statements42 by China’s Minister of Finance, Liu Kun, the country has implemented economic measures that have enabled it to deal with the impact of the pandemic, including: tax cuts, the reduction or elimination of value added tax for small taxpayers and the postponement of tax payments for businesses.
The Federal Reserve’s Vice President and Director of Banking Supervision, Richard Clarida, said43 on Wednesday, August 5, that despite the increase in the number of cases and the slow resumption of activity in general, he expects the U.S. economy to continue to recover throughout this year, with a rebound in activity by the third quarter, and to return to pre-COVID-19 levels by the end of 2021. However, the officer acknowledged that «…the course of the economy will depend on the course of the virus, and it is a complex scenario«; other factors to be considered would be, according to Clarida, the performance of the labor market and the expectation of an additional rescue package from Congress.
In this regard, the figures44 of unemployment in the USA, reflected in the number of applications for government benefits, fell in the week ending August 1st by 249,000 (from 1,435,000 to 1,186,000); although this reduction may be the result of the initial momentum of the reopening -which in many states of the country has had to slow down- the unemployment figures remain high: this is the 19th consecutive week in which applications have exceeded one million (the historical record45 in weekly applications for benefits was 695,000 in October 1982).
The Department of Labor’s monthly report46 also shows a decline in general, from 11.1% in June to 10.2% in July, a figure which, «although significant, is still three times higher47 than the pre-pandemic level»; furthermore, some media claim48 that the decline may have been influenced by people declaring themselves «employed but absent from work» due to the pandemic, and that temporary jobs are falling, but the number of permanent job losses is also increasing. It should also be noted that as of July «…more than 31 million people in the United States were receiving49 some form of unemployment insurance.»
U.S. UNEMPLOYMENT CLAIMS
On the other hand, Democratic and Republican representatives in Congress, and the Democrats and the Trump administration, continue to negotiate50 a new stimulus package, although without making further progress. Having failed to reach an agreement before the aid program expires on July 31st, or by the deadline set by Congress (August 7, before the Senate recess), President Trump signed, on Saturday, August 8, several executive orders to extend the economic benefits (in the amount of $400 per week; down from the $600 approved in the March package), to defer payments on college loans, to defer the payroll tax and to extend the moratorium on evictions from federally-funded housing.
The rivalry between the governments of the United States and China continues to intensify at the level of declarations and actions. So far, it has been the Americans who have taken the most concrete actions, particularly the inclusion of individuals and companies from China on the unilateral sanctions lists of the Departments of State or Commerce.
Suspicion of espionage has been behind the U.S. demand for China to close its consulate in Houston in July; an action to which China responded by ordering the closure of the U.S. consulate in Chengdu.
These diplomatic actions taken by both countries were followed by the end of preferential trade treatment to the United States in terms of tariffs in Hong Kong province, which is why Washington announced on August 8 sanctions against the Chief Executive of the autonomous province, Carrie Lam, and ten other officials of the Hong Kong government.
The Trump government also announced a deadline of September 15 for a Hong Kong company to purchase the TikTok digital platform (owned by the Chinese company ByteDance), because of accusations of potential privacy issues and potential instructions or interference from the Chinese government. If the sale does not take place, this video application will be banned in the USA.
Other recent developments include Health and Human Services Secretary Alex Azar’s August 10 trip to Taiwan, in what is the highest-level visit by a US official since 1979 (when the U.S. recognized Beijing as the capital of China instead of Taipei), and the Chinese government’s decision to sanction 11 Americans, comprising congressmen (including Marco Rubio and Ted Cruz, who had already received other sanctions from China) and representatives of political organizations.
The Sino–US struggle, fueled by the rhetoric of the U.S. electoral campaign, threatens to increase in intensity and adds to the variables that may affect the recovery of the world economy in the context of the pandemic and, therefore, the demand for oil in both countries.
In the report published51 on August 4 by the International Monetary Fund (IMF), in relation to the impact on the trade balances of commodities, they forecast that the demand for oil will be reduced by 8% in 2020, based on the comparison of the World Economic Outlook52 published in June 2020 with the one published53 in October 2019, which will have a negative influence on the recovery of oil prices.
IMPACT ESTIMATED BY THE IMF
IN THE OIL TRADE BALANCE IN 2020
(PERCENTAGE OF GDP)
The countries most affected by the reduction in oil demand, according to the IMF, are those most dependent on net exports, such as Norway, Russia and Saudi Arabia, where economic losses of between -3% and -7% of GDP are expected.
Fuel demand in the UK has shown signs of recovery since last week. This was indicated54 by the energy firm S&P Global Platts, specifying that average sales of gasoline and diesel, up to August 2, increased by 5% over the previous week, reaching 15,570 liters per fuel station, according to data published on August 6 by the United Kingdom’s Department for Business, Energy and Industrial Strategy.
