Flooded with oil

We receive with apparent relief the decision of OPEC + to reduce crude production by 9.7 million barrels per day (mbd) from May 1, 2020, to generate a stimulus to prices, which have fallen 32% in the last month. However, the cut will not be enough to mitigate the impact of low demand and excess supply that floods the market.

In other circumstances, a cut of this size would have triggered oil prices, but this is not the case because the markets are skeptical. Despite being a late decision and oil prices will not recover as quickly, the deal may help set a floor low of $ 20 a barrel.

The agreement could not reassure the markets, in which fear for the future of oil demand on behalf of Covid-19 overcomes the optimism that a supply-demand balance could stabilize in the medium term. OPEC + estimates that the world will consume an average of 92.82 mbd this year, 6.8% less than in 2019.

In this sense, the International Energy Agency (IEA) pointed out that with the affectation to 187 nations and the halting of the productive apparatuses, the world demand for oil is expected to fall by an average of 9.3 mbd in 2020, with minimum peaks in the May and June on the order of 25 and 30 mbd.

The production cut agreement to compensate for the sharp drop in demand will not be enough and there will surely be additional cuts that have been pre-agreed for an additional 7.0 mbd where countries such as the US, Canada and others in the G20 must place the highest quotas.

However, the magnitude of the imbalance at this time does not allow the reaction of the price of crude oil in the short term and it would be expected that additional strategies such as increasing the strategic reserves of countries that have storage capacity such as China, South Korea, and The US would allow an additional reduction of 2 mbd in the next 60 days, which together could make the price of a barrel react perhaps in the middle of 3Q-2020.

Emerging economies such as Colombia, which depend on hydrocarbon exports to a great extent, will suffer from the reduction in their currencies due to the low prices of crude oil, and will increase the value of their imports due to the increase in the price of the dollar, which for This will of course affect the fiscal deficit.

However, to this harsh situation should not be added the loss of production levels that exist today, the country must maintain production at a level close to 890,000 bp by 2020. This is a greater challenge if the price of the Crude remains below US $ 30, an area in which many heavy crude projects are not viable due to the high production and transportation costs they demand.

Nor should we leave out of this perspective the search for the oil and gas reserves that the country requires adding to the portfolio, to remove the phantom of importation in the medium term of a decade that flies by. The ANH must be very creative in generating formulas and scenarios that allow exploratory activity to be encouraged even in these stormy times in the sector.

Carlos Alberto Leal Niño

President of the Board of Directors of Acipet

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