In March 2019, Venezuela's crude oil production (excluding condensate) averaged 840,000 barrels per day (b/d), down from 1.1 million b/d in February, according to estimates in the U.S. Energy Information Administration's (EIA) April 2019 Short-Term Energy Outlook(STEO, Figure 1). This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought Venezuela's state oil company, Petróleos de Venezuela, S.A.'s (PdVSA), operations to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines. Venezuela's production decreased by an average of 33,000 b/d each month in 2018, and the rate of decline accelerated to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years, with average 2018 imports the lowest since 1989. However, there may be upward pressure on the prices of other crude oils imported into the United States.
Venezuela's production is expected to continue decreasing in 2019 and declines may accelerate as sanctions-related deadlines approach. These deadlines include provisions that third-party entities that use the U.S. financial system must cease transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies will likely contribute to a further step-level decrease in production.
Additionally, U.S. sanctions, as outlined in the January 25, 2019, Executive Order 13857, immediately banned exporting petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—from the United States to Venezuela and required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. The imposition of these sanctions has already affected oil trade between the United States and Venezuela in both directions. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States. India, China, and some European countries continued to take Venezuela's crude oil, according to data published by ClipperData Inc., while the destinations of some vessels carrying Venezuelan crude oil remain unknown (Figure 2). Venezuela is likely keeping some crude oil cargoes intended for exports in floating storage until it finds buyers for the cargoes.
A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils produced using complex processing units, or upgraders, to upgrade the crude oil before it is sent via pipeline to domestic refineries or export terminals. These upgraders were shut down in March during the power outages. If the crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, the heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.
In 2019, Venezuela's crude oil production decline has resulted from a combination of disruptions and lost capacity. EIA differentiates among voluntary production reductions; unplanned production outages, or disruptions; and expected declines in production. For the Organization of the Petroleum Exporting Countries (OPEC), voluntary cutbacks count toward spare capacity. EIA defines spare crude oil production capacity as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices.
For all countries, involuntary disruptions do not count as spare capacity. Events that could cause a disruption include, but are not limited to, sanctions, armed conflict, labor actions, natural disasters, or unplanned maintenance. In contrast, EIA considers production capacity declines that result from irreparable damage to be lost capacity and not a disruption. EIA no longer counts the lost production because it is very unlikely that it could return within one year and add to global supplies.
Because the power outages in Venezuela resulted from a lack of maintenance of the electricity grid, associated crude oil production declines are considered lost production capacity resulting from mismanagement. As of the April 2019 STEO, EIA includes the portion of Venezuela's production decline that resulted from U.S. sanctions—approximately 100,000 b/d beginning in February—as a disruption (Figure 3). If sanctions persist, the country will likely be unable to restart the disrupted portion of production and the 100,000 b/d will become lost capacity. Although EIA does not forecast unplanned production outages, its forecast for OPEC production totals will reflect declines in Venezuelan production.
As Venezuelan crude oil has come off the global market and as other countries—including the United States—have produced more light, sweet crude oil, the price discount of heavy, sour crudes has narrowed. U.S. refineries are among the most complex in the world, making them well-suited for the physical properties of Venezuelan crude oil (with high sulfur content and heavier API gravity). Heavier, more sour crude oil is typically priced lower than other crude oils because of differences in crude oil quality. Mars—a medium, sour crude oil produced in the U.S. Federal Offshore Gulf of Mexico—traded at a five-year (2014–18) average discount to Light Louisiana Sweet (LLS) of $3.94 per barrel (b). The Mars-LLS discount has narrowed in 2019, averaging $0.62/b in March, and even reached parity on March 27 (Figure 4).
Venezuela's crude oil production is forecasted to continue to fall through at least the end of 2020, reflecting an expectation of further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what is currently included would change this forecast.
U.S. average regular gasoline and diesel fuel prices increase
The U.S. average regular gasoline retail price increased more than 1 cent from a week ago to $2.84 per gallon on April 22, more than 4 cents higher than the same time last year. The Rocky Mountain price increased nearly 12 cents to $2.76 per gallon, the West Coast price rose 5 cents to $3.63 per gallon, and the East Coast price increased nearly 2 cents to $2.73 per gallon. The Midwest price decreased more than 1 cent to $2.72 per gallon, and the Gulf Coast price fell slightly, remaining virtually unchanged at $2.54 per gallon.
The U.S. average diesel fuel price increased nearly 3 cents to $3.15 per gallon on April 22, more than 1 cent higher than the same time last year. The Rocky Mountain price increased 6 cents to $3.14 per gallon, the West Coast price increased nearly 5 cents to $3.70 per gallon, the Midwest price increased more than 3 cents to $3.04 per gallon, and the East Coast and Gulf Coast prices increased 2 cents to $3.17 per gallon and $2.92 per gallon, respectively.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.0 million barrels last week to 57.8 million barrels as of April 19, 2019, 10.6 million barrels (22.5%) greater than the five-year (2014-2018) average inventory levels for this same time of year. Midwest inventories increased by 0.6 million barrels, while East Coast and Gulf Coast inventories each increased by 0.3 million barrels. Rocky Mountain/West Coast inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 10.4% of total propane/propylene inventories.
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Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b
Headlines of the week
Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.
WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.
Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).
On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.
Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.
Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.
Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.
Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.
The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.
Residential heating fuel prices decrease
As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.
Headline crude prices for the week beginning 16 March 2020 – Brent: US$30/b; WTI: US$28/b
Headlines of the week