Argentina authorizes first hike in fuel prices in nine months

Buenos Aires — Argentina's government authorized YPF, the country's biggest refiner, to hike diesel and gasoline pump prices by an average of 4.5% nationwide effective Aug. 19, the first increase in nine months, a move that is expected to help the state-backed company revive oil production after a slump during a coronavirus-induced lockdown of the economy.

A source at YPF, who asked not to be named, confirmed the decision by WhatsApp.

Pump prices have been subject to government control since August 2019, with only a couple of increases allowed since then as the country struggles to reel in 40%-plus inflation. The latest hike was made on December 1, 2019.

YPF, the country's biggest oil producer and refiner, has been pressing for government approval to increase prices since the start of August. It has a 55% share of diesel and gasoline sales, making it a price setter for the other refiners: Shell-backed Raizen, BP-backed Pan American Energy and Trafigura.

Before this hike, the average price of 95 RON gasoline was 79 cents/liter, or 54% below the global average of $1.22/liter, since May, according to globalpetrolprices.com. Over the same period, diesel prices averaged 72 cents/liter, or 53% under the global average of $1.10/liter, the data show.

Shortages

On Aug. 5, YPF Chairman Guillermo Nieslen said in a radio interview that prices were "significantly" lower than the levels the company needs to invest in its upstream and downstream businesses. He warned that without higher pump prices the country would run the risk of shortages.

YPF gets most of its cash flow for investments from its sales at the pump, which plummeted at the start of a lockdown introduced to combat the spread of the novel coronavirus. The shutdown, which began March 20, slashed its second-quarter diesel sales by 20% year on year, while gasoline demand dived 54% and jet fuel consumption tumbled by 93%, according to company data.

A loosening of the shutdown has revived road traffic, but jet fuel demand is expected to remain weak until international borders are reopened and domestic flights allowed to resume. The government has not provided clear guidance on when this could happen, only that the lockdown will remain in effect until Aug. 30.

"Demand for refined products is starting to recover," YPF CEO Sergio Affronti said in an Aug. 11 conference call with investors, adding that this should help provide the cash flow for well drilling and completion activities to resume in the short term.

He also mentioned the need for higher pump prices to help the company rebuild oil production, which declined 10.3% to 200,800 b/d in Q2 from 224,000 b/d in the same quarter of 2019.

"We believe our prices need some adjustment to strengthen our cash generation capacity," Affronti said, adding that this is "critical to reverse the production decline."

Fragile economy

Even so, Affronti said the company cannot raise pump prices too much because of the "delicate" economy.

The economy is expected to contract 12.5% this year, perhaps the worst on record, before recovering by 5.6% in 2021, according to a late July survey of economists by the Argentinian central bank. And while inflation should slow to 39.5% this year from 54% in 2019, it is expected to edge back up to 46.7% in 2021, the survey found.

Even so, the government has come out in support of increasing prices and taking other measures to promote investment in the oil sector, with Economy Minister Martin Guzman saying during a radio interview in the week that ended Aug. 14 that energy development was a strategic priority.