What countries in Latin America will benefit from the oil price surge? What countries will lose most?
BY ALBERTO BERNAL AND
KATHRYN ROONEY VERA
Recent developments in the Middle East and North Africa have brought about another source of uncertainty to the international markets. On top of the poignant human tragedy involved with the uprisings started and since the different regimes started to react, the recent developments in Yemen, Tunisia, Egypt and Libya have generated a material increase in international oil prices.
Since the news of the crisis started to take over world headlines in early February, the price of oil has increased by about +20 percent, going from $87 to $105. The increase in oil prices has also generated a material increase in the level of market volatility, with the VIX going from 15 to around 21 in the second week of March. Risk aversion has increased because higher oil prices shed growth in the medium-run. According to the current IMF estimations, a sustained 10 percent increase in international oil prices tends to reduce yearly global growth by 0.2 percent to 0.3 percent. (…)
Under a “middle of the road” scenario, one in which Libya and other regional countries continue to suffer from high levels of political and social instability, but one in which Saudi Arabia, Kuwait, Iran, Iraq, nor the UAE get immersed into political and social havoc, we think oil prices continue to trade at around $100. Under such environment, which countries in the Latin America region are the main winners and which ones are the most notable losers?
The “winners” in an environment of high oil prices:
Colombia: Colombia exported $16.45 billion of oil and derivatives during 2010, up from USD $10.2 billion in 2009. …The +60 percent year-over-year increase seen in the value of Colombia oil exports was a function of –both— quantities and prices. During 2010 total oil production averaged 785,000 barrels per day, up from 670,000 barrels per day in 2009. This means that Colombia exported an average of about 585,000 barrels per day during 2010, since oil consumption in Colombia is running at around 200,000 barrels per day (according to the BP statistical review). We are projecting that Colombia’s daily oil production will increase from an average of 785,000 per day in 2010 to an average of 905,000 in 2011 (with December 2011 showing an average daily production of 985,000 bpd). In other words, we are forecasting that oil production will increase by 15 percent year-over-year in 2011.
The WTI averaged $79.5 in 2010. So far in 2011, oil prices have averaged $91.4, implying a year-over-year increase of 16 percent in the average price of crude oil since the year started. Assuming that oil prices (WTI) linger around $100 during the remainder of the year, it seems possible to us that oil prices will average $95 during 2011 as a whole (implies that the average price of oil increases by 19.5 percent year-over-year in 2011). Therefore, everything else equal, not least the level of domestic consumption remaining more or less stable (at around 200k barrels per-day), it seems to us that Colombia’s total oil-related receipts could easily reach $22.9 billion in 2011, implying an extra-inflow of $6.5 billion in export revenues related to oil. This is a sizable number, since Colombia exported $39.8 billion during 2010. We estimate at this time that Colombia will export $48.4 billion in goods during 2011, delivering an increase of 21.7 percent in total sales. The high growth rate that is likely to take place in exports will allow the country to show a positive trade balance in 2011, despite the likelihood of imports growing strongly –following an economy that will be expanding at a rate above +5 percent year-over-year.
Mexico: Mexico exported $41.68 billion of oil during 2010, delivering an increase of +35 percent year-over-year in the US dollar value of those receipts. That said, 2010 exports were materially lower compared to the ones that were present in 2008, when the country received a total of $50.5 billion in export oil receipts. Lower levels of domestic oil production explain the lower sales number that was present in 2010, compared to 2008. As investors surely know, Mexico has gone from exporting 1.7 million barrels of oil per day in 2005, to exporting around 500-600k barrels per day of oil in 2010. The reason remains the lack of sufficient investment in new exploration and the continued decline that has taken place in the Cantarell field. The production percentage of Cantarell to total oil production has gone from 63 percent in the 2003-2004 period to 21.7 percent in 2010. According to PEMEX, during 2010 average daily oil production stood at 2.576 million barrels per day.
