Nov 6 / Victor Arduin

Energy Weekly Report - 2023 11 06

  Back to main blog page
"The lack of gasoline and diesel supply at the country's gas stations is a reflection of the economic crisis and price controls. Despite producing more oil than its domestic demand, the country faces serious issues in its energy complex."

Fuel crisis in Argentina puts price controls in check

  • After the expiration of the “Precios Justos” program, gasoline and diesel prices saw an increase of approximately 10% on November 1st.
  • Price controls imposed by the Argentine government to curb inflation are cited as the primary cause of fuel shortages in the country.
  • The situation is currently returning to normal, but the risk of fuel shortages are still be possible in the coming months.

Introduction

The lack of gasoline and diesel supply at the country's gas stations is a reflection of the economic crisis and price controls. Despite producing more oil than its domestic demand, the country faces serious issues in its energy complex.

Furthermore, in an attempt to curb inflation, the government, through its mixed-capital company, the oil company YPF, sells oil barrels to the country's refineries at a price below the international market rate. This results in a "cheapening" of refined products, even if done artificially.

One of the challenges is that it's not enough to possess oil; it needs to undergo a refining process to convert it into products ready to meet market demands. In this regard, Argentina's refineries production are not enough, so fuel imports are necessary to satisfy the country’s consumption.

However, purchasing finished products from foreign suppliers requires dollars, as a significant portion of energy commodities are traded in the US currency, which is scarce in Argentina due to its strict exchange controls.

So, how can the portion of the market that cannot be satisfied with domestic fuel production be served? The answer is imports. However, how can this operation be made viable if price controls remove the market incentives to bring fuels from outside of Argentina?


Image 1: Gasoline Prices in the Region (USD per liter)

Source: Global Petrol Prices (Octane-95, 30-Oct-2023)

Gasoline imports increased substantially in November

During the first half of the year, the drop in oil prices helped "mask" energy costs in Argentina. However, after OPEC+ measures restricted the market and raised the price of a barrel of oil, the government had to intervene to limit the cost for domestic consumers.

Since August, an agreement between oil companies and the government had frozen fuel prices in the country, effective until October 31st. This measure succeeded in keeping prices artificially low for a period but created a market distortion that affected the imports of fuels. Combined with higher-than-expected demand in recent weeks, it resulted in widespread shortages in the country.

Image 2: Inflation Variation & Fuel Prices YoY (%)

Source: INDEC, Surtidores

One of the most attributed reasons for the fuel shortage was the rush to the pumps, caused by the anticipation of fuel price increases after the first round of the presidential election, due to the devaluation of the Argentine peso. Other mentioned reasons included scheduled refinery shutdowns and the lack of dollars in the country, resulting in delays of oil tankers bringing fuel - this is because the ships need to wait for payment to release their cargoes.

Even though the other mentioned causes contribute to the fuel scarcity in Argentina, price control is the central issue. It eliminated the incentive for imports, which declined in September and October (Data illustrated on the chart). The significant volume of gasoline imported in November should alleviate the short-term risk of shortages. However, as long as market distortions persist, risks in the country's energy sector will continue.

Image 3: Gasoline Imports (barrels)

Source: These numbers are from Refinitiv's ship tracking application, and these indicative figures may not correspond to officially published data later on.

Argentina has one of the most "discounted" oil in the world

The main reason the Argentine government is able to keep fuel prices low is by selling its crude oil to domestic refineries at an agreed-upon price of $56 per barrel (referred to as the 'barril criollo'). This is significantly lower than the main international benchmarks, where WTI is around $82 and Brent is approximately $86 on November 3rd.

In contrast, Russia, which faces sanctions from G7 countries, making it more difficult to sell its oil, theoretically undervalues it, sells Urals for over $70 in the international market, above the price ceiling imposed by the United States and its allied countries of $60. Therefore, Argentina's oil accesses the local market at prices lower than those of Western-sanctioned countries.

Image 4: Oil Production - Argentina (thousand bpd)

Source: hEDGEpoint, EIA

It is worth mentioning that Argentina has great potential in the continent for oil exploration.

The Vaca Muerta region, rich in shale oil, is one of the world's leading oil fields and has significantly contributed to the growth of the country's oil production and exports. In this sense, the Neuquén basin plays an important role for the country's economy, capable of draining large quantities of oil and gas.

In Summary

During this week, there have been increases in fuel prices, shortly after the end of the agreement between the government and the country's oil companies. Because of this, the government delayed the increase in taxes on fuels to seek to stabilize the market without major costs to consumers.

For now, the situation seems to be normalizing, mainly due to the actions of the last few days, which include the arrival of 10 oil tankers loaded with fuels for the country. However, lines at gas stations due to lack of fuel could be repeated between the end of this year and the beginning of the next if the country continues with the price control policy. And this is a point to be monitored closely, especially at this time of potential recovery of agricultural crops after La Niña.

Weekly Report — Energy

Written by Victor Arduin
[email protected]
Reviewed by Alef Dias
[email protected]
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

To access this report, you need to be a subscriber.