Mar 24, 2020
A price war between global oil giants is leaving many producers in Latin America struggling to cover production costs, increasing the chances of investment cuts and delays in the coming months.
Global oil price benchmarks are experiencing their sharpest declines in decades, in a perfect storm, with declining demand in the face of the coronavirus pandemic and increased supply after Russia and Saudi Arabia have not reached an agreement to reduce production.
US oil (WTI) fell 29% last week, its biggest decline since the 1991 Gulf War.
In the past two weeks, the US market reference has lost about half of its value, while Brent has dropped about 40%.
Heavy oil from Latin America, mainly indexed to these reference indexes and the Maya type, from Mexico, accumulated a drop of 42% in the same period, leaving some types with single digit prices, according to independent calculations.
Experts and analysts expect global demand to contract by at least 10% this year.
“There will be no rapid recovery from these low prices,” said a Latin American oil trader, who asked not to be named.
“Now we are seeing the destruction of demand and we all know what comes after that: layoffs, cuts in production and deferred investments.”
The average cost of extracting Latin America for a barrel of oil is close to $ 13 since 2019, excluding indirect costs and taxes, according to a Reuters calculation based on data provided by Colombian Ecopetrol, Ecuadorian Petroecuador, Mexican Pemex and Brazilian Petrobras , as well as specialists accompanying the Venezuelan PDVSA.
Until last month, these essential costs were covered by sales prices.
But the price war is drying up spot sales of heavy types in Latin America, knocking down regional benchmarks like Mexico’s Maya, while dragging Venezuela’s main oil, Merey, to just $ 8 a barrel last week.
With fuel demand in the United States – Latin America’s main oil market – declining as the country goes into isolation, the appetite for heavy oil from US Gulf refineries has declined.
On March 18, Maya Mexico dropped to its lowest level in 18 years, with sales on the U.S. Gulf Coast closing below $ 13 a barrel, according to S&P Global Platts, creating panic among neighbors.
Sending oil from Latin America to more distant markets, such as Asia, has provided some outlet for oil, but if freight rates rise amid growing demand for floating storage, that avenue could also close in the coming months, said traders.
With few options on the table, more expensive production operations can be forced to reduce production or shut down.
This may include offshore developments, such as some deep and shallow fields in Brazil, where production costs last year were two to five times higher than the $ 5.6 per barrel recorded in the pre-salt, according to Petrobras data.
Also at risk are extra heavy oil that needs to be improved, such as Venezuela’s production from its Orinoco Belt joint ventures and shale projects, like many in Argentina.
“Petrobras should have a slower development in its investments, while Ecopetrol and YPF (from Argentina) would face difficulties, as they have an equilibrium price of 30 dollars per barrel and 40 dollars per barrel, respectively,” said the UBS investments, in a note to customers.