The week ahead in LatAm energy: What you need to know

As the coronavirus pandemic continues in Latin America and around the world, the region is on tenterhooks awaiting news of a possible oil production deal between Saudi Arabia and Russia.

Oil prices rallied last week after US President Donald Trump said the two nations were close to reaching a deal to cut oil production that would be closed “in a few days.” News on this front seems imminent, and on Monday media were reporting Russian sources as saying a deal as "very close," although it is not clear whether an agreement would bring prices anywhere close to pre-pandemic levels. 

Demand for crude oil and fuels has been decimated by the health crisis, which has been reflected in adjusted outlooks for the rest of the year. A more likely consequence of a successful deal would be for oil prices to recover somewhat and then remain at lower levels than those in the past few years. 

Most observers seem to agree on a US$35/b target, which is the level at which markets settled last week after the announcement. However, no Russia-Saudi deal could mean prices would tend to hover around the US$20/b mark.

Either of these price levels would threaten a great deal of Latin America’s oil production, especially some of its most promising growth prospects, such as Brazil’s pre-salt region and Argentina’s Vaca Muerta formation. US$35/b, however, would be much manageable, depending how long prices stayed at those levels.

Still in lockdown?

Latin American nations under lockdown are expected to update their timetables and decide whether measures will continue, intensify or loosen this week. While Chile and Colombia have enacted limited lockdowns in specific urban regions, Argentina, Peru and Paraguay enacted nationwide measures in early March.

The two biggest economies in the region, Mexico and Brazil, were slower to react, with Mexico putting in place some loosely defined country-wide lockdown measures last week until April 30. Meanwhile, Brazilian President Jair Bolsonaro continues to resist any measure to curb the spread of COVID-19, even lashing out at local leaders that have advised the public to stay at home.

The worst affected nations in the region this week include Brazil (11,494 confirmed cases of COVID-19 as of Monday), Chile (4,815) and Ecuador (3,646), while countries such as Peru (2,281), Mexico (2,143), Panama (1,988), Dominican Republic (1,828), Argentina (1,554), Colombia (1,485), Costa Rica (454) and Uruguay (406) continue to see numbers rising.

Testing capabilities must also be accounted for to have an accurate picture. Chile (54,864) and Brazil (54,824) had conducted the most tests in the region as of Monday, followed by Colombia (23,706), Peru (19,410), Mexico (18,034), Ecuador (12,386), Panama (9,749), Argentina (8,488), Uruguay (5,208), Costa Rica (5,098) and Dominican Republic (4,542). These numbers suggest the actual numbers of infected people in each country may be very different from officially confirmed cases. 

Whether countries decide to remain in lockdown or tighten measures will have a big impact on the energy sector, as power demand and especially fuel purchases have plummeted across the region, threatening cash flows and upending the industry’s chain of payments. While this most evidently affects downstream and distribution, it will have ripple effects across the value chain, as many upstream producers are left without buyers for their output and generation companies see their cash flows dwindle.

Venezuela: On the verge of a breakthrough?

Lastly, this week we await further news on Venezuela and its ongoing standoff with the US government. Donald Trump’s administration is deploying a carrot-and-stick strategy as it threatens to incarcerate associates of President Nicolás Maduro and deploy ships close to the country's coast, while proposing a framework to call for new elections peacefully at the same time.

Venezuela will be impoverished further by the oil price rout, and some believe the regime is coming to an end. Across Latin America, leaders are deciding whether to side with the US, Maduro or remain impartial.

Probably the most influential position is that of neighboring Colombia, which relies heavily on US economic aid to wage a long-standing war on drugs. Members of Colombia's congress are warning the government of Iván Duque not to show support for US military action, and pressure on the president to clarify Colombia's position is expected to grow in the coming days. Without explicit regional support, US action against Venezuela could fail to achieve the necessary credibility.

With additional reporting by Michael Place