Oil prices hit highest level since November 2014; mixed effects expected on regional economies

Between October 1-5, oil prices surged to the highest level since November 2014, with Brent Crude reaching 86 USD and WTI Crude rising above 75 USD per barrel at one point that week. Reports attribute this development to uncertainty following the reduction of Iranian oil outputs and apprehension on whether Russia and OPEC countries are willing to compensate for the expected losses in global supply, especially on short notice. On September 30, during the body’s annual meeting hosted in Algiers, OPEC advised oil-producing countries against boosting production. Market analysts predict a rise towards 90 to 100 USD, particularly against the backdrop of coming U.S. sanctions against Iran, slated to be effective starting on November 4. Some reports suggest prices could potentially decline thereafter if Saudi Arabia increases production unilaterally to fine-tune the market, or if destruction of oil demand signals the need for a correction.

If the upward trend in oil prices continues, the effect on Latin American economies will be mixed. Countries which stand to benefit from this trend include Colombia and Ecuador. The former displaced Venezuela as the largest South American exporter of oil to the U.S., and the government is making efforts to attract investment and improve crude production. The increase in oil prices could thus benefit Colombian external accounts. While a similar forecast can be made concerning Ecuador, the country has fewer resources to incentivize investment in the energy sector accordingly. In turn, the effect of this trend is likely to be mixed in Argentina, Bolivia, Brazil, and Mexico. Although they produce oil, their economies are not reliant on crude exports. Furthermore, they import considerable amounts of refined products such as diesel and gasoline. Noteworthily, notwithstanding Venezuela’s traditional position as the main exporter of crude oil in the region, the country continues to witness a remarkable increase in imports of light crude from the U.S., which is used to dilute the heavy crudes extracted locally. Therefore, the increase in global oil prices does not necessarily translate into considerable benefits for the ailing Venezuelan economy. Finally, given that Chile and Peru are net crude oil importers, the increase in oil prices could have a direct impact on fuel prices, subsequently impacting a variety of consumer prices. All in all, it remains to be seen if the upward trend will continue well into 2019, in which case surging prices would likely have a significant impact in macroeconomic indicators from emerging markets.

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