Meanwhile, average mobility rates in other major economies on the European continent, such as Germany, France, Italy and Spain, were 17% below pre-pandemic levels last week.
Taking into account the 5 largest economies in Europe, including the UK, mobility last week was 21% below the levels recorded before COVID-19.
OF THE 5 LARGEST ECONOMIES IN EUROPE
With regard to China’s imports of energy products from the United States, Reuters published55 in a report on August 4 that the Asian country bought only 5% of the 25.3 billion dollars destined for this sector in the first half of 2020, which is below the trade commitments made, within the framework of tensions in relations between the two main economies.
ENERGY IMPORT RATIO
CHINA TO U.S. (REAL VS. COMMITMENTS)
China’s purchases of crude oil, liquefied natural gas (LNG), metallurgical coal and other energy products totaled $1.29 billion this year through June, according to Reuters estimates based on Chinese customs data.
IMPORTED BY CHINA FROM THE U.S.
According to an analysis published56 by S&P Global Platts, year-on-year demand for oil in India is estimated to fall by 405,000 barrels a day.
At present, some provinces in the country are implementing radical measures in response to the COVID-19 upsurges, which is causing demand to fall in order to avoid the problem of surplus in the country’s crude oil inventories, as hopes of recovery for the second half of the year are increasingly weak.
HISTORICAL AND ESTIMATES OF OIL DEMAND IN INDIA
Oil imports into the United States increased57 to 6 million barrels per day as of July 31st, an increase of 4% over the week of July 24, when they had recovered slightly to 5.14 million barrels per day.
At the end of July, crude oil imports averaged 5.7 million barrels per day, representing an 18% reduction compared to the same period in 2019.
The refineries increased their activities this week to operate at 80% capacity, showing a progressive recovery during the month of July.
This week, news of falling inventories boosted oil market prices, when the EIA reported58 as of July 31st that U.S. oil storage fell by 1%, excluding strategic reserves, to a volume of 518.6 million barrels. It would be the second week of reduction after the record levels registered in the second quarter.
OIL STORAGE UNITED STATES 2019-2020
U.S. coverage days fell59 for the second week in a row to 35.9 days, a drop of 2% from the previous week. Although the gap between 2019 and 2020 records continues to narrow, inventories are now 24 days above 2019 levels.
OIL COVERAGE DAYS IN THE UNITED STATES 2018-2020
The crude oil inventory in the U.S., including the strategic reserves which stand at 656.1 million barrels per day, reached a storage volume of 1,175 million barrels per day. The total inventory of the country increased 8.4% compared to the same date in 2019, mainly due to commercial storage, which increased by 18%.
Venezuela’s crisis is deepening at the same time the fall in national oil production occurs. In recent months, the shortage of fuel in the country has worsened due to June’s oil production of just 356,000 barrels per day. The destruction and abandonment of the refinery system increase the strong shortage of fuel in a pandemic scenario.
The Razetti Study Center report60 of August 6, shows a substantial increase in the number of active cases of COVID-19, with a record of 981 new cases in one day, for a total of 23,280 confirmed cases, of which 10,608 are active, and a report of 202 deaths.
Gasoline no more
The critical fuel shortage situation in the country is deepening, as the 1.5 million barrel per day shipment received from the Islamic Republic of Iran in May has already run out, according to reports61 from member workers of the United Federation of Oil Workers of Venezuela (FUTPV). The supply of Liquefied Petroleum Gas (LPG) is also scarce, as we mentioned in last week’s Bulletin.
Representatives of the FUTPV indicated62 that the El Palito refinery reactivated its operations by 7%, some 10 thousand barrels of its production capacity, which is 140 thousand barrels per day; however, these kind of actions do not offer a solution to the terrible situation regarding fuel supply, and the forecast is that supply will worsen, since no ship with fuel is expected to arrive in Venezuela.
In Caracas, the closure of some gas stations was announced, but there are still volumes of gasoline stored to supply the population -with long queues and slow dispatch- in both modalities (in subsidized gas stations and stations selling fuel at international prices).
In the interior of the country, lack of fuel cannot be mitigated and hits hard.
In some central Venezuelan states, such as Carabobo, where the El Palito refinery is located, only the stations that sell gasoline at international prices are dispensing fuel, while the stations with fuel at subsidized prices are completely empty.
In the eastern states, oil states, where the Puerto la Cruz refinery is located (a refinery that has been shut down since the beginning of the year), the authorities suspended the sale of fuel, claiming restrictions because of COVID-19.
In the western side of the country, an oil-producing region that is normally supplied by the Paraguaná Refinery Complex, the shortage of gasoline and the lack of electric power have become permanent problems.
