"This prognosos is good for us except for the critics who insist that the heavens will fall."
"This prognosos is good for us except for the critics who insist that the heavens will fall."
Just before Christmas, the Duterte administration decided to proceed with the programmed increase in the oil excise tax by January in view of the expected drop in oil prices. The administration stood its ground in spite of the strident calls for its deferment, if not outright recall, by Duterte critics and a number of personalities in and out of government who should know better. These peope however insisted that the drop was unsustainable and that sooner rather than later prices would spike again, to our utter consternation. These guys predicted that the inflation rate would increase, prices of basic goods and services would soar, investments would dry up and the country’s growth rate would barely move up, if at all.
Well, the drop continues. Inflation has been tempered with the December rate dropping from a high of 6.2 percent in November to just about 5.1 percent. That huge drop brought the annualized inflation rate for 2018 to a modest 5.2 percent – higher than the 4.4 percent forecast of the country’s economic managers but way, way below the critics’ 6.8-to-7-percent prediction.
And what brought this to such a level? By all indications, it is the dramatic drop in oil prices. So, the question now is: will the oil prices hold? Again, by all indications, it will.
As of this week, all crude benchmarks point to a lowering of prices despite the December 7 deal among OPEC and non-OPEC countries to cut oil supply by 1.2 million barrels per day for the first six months of 2019. The OPEC members pledged to cut 800,000 barrels per day with non-OPEC countries taking up the rest. That arrangement has not bothered the markets with Brent futures holding at $53 per barrel and West Texas at a trough of $45 per barrel. Analysts predict that it will take more than that December pledge to move the markets as crude supply remains in surplus and it will take time before the same can be mopped up to such levels as will allow the agreed supply cut to hold.
A number of factors stand in the way of the December agreement being implemented in full. First, OPEC members are not as judicious in their production pledges as they make it appear to the markets. Many of them are in the throes of budgetary constraints (Iran, Nigeria and Venezuela being the most affected) which translates into social chaos if the cash flow from a volatile oil market does not stabilize. It should be noted that both Iran and Venezuela are also the subject of sanctions by the major powers which constrain their possible courses of action at any time.
Second, OPEC itself is on the verge of dysfunction. Aside from the ones mentioned earlier, the internal problems in a number of their members including Libya and Iraq makes it impossible to even consider the output cuts as implementable. Then, some members are considering withdrawing from the group with Qatar finally bidding goodbye right after the pledging session last December in Vienna.
Finally, with the US becoming the largest oil producer in the world and therefore less vulnerable to movements in the oil markets, there is no saying how it will now play the global market. It can chose to slow down production and go with the OPEC/non-OPEC agreement, thus stabilizing prices with a reduced supply within the quarter. Or, it can chose to bring the “problematic” OPEC members to their knees by flooding the world with additional oil thus lowering prices and dis-empowering and targeting such countries as Iran and Venezuela for possible regime change. After all, with President Trump facing all kinds of problems at home, he may just decide to do some tweaking abroad which he just did with that decision to withdraw US troops from Syria which caused a mini-crisis within his own Cabinet.
In the end, if we go by most oil market watchers, the prognosis is for most of 2019 there will remain a small surplus of around 500,000 to 800,000 barrels per day. That is a surplus that will hold prices relatively low which is good news for most of us—except to the critics who continue to insist that the heavens will fall with the implementation of the programmed increase in the excise tax for oil.