Caution with prices

The increase in oil prices in recent weeks, when it reached 70 dollars per barrel, generated an understandable atmosphere of optimism, not only in the sector but in the country, due to its positive impact on public finances. It was undoubtedly good news, especially when compared to the 27 dollars per barrel at the beginning of 2015 and the following years, when the industry and the country entered a severe crisis.

Being good news that should not be overlooked, it is advisable to view it with caution. Not only because it seems to be a temporary increase, due to a series of market and geopolitical factors, but also because the new reality of the sector indicates that when prices rise, the supply capacity to react is quick. For this reason, companies and the National Government must be grounded in their expectations.

Let’s review the reasons behind the price increase. Different analyses point to three: an increase in demand in the northern hemisphere countries due to winter -one of the coldest in decades-, the gradual reduction in U.S. crude inventories, and nervousness about the situation in Venezuela, Nigeria, and Libya; whether they will be able to continue supplying high volumes of oil.

What happens in terms of geopolitics is not easy to predict, which in an industry like oil translates into a factor of speculation. But once winter passes in the northern countries, it is logical that demand will decrease. And what analysts seem to agree on is that with prices hovering around 70 dollars a barrel, a new reactivation of supply is to be expected, especially in the United States.

That is to say, there are reasons to believe that the increase seen in prices over the last two weeks is not sustainable, at least in the medium term. Experts point this out, calling for caution. This has worried some OPEC countries whose fiscal stability depends on oil: a new oversupply could undermine the effort they have made to achieve better prices by cutting production.

This outlook must be analyzed with special attention in our country, a nation with a short-term DNA. By companies and by the Government. It would be a mistake to believe that with this single price increase the sector will reactivate and the uncertainties and problems facing the sector, especially in operations, will magically disappear. The sense of urgency around increasing crude reserves has not changed.

Hence the importance of swiftly implementing the mechanisms established in the tax reform to boost the industry, promote new areas of exploration and production under competitive parameters, have good regulation, and continue working to improve the structural factors that ultimately sway investment: legal security, environmental conditions, operational costs, and tax burden.

That is to say, beware of siren songs. The prices recorded in recent days are encouraging and give the sector and finances a breather, and if this continues, it will distract from the specter of another tax reform for a while. It is not easy to know what will happen with prices; what we do know is that regardless of them, we must be much more competitive. Look less at Brent and WTI and act as if prices were at rock bottom.