In Maracaibo, Zulia State, the gas stations remain closed, so citizens decide to purchase smuggled fuel from Colombia, whose sale price amounts to $2 per liter, an amount that represents more than half of the minimum wage of the Venezuelan, which barely reaches $2.72, as a result of this week’s exchange rate increase, which reached 294 thousand bolivars per dollar.
Last July, the Observatory of Labor Conflict and Union Management, an organization that belongs to the Institute of Higher Union Studies (INAESIN), published63 its latest report on labor conflicts in Venezuela so far this year, 2020, with emphasis on the labor conflict caused by the COVID-19 pandemic.
To date, there have been 559 labor disputes in Venezuela, 84.4% of which have involved public sector workers. Most of the demands expressed by the workers are related to wage claims (35.4%), improvements in working conditions (25%), and the violation of personal freedom, as well as the lack of delivery of fuel to the workers (16.6%).
The oil workers, who have been through the years a national reference on the issue of labor claims, have staged numerous demonstrations this week, despite the pandemic and mobility restrictions, to demand improvements in their working conditions.
The workers, who strongly question the presidency of the FUTPV for being complicit in the dismantling of its economic and social benefits, remain mobilized, demanding that PDVSA authorities immediately discuss, and reinstate the Petroleum Collective Bargaining Agreement, the payment of the Pension Fund and the delivery of the financial statements of the 2016-2019 pension fund, the reestablishment of medical services and of the Contributive System for the Health Protection (SICOPROSA), the cessation of the labor repression and the freedom for the workers imprisoned for joining the protests.
A large oil spill64 occurred last weekend, affecting greatly the coasts of the state of Falcón (west of the country); apparently, the spill happened because of the overflowing of the hydrocarbon lagoon of the El Palito refinery, in the neighboring Carabobo state.
To date, no authority from PDVSA or the Ministry of Petroleum has reported on the origin of the spill, nor has taken any collection and remediation actions, so the oil has spread along the entire coastline and has moved more than 4 km, affecting Morrocoy National Park.
Numerous environmental groups have spoken out about the ecological impact this oil spill will have on the flora and fauna of the Morrocoy National Park, where the red mangrove has been the most affected species so far; this is a situation that puts at risk the marine life that depends on this species to survive.
These environmental groups demand Petróleos de Venezuela to apply the corresponding protocols for these situations, since the oil collection actions are carried out by members of the hotel guild and inns in the area, together with fishermen, who do not have the appropriate equipment for handling the oil, and do not know where the oil waste will be deposited.
Three other oil spills were reported this week by communities in the eastern part of the country, specifically in the towns of San Tomé65 and Barbacoa66, and in the vicinity of the town of Dación.
Oil workers at the Guara 14 station in San Tomé reported a new oil spill that is affecting large natural areas of Anzoátegui state near where the event occurred, causing a huge oil lagoon that has affected wildlife and soil conditions.
An unofficial investigation shows that the main cause of this event is a failure in the crude oil storage tanks, due to the lack of preventive maintenance of the oil facilities. It was only days after the environmental accident that PDVSA sent crews to clean and sanitize the affected areas.
The second event occurred in the south of Anzoátegui state, in the José Gregorio Monagas municipality near the town of Dación, where the spill of waste from the oil industry has affected the crops in the area due to the waters of the Aribí River, where the waste is presumed to have been dumped.
The inhabitants of the area have filed complaints with PDVSA, who have answered that the responsibility lies with the Indian-Venezuelan Mixed Company (a PDVSA subsidiary); however, people is asking the state oil company to enforce the legal, environmental, social, technical, and technological obligations to the companies with which it establishes commercial relations.
The danger that the environmental damage will spread is latent, because as rains increase, the waste will advance and continue to affect new areas. No authority has come forward in the area, not even to report on the situation.
The third oil spill that occurred in Anzoátegui State was in the town of Barbacoa, was the result of the collapse of the 16 Poliduct, which sends LNG from the Santa Bárbara plant to the José Antonio Anzoátegui Complex in the north of the state, affecting farmland. This is the third oil spill reported in less than a week in the eastern part of the country, while the Venezuelan state oil company has not made any statements on the matter.
These events, which caused damage to the environment and the communities, besides being clear evidence of the operational and management problems of PDVSA or its mixed companies (such as the case of the Indo-Venezuelan company67), above all reflect the degree of disarticulation of both PDVSA and the government authorities. They do not act, they do not inform and they do not assume their responsibility, which -according to strict existing Venezuelan environmental legislation- is of a criminal nature. No authority in the oil sector has come out to report on the causes and dimensions of these spills, nor was the hydrocarbon collected, nor was a solution presented to the environmental damage. The responsible authorities have not acted. At the time of publication of this Oil Report, the spills are still going on, without anyone, beyond the communities and environmental groups, seeming to care.
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