Argentina eases oil price freeze, levies crude subsidy

Argentina eased the scope of an oil price freeze by excluding the wholesale fuel market and slightly improving compensation for crude producers, partly through a new subsidy.

The crisis-mode government of President Mauricio Macri imposed a three-month freeze on motor fuel and crude prices through an emergency decree last month following a sharp depreciation of the local currency.

The wholesale market involves 17pc of the total volume of motor fuel sold, according to the energy secretariat. When other types of fuels that were not included in the price freeze—including jet fuel, marine fuel and lubricants, among others—are taken into account, this means 47pc of the total market by volume is excluded from the freeze.

The new measure leaves intact a retail price cap, effectively leaving pump prices where they are until after a closely watched presidential election on 27 October.

Under the terms of the original price freeze, crude sales between producers and refiners must be conducted at the same price that had been agreed to before 9 August, setting as a reference a Brent price of $59/bl. Although that reference price remains the same, the currency exchange rate for crude transactions was adjusted to 46.69 pesos per US dollar, compared to a previous Ps45.19/USD.

At the same time, the government instituted a 30-day subsidy for crude producers of Ps2.81/USD, a move that effectively takes the exchange rate to Ps49.50/USD and implies a 9.5pc increase in the domestic crude price.

The exchange rate in the wholesale fuel market is currently at Ps55.35/USD.

The fiscal cost of the subsidy will be Ps1.55bn ($28mn), the economy ministry said today.

Oil companies have been in talks with government officials to try to limit the duration of the freeze. While they are not satisfied with its continuation, the new measures improve their bottom line. There is particular widespread concern about how companies will remove the measure without sparking a steep price increase from one day to the next.

Macri's business-oriented administration that is winding down its four-year term implemented the freeze shortly after the main opposition presidential candidate Alberto Fernandez scored an unexpectedly wide margin of victory in an 11 August national primary that is considered a harbinger of the formal election next month.

The surprising primary outcome triggered a sharp depreciation of the peso and a broad sell-off of Argentinian assets as investors fear that Fernandez, who is running with former president Cristina Fernandez de Kirchner as his vice presidential candidate, will return Argentina to state-driven economic policies.