Argentina returns to oil price controls: Update

Argentina's government decided to unilaterally implement a three-month freeze on fuel and crude prices, applying a decades-old shortage law to implement the measure that President Mauricio Macri unveiled yesterday as part of a battery of emergency economic moves.

The decision to take unilateral action came a few hours after the government had said it would meet with oil companies to negotiate the price freeze instead. That assertion was itself a backpedaling from initial hints of unilateral measures.

A resolution on the price caps will be published in the country's official bulletin tomorrow, the energy secretariat confirmed.

Argentina has a long record of controlling oil prices that are out of step with international levels. Macri took office in 2015 on a platform of pro-market reforms.

Following Macri's announcement yesterday, oil firms received a government message saying that pump prices as well as crude prices would be frozen, setting as a reference a Brent price of $59/bl and a currency exchange rate of 45.19 pesos per US dollar that were in effect on 9 August. It is unclear whether the impending resolution will use those same baseline figures.

Confusion over how the new price controls would be implemented has reigned since yesterday. Following a meeting early today, a cabinet spokesman said the measure would not be implemented through a resolution.

Oil industry executives had been skeptical of the success of any negotiation, as Argentina's state-controlled YPF insisted it could not agree to a price freeze without potentially facing legal trouble from its minority shareholders. Although 51pc of Argentina's largest oil firm is controlled by the state, the balance is traded in the stock market.

"You can explain to shareholders that you'll increase prices less than the (currency) devaluation or inflation as part of a market strategy, but you cannot tell them you will not increase prices at all," explained a YPF employee.

The back-and-forth over tactics appeared to reflect reluctance among senior government officials to resort to a legacy price-setting law that runs counter to the Macri administration's market orientation. The government has been forced to abandon that stance in an effort to stem the rout of the currency and stock market in the aftermath of a surprisingly poor showing in an 11 August primary election signaling a potential return to populism in a 27 October presidential election. The peso strengthened and Argentinian stocks rose today for the first time this week.

Along with the oil price freeze, Macri also announced a temporary income tax cut and a bonus for middle-income workers, among other measures.

Oil companies that are limited to production and are not vertically integrated with refining in Argentina, such as domestic firms Pluspetrol and Tecpetrol, are most vulnerable to the economic effects of a crude price freeze. But even YPF that is present across the oil supply chain is faced with potential losses.

YPF's breakeven price for Vaca Muerta shale production is around $40/bl. If forced to use an exchange rate of 45 pesos per dollar, the implicit price would be around $44/bl, according to the calculations of an oil sector official.