Argentina Extends Diesel, Gasoline Frice Freeze

(Argus, 30.Jan.2020) — Argentina’s government said Thursday it has extended a freeze on diesel and gasoline prices until the end of February, as it tries to reel in one of the highest inflation rates in the world.

The freeze had been due to end Friday, but the country’s president, Alberto Fernandez, issued a decree ordering it to continue until February 29, saying this is necessary to reduce inflation. The inflation rate has more than doubled over the past two years to 53.8% at the end of 2019, according to data from Indec, the state statistics agency, as Argentina drops deeper into an economic and financial crisis.

After a run on the peso last August, the country’s then president, Mauricio Macri, implemented the freeze to limit the impact of a weaker exchange rate on inflation. The cap ran from mid-August to mid-November, when it was lifted. However, refiners were unable to increase prices from one day to the next to make up for a 20% lag with international references because of the potential impact on sales, and so they only were able to narrow the margin to 15%, according to analysts.

In December, state-backed YPF, the country’s biggest energy company, was going to increase prices by 10%, effective January 1. But Fernandez asked for only half the increase and then told Guillermo Nielsen, who he had appointed chairman of YPF only a few days before, to halt the increase completely. The other refiners — Shell-backed Raizen, BP-backed Axion, and Trafigura — had to follow suit because YPF is the market leader with a 55% share of diesel and gasoline sales.

IT MAY TAKE A YEAR

Fernandez went on to ask oil executives in a January 16 meeting for proposals on how to ease out of the freeze, suggesting that it could be done over the course of 2020.

In a subsequent interview on January 26 with C5N, a local news network, the president called on companies across all sectors to be “responsible” with prices. He said he doesn’t want to “indefinitely freeze the price of fuels,” but warned that they can’t be raised “just for fun” because that will “affect all prices,” and thus slow efforts to reduce inflation.

IMPACT ON PRODUCTION

The price freeze has cut the price of crude to less than $50/b, according to market estimates. That is below the $58/b for Brent, the international reference price followed in Argentina, and this is squeezing profits given that breakeven prices in Vaca Muerta, a huge shale play that is driving production growth, are running between $40/b and $45/b.

As a result, the number of frac stages in the play fell to 470 in December from 529 in November, according to data compiled by Houston-based services company NCS Multistage. This is threatening to slow production growth from Vaca Muerta, which led a 3.6% increase in overall oil production to 514,002 b/d in November from 496,009 b/d a year earlier, according to Energy Secretariat data.

To revive investment, the government is preparing a bill designed to provide stable conditions for the sector.

“We are working on the hydrocarbons law to be able to provide predictability, establishing clear and equal rules for all,” Energy Secretary Sergio Lanziani said in a statement late Wednesday after meeting with Sean Rooney, head of Shell Argentina, a major investor in Vaca Muerta.

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