Crude conjecture: The IMF & a view from Peru

The Oilholic is just about to wrap-up a touristy weekend in Lima, Peru, before heading over to Santiago de Chile. One arrives barely a week after International Monetary Fund annual meetings held here from October 5 to 12.

The IMF’s decision to choose Lima as the venue had a ‘crude’ subtext; ok perhaps a ‘natural resource’ centric subtext. In March 2014, the fund’s Survey Magazine: Countries & Regions had predicted that commodity exporting countries of the Andean region, including Peru, could achieve sustainable economic growth levels and match the output rates of industrialised economies in percentage terms.

Extractive industries – chiefly oil, gas and mining – would play a growing role, it added. Of course, that was before the oil price started slumping from July 2014 onwards. By the time the first day of the Lima meet arrived this month, the IMF was predicting that should headline regional growth touch 1% over 2015, we’d be lucky. It also confirmed that Latin America would see its fifth successive year of economic output deceleration.

There is clear evidence of the oil price decline hurting Peru. However, as the Oilholic wrote on Forbes.com, the political climate in the run up to the April 2016 presidential election, is also spooking investors. President Ollanta Humala had to appoint his seventh Prime Minister in less than four years earlier this year and is in a tussle with Congress over the state’s role in oil and gas exploration.

All the while, the stars aren’t quite aligning, crudely speaking and are unlikely to do so for a while yet. Both benchmarks are currently languishing below $50 per barrel, and even the Oilholic’s $60 medium term equilibrium projection won’t quite cut it for Peru, where production has been declining since the mid-1990s (though proven reserves have been revised upwards to 740 million barrels).

Soundings over the past week have been anything but positive Latin American oil and gas producers in general, and we’re not just talking about the IMF here. The International Energy Agency said last week that the global economic outlook was “more pessimistic” and expected a marked slowdown in oil demand growth, with the commodities downturn hurting economic activity of exporting nations.

“Oil at $50 a barrel is a powerful driver in rebalancing the global oil market...But a projected marked slowdown in demand growth next year, and the anticipated arrival of additional Iranian barrels will keep the market oversupplied through 2016,” it added. In near tandem with the IEA, several brokers and rating agency Moody’s also revised their respective oil price assumptions “on oversupply and weakening demand.”

Moody's lowered its oil price assumption in 2016 for Brent to $53 from $57 per barrel and for the WTI to $48 from $52 per barrel. The rating agency expects both prices to rise by $7 per barrel in 2017, or a $5 per barrel reduction from its prior forecast.

Steve Wood, a Moody's senior analyst, said, "Oil prices will remain lower for a longer period, as large built-up inventories and oversupply cause oil prices to increase at a slower rate. Although supply should begin to drop as capital spending declines, increased Iranian exports could place additional pressure on oil prices in 2016."

As is evident, sentiment on the supply glut persisting in 2016, is gaining traction. These are particularly worrying times for smaller oil and gas exporters, a club that Peru is a member of. That’s all from Lima folks, as the Oilholic leaves you with a view of the Pacific Ocean from Larcomar. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: IMF Meetings Banner at Lima Airport, Peru. Photo II: A view of the Pacific Ocean from Larcomar, Lima, Peru. © Gaurav Sharma, October 2015

Latin America's commodities downturn problem

The Oilholic finds himself roughly 5,300 miles west of London in Bogota, Colombia wandering around the city’s rustic and charming La Candelaria area. 

It’s the beginning of a journey through South America to find out how the recent commodities downturn is affecting the market mood and investment outlook in what (still) remains a very commodity-exports driven continent. 

One gets a sense of opportunities missed and dismay from those who saw the downturn coming – not just here in Colombia, but looking outside in at Chile, Argentina, Peru and of course that colossal corruption scandal at Petrobas in Brazil. While the sun was shining, and China’s double digit economic growth was fuelling the commodities boom, attempts should have been made at macroeconomic diversification instead of relying on a party that was bound to end sooner or later.

We’re not just talking oil and gas here; take in everything from minerals to soya beans, or copper specifically in the case of Chile. Most Latin American currencies got marginal power boosters during the commodities boom, if not a case of full blown Dutch disease, which resulted in lacklustre performance from non-commodities sectors that became increasingly uncompetitive and to an extent unproductive over the last 10 years.

The International Monetary Fund reckons come the end of 2015, if headline regional growth touches 1% we’d be lucky. In fact, in its latest update the IMF confirmed that Latin America would see its fifth successive year of economic output deceleration. While past commodity busts have triggered regional financial crises, thankfully not many locally as well as internationally, including the IMF, expect a repeat this time around. That’s largely down to the fact LatAm economies, with notable exception of Venezuela, have not indulged in fiscal populism and daft economic policies.

In sync, ratings agencies, while negative on the economic outlook of many countries in the region, but only fear a sovereign default in Venezuela. However, another negative aspect of dependency on the commodities market is that investment – especially on terms prior to the market correction – would be hard to come by.

Just ask Mexico! As the Oilholic noted in a recent column for Forbes, phase I of round one of Mexico’s oil and gas licensing was a damp squib. Hence, with the September 2015 (phase II) bidding round, the Mexicans had to adjust their thinking to attract (and eventually) secure a decent take-up of available blocks.

Peru’s nascent oil and gas market, Colombia’s emerging and hitherto impressive one face similar challenges as will the copper market in Chile. Argentina faces a general election on October 25th while Brazil is in a technical recession with the IMF seeing few improvement prospects for 2016.

Productivity, in all five countries is down with workers spending hours in a day commuting, and traffic jams (the first of which the Oilholic has already experienced) are legendary enough to give Bangkok and Delhi a run for their money. 

Over the coming weeks yours truly will make sense of it all talking to experts, policymakers, fellow analysts and local folks one is likely to meet and greet while having the odd touristy mumble about. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. La Candelaria, Bogota, Colombia © Gaurav Sharma, October, 2015