Economy 22-11-2018

Expensive oil abandoned the new Government

Analysts warn that, due to excess supply and the stagnation of world demand (oil), the price of crude oil could fall below the projections with which Colombia made its fiscal accounts for 2019. More pressure for the law of financing?

The Government no longer has that important economic boost with which it began just over 100 days ago, as oil has fallen again strongly and it would not be just a temporary outburst of the market. Everything changed very fast: from the happy accounts to the pessimistic ones.

In August, September and until October 3, the crude quotation presented a strong and consistent valuation, reaching US $ 86 (the highest since 2014). Clearly this rebound in prices fell well at the time, even the Ministry of Finance raised the royalty budget for the 2019-2020 biennium from $ 11.7 trillion to $ 19.2 trillion.

But in the last 40 days, the situation has reversed: Brent, the crude reference used by Colombia, has fallen more than 23% and stands at US $ 64. And although this Wednesday saw an upturn (rising close to 2%), there are structural factors that indicate that the bearish streak would remain or could even worsen. The worst possible scenario is presented: an increase in the supply of crude oil and a weak demand for hydrocarbons.

Until a couple of months ago it was said that the production problems of Iran and Venezuela, together with the cuts made by the Organization of Petroleum Exporting Countries (OPEC), were enough to keep prices above US $ 80.

However, the oversupply returned, as nations such as Saudi Arabia (member of OPEC) instead of lowering production have been increasing. In addition, the United States continues to flood the hydrocarbon market due to its efficient fracking operations that can operate at prices of less than US $ 30 per barrel.

On the other hand, Esteban Espitia, macro analyst of Alianza Valores, explains that "the world demand for crude oil has been weakening due to the risks of economic slowdown that the main powers have: China and India already show signs of less dynamism, and there are fears that next year the United States can lose the thrust that had been presented. "

Espitia adds that "although OPEC will meet in December (the 6th), any cut that they agree should not increase the price in a big way. Because of this, we believe that the price of crude oil should close 2018 at levels similar to the current ones, close to US $ 60 a barrel. And given that both the problems of supply and demand would remain, in 2019 the price could fluctuate between US $ 50 and US $ 60. That is, the government's projections could be around US $ 5 over how the crude is expected to behave next year. "

In effect, an oil for the US $ 50 does not fit the Government's projections: according to the Medium Term Fiscal Framework (MFMP), a document with which the country's accounts are made for the next 10 years, it is expected that Brent averages US $ 62 in 2019. If this assumption is met, the economy should grow 3.5% and the fiscal deficit should stand at 2.4% of GDP next year. In addition, based on these estimates, the Ministry of Finance made the explanatory statement of the financing law that is currently processed in Congress. This document indicates that the country expects to have 2019 and 2020 oil revenues of more than $ 12 billion.

Hit the pocket?

Julio César Vera, president of the Colombian Association of Petroleum Engineers (Acipet), explains that "companies like Ecopetrol are already very well adapted to the oil crashes, so it should be able to give profits even with these prices. However, there could be a reduction in oil revenues: we estimate that for every dollar that oil falls, you can lose $ 50,000 million in revenue per month. In addition, the current price would harm the already weak Colombian oil exploration. "

Vera also explains that "as long as prices stay above US $ 60, it is still profitable to do fracking in Colombia. But clearly these levels slow down the interest of producers (although it is currently suspended by the Council of State).

For his part, Horacio Ayala, former director of the Directorate of National Taxes and Customs (DIAN), warns that "current prices clearly put more pressure on the financing law: there is greater effort to get resources. In addition, we must consider that this project proposes reductions to taxes on companies, including oil companies. Personally, I do not think it is necessary, because in Colombia there are many exemptions, so in reality they do not pay as many taxes as the guilds warn. "

Although the price of oil is at the limit of the projections, there are no good prospects for the rest of the year and 2019. Therefore, the discussions by the financing law of the coming weeks could be even more heated. Especially after the rapporteurs of the bill agreed on Wednesday to remove the articles that proposed to tax 80% of the products of the family basket with a VAT rate of 18%. Initiative with which it was expected a collection of more than $ 11 billion in 2019. That is to say, oil no longer rows in favor of the new Government, and just at a time when it needs resources.


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