Argentina returns to negotiated crude, fuel prices

Argentina has yet to determine how it will implement a three-month freeze on fuel and crude prices that President Mauricio Macri unveiled yesterday as part of a battery of emergency economic measures.

The government said it would meet with oil companies to reach a negotiated agreement on the freeze. Earlier, it seemed the government would act unilaterally.

Argentina has a long record of imposing negotiated oil prices that are out of step with international levels.

Following Macri's announcement, oil firms received a message from the government 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 negotiations will begin from that baseline or if the government and company officials will begin negotiating from scratch.

"There was no reversal in the freeze on fuel prices. What happened is that it will not be through a resolution," said education secretary Alejandro Finocchiaro, who was the government's designated spokesperson at the end of a cabinet meeting today.

Oil company executives are still unclear on how a negotiation will be carried out or how the freeze will be instituted if it does not come through a government order.

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 state-controlled 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 from an oil sector official.

The uncertainty coincides with a mellowing of the currency and stock markets that collapsed after an 11 August electoral primary signaling a potential return to populism in a 27 October presidential election.

Macri held a telephone call yesterday with Alberto Fernandez, the main opposition presidential candidate who obtained a 16-point advantage in the open primary. Fernandez is running with former president Cristina Fernandez de Kirchner as his vice president. Their platform points to a revival of state intervention in the economy if Macri is not re-elected, which now seems likely. His four-year term, which was supposed to usher in market-oriented policies, ends on 10 December.

State intervention was the norm during Cristina Fernandez's two terms as president from 2007 to 2015. She is not related to her running mate.

Alberto Fernandez insisted yesterday that he intended to fulfill the country's debt obligations, although he has vowed to renegotiate the terms of a $57bn standby credit line Macri negotiated with the International Monetary Fund last year.

Argentina's main crude producers are YPF, BP-Bridas joint venture Pan American Energy, Pluspetrol, Tecpetrol, China's Sinopec and Mexico's Vista.

YPF is the country's largest refiner followed by Raizen, a 50:50 joint venture between Shell and Brazilian conglomerate Cosan, and Axion, a 50:50 joint venture between BP and Bridas.