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Expect strong oil prices for rest of year

Thursday, April 19, 2018

There is good news for Finance Minister Colm Imbert as the United States Energy Information Agency (EIA) is now predicting that oil prices will remain just above US $60 a barrel for the rest of 2018 and all of 2019. This is US$8 a barrel above what he predicted would hold for this country’s suite of crude oil in 2017/2018. Once production holds that means much needed additional revenue for the exchequer.

In its latest outlook the EIA said: “Brent crude oil spot prices averaged US$66 per barrel (b) in March. EIA forecasts Brent spot prices will average about US$63/b in both 2018 and 2019. EIA expects West Texas Intermediate (WTI) crude oil prices to average US$4/b lower than Brent prices in both 2018 and 2019.

“NYMEX WTI futures and options contract values for July 2018 delivery that traded during the five-day period ending April 5, 2018, suggest a range of US$52/b to US$78/b encompasses the market expectation for July 2018 WTI prices at the 95 per cent confidence level.”

It must be noted that 30 per cent of the crude oil produced by T&T fetches close to US$1.50 a barrel more than Brent, while 10 per cent fetches just above WTI prices, with the remaining 60 per cent around US$3 below WTI prices.

In his budget presentation in October last year, Imbert told Parliament revenues from the energy sector were based on an average crude oil price of US$52 and natural gas prices of US$2.75 per million British Thermal Unit (MMBTU).

He said: “The budgeted revenue for 2018 is predicated on an oil price of US$52 and a gas price of US$2.75 per MMBtu. It should be noted that our assumed oil price is below the International Monetary Fund forecast of US$56.20 per barrel for 2018, and lower than the current oil price forecasts made by the World Bank, United States Energy Information Administration (EIA) and International Energy Agency (IEA).

“Based on these assumptions we are projecting: Total revenue $45.741 billion, oil revenue $ 6.412 billion.”

The EIA said while there has been a levelling off of demand there were significant global risks that could lead to strong oil prices.

“Continuing draws in US and global oil inventories, as well as actual and potential supply disruptions may have put upward pressure on crude oil prices in March. Economic and political instability in Venezuela continues to affect its crude oil production. EIA estimates Venezuelan crude oil production averaged 1.5 million barrels per day (b/d) in March, a decline of about 24 per cent year-over-year.

“In addition, whether or not the United States will extend the Joint Comprehensive Plan of Action remains uncertain. Without an extension, it could lead to the reinstitution of sanctions on Iran, which could affect Iran’s oil production and exports.”

Lecturer in Economics at the University of the West Indies Dr Roger Hosein said while the prices have been better than budgeted and the predictions are for the prices to remain stable at around US$60 a barrel, there is the possibility of increasing government consumption expenditure.

“If this happens then it will stimulate aggregate demand, and given that the economy has spare capacity overall economic activity will rise and the unemployment rate may fall,” he said.

Dr Hosein said the Government needed to ensure it invests in capital projects.

“There is a danger that the state may spend too much resources on consumption as has happened in the past and not enough on capital sector intervention and as a consequence the increase in economic activity will be short lived and not long term and sustainable,” he said, adding that the country should not forget the lessons of 2007 to 2017 in which the economy did not grow after the start up of Atlantic LNG’s fourth train.

Should the Minister of Finance maintain his expenditure profile based on a US$50 a barrel oil price, the Government should have extra revenue, some of which should go to the Heritage and Stabilisation Fund, he said.

The UWI lecturer warned that with an election due in just over two year’s time it might be difficult for Government to maintain its discipline and keep spending under control.

In that case, he said, the country could return to unsustainable spending patterns.


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