The prices of the OPEC basket collapsed. Wednesday’s closing price of its basket of crudes was $16.87 a barrel, $6 below Wednesday’ (April 1st) price, a 67% drop from the price before the last OPEC+ meeting.
At the close of the European markets, Brent oil traded at $30 a barrel and WTI at $25.58 a barrel, both up 16% and 21%, respectively, from Wednesday’s price, in reaction to the call made this Thursday morning by the Kingdom of Saudi Arabia to convene an urgent OPEC and OPEC+ meeting, as well as other producing countries, with the aim of reaching an agreement to cut production to stabilize the oil market, as well as the talks between the major oil producers (United States, Russia and Saudi Arabia), was promoted by US President D. Trump.
Earlier this Thursday morning, the WTI score increased by nearly 35% and the Brent by 47%, after President D. Trump tweeted about a possible cut in oil production of up to “10 million or more” barrels by Saudi Arabia and the Russian Federation (15 million would be said later in another tweet). Trump indicated that Russian President V. Putin spoke with Saudi Prince Mohammed bin Salman, a conversation that was denied by President Putin’s spokesman. However, futures prices, which were already beginning to recover, increased by more than 20%.
The last major OPEC production cut was agreed on in December 2008, in the city of Oran, Algeria, where a 4.5 million barrel cut in OPEC production was reached, allowing the oil market to stabilize a year later and recover the price to $80 a barrel. A cut of 10 million barrels a day, as Trump is demanding, must necessarily include a cut in U.S. production itself.
Meanwhile, Maya crude, the marker of heavy crudes for the Atlantic basin, is now trading at $10 a barrel, affecting the price of all crudes, especially Venezuelan Merey crude.
Several market analysts agree that prices could fall below $20 a barrel, both because of the effects of the coronavirus on the economy, which would cause an estimated 20% drop in oil demand this year, as well as the overproduction of oil that currently floods the market.
Meanwhile, Saudi Aramco appears to be fulfilling its promise to increase production to 12.5 million barrels a day, as indicated by its tanker loading activity with extra oil production.
The Market in “Contango”
The price differential of spot cargoes at the May and November Brent crude futures prices has reached a record $13.45 per barrel, while the WTI six-month differential widened to minus $12.85 per barrel, the highest discount since February 2009.
The market is reflecting the current overproduction of oil and the collapse of demand, which is affecting the fall in future prices, while crude oil inventories, both onshore and floating, are increasing.
At some point in this price fall, the crude oil that is most expensive to produce will begin to leave the market, as well as new investment projects. It seems that the first candidates will be the volumes of shale oil, produced by “fracking” in the USA; Canadian extra-heavy oil, produced from oil sands; the production of deep-water platforms, as well as the production volumes of countries subject to sanctions or with severe economic problems, as is the case of the production of Iran, Venezuela, Libya, and some other African countries, which will not be able to face the fall in their own production due to the decrease in their oil revenues.
Russia’s energy minister stated that the market could return to balance by mid-2021, indicating that this will depend on how long the world’s major economies remain locked in. He estimated that the fair price would be between $45 and $55 per barrel, a price range that would discourage costly projects while allowing demand to grow.
The Chinese Ministry of Health reported 36 new imported cases, for a total of 691 since the beginning of the count, 1,367 asymptomatic cases in addition to the 81,554 reported infections. In its April 1st report, WHO reports new territories with cases of COVID-19 Botswana, Burundi, and Sierra Leone, and also recognizes the importance of addressing the needs of refugees and migrants for the COVID-19 pandemic. The total number of cases globally reaches 823,626 of which 163,000 are registered in the United States. The U.S. Department of Labor reports a new record of unemployment of six million people, double the previous week’s figure of three million, a direct effect of the coronacrash.
Europe discusses financial solidarity in the face of the COVID-19 pandemic crisis. The discussion among the 19 countries of Europe focuses on which financial instrument would be applied to solve the economic effects. Christine Lagarde, the President of the European Central Bank (ECB), proposes the “coronabonos” that would allow the member states of the Eurozone to obtain money from the markets at a low price. This initiative is refuted by the Netherlands and Germany. German Chancellor, Angela Merkel, promotes the use of existing financial instruments, such as the European Stability Mechanism (ESM), emergency funds set up at the end of the eurozone crisis so that countries in financial difficulty can obtain rapid access to liquidity, which would avoid joint debt.
On April 1st, Ecuador will be the largest COVID-19 country in Latin America, with 60 deaths and 1,937 infected. But this figure is not complete, considering that many deaths from the same symptoms of COVID-19 were not confirmed, Dantesque images become viral on social networks, denouncing the abandonment of corpses in the streets and no action by the State
In a press conference from the White House, President Trump, accompanied by the Attorney General of that country, the Secretary of Defense, as well as other members of his cabinet, reported on the deployment of his Navy’s ships near the Venezuelan coast, with the argument of stopping drug trafficking to his country. At the hearing, Joint Chiefs of Staff Chairman, Mark Milley, said there was a “growing threat” that cartels and criminals would try to take advantage of the pandemic to increase their drug shipments to the United States.
This military activity off the Venezuelan coast comes two days after the U.S. Department of Justice accused Maduro of being the head of an alleged “Cartel de los Soles” and offered a $15 million reward for anyone who collaborated in its capture. The United States, moreover, has sanctioned through OFAC the Russian companies, TNK and the marketing subsidiary of Rosneft which, added to the operational problems and the dramatic decrease in oil revenue, both because of the drop in production and the drop in price, will make it very difficult for the government to import gasoline to alleviate the water shortage in the country. PDVSA’s Intervention Commission must move away from worker detentions to focus on trying to reactivate Venezuela’s virtually paralyzed refining system.
Meanwhile, a new blackout is registered in the oil state of Zulia, in the west of the country, which has seen its oil production decrease from 860 MBD at the end of 2013, to 145 MBD at the end of February 2020. This drop in electricity service is added to a series of accidents and fires in operational areas in the east of the country that continue to affect its diminished oil production.