Looking into 2011, we estimate that PEMEX will be able to increase production somewhat, to about 2.62 million of barrels per day. We estimate that local demand will come at 2.0 million barrels, implying that total exports will only reach 625,000 barrels per day, compared to the 1.1 million barrels that Mexico was exporting in 2008, but most likely higher compared to the 2010 export reading. As we argued before, assuming that oil prices (WTI) linger around $100 during the remainder of this year, it seems possible to us that oil prices will average $95 during 2011 as a whole (implies that the average price of oil increases by 19.5 percent year-over-year in 2011). Pemex spent some money on hedges, yet in terms of current account dynamics, we think that the main issue is that oil export receipts will likely increase to $53.46 billion in 2011 –from $41.6 billion in 2010.
Clearly, higher oil export receipts are a positive occurrence from the standpoint of the (1) the fiscal accounts –since PEMEX finances a large portion of the budget--, and from the standpoint of (2) the expected strength of the USDMXN –since higher oil receipts will coincide with foreign direct investment flows which (we estimate) will increase from $17.7 billion in 2010 to $24.1 billion in 2011. We continue to think that the Mexican Peso remains the most attractive investment option in the Latin America FX spectrum, and we expect the USDMXN to trade at $11.5 by the end of 2011.
Venezuela exported $66 billion of oil during 2010, an increase of +14 percent year-over-year in the US dollar value of those receipts, but a 30% collapse from 2008 levels when oil receipts totaled $95 billion. Since 1998, production has been on a general decline with the exceptions of (unsustained) increases in years 2000 and 2004. Meanwhile, consumption has been gradually increasing, leading to a decline in net exports since 1998. Lower levels of domestic oil production explain the lower sales number that was present in 2010, compared to 2008. According to PdVSA, Venezuela was exporting 2.7 million b/d in 2000, and this has declined to PdVSA to 2.3 million b/d in 2010.
The reasons are sadly obvious: deficiency of investment and the continued decline from aging oil fields. Venezuela still boasts the region’s mightiest quantity of proved reserves of 172 billion barrels as of 2009. The country is virtually entirely oil-based so a decline or rise in international oil prices mean a bust or boom for Venezuela. PdVSA itself makes up about 33% of GDP, it accounts for 95% of total exports, and half of total government revenue. Assuming oil prices (WTI) stay around $100 during the remainder of this year, it seems possible to us that oil prices will average $95 during 2011 as a whole (implies that the average price of oil increases by 19.5 percent year-over-year in 2011). We estimate that Venezuela net oil receipts of some $72 billion in 2011. Government coffers will benefit from the additional windfall from higher Venezuelan crude oil prices, which we think will benefit spread levels on external debt, where investors can pick up a nice yield in a short-term investment horizon in a name with a low probability of default.
Straddling the fence in an environment of high oil prices: Brazil.
Brazil emerged as a net oil exporter in 2009 but has returned to net importer status again, a trend which we expect to reverse course in coming years with the ramping up of production from the ”pre-salt” oil fields. However, Brazil faces several complicating factors that make a world of higher oil prices a trying environment for this economy. Brazil exported USD $23.02 billion of oil and derivatives during 2010, up from $23 billion in 2009, a minor increase in production but back on par with 2008 levels (see graph below) with the ascending trend to continue with increased production as pre-salt fields come on line. Brazil became a net exporter of oil in June 2009 until August 2010 but returned to net imported status thereafter, and as of February 2011 was a net importer in the amount of $2.11 billion (12-month moving average).
According to Petrobras 4Q 2010 results, as of December 27, 2010, Brazil was producing 2.256 million barrels/day. Brazil averaged 2.122 million b/d in December and for all of 2010 averaged 2.004 million b/day versus 2009’s level of 2.029 million b/d. This implies that Brazil imported 401,000 b/d by the end of 2010, as oil consumption is 2.405 million b/d. We project oil production to rise to 2.26 million b/d in 2011, +7.6 percent year-over-year, and to rise to 2.44 million b/d in 2012, when production will outstrip consumption. In years thereafter, Petrobras extraction of the pre-salt oil layer will be a significant contributor to oil production.
This pre-salt region is estimated to hold a probable 123 billion barrels of reserves according to a private study, more than double government estimates of 50 billion barrels, 7.7 times proved reserves at the present time, and compared to Venezuela’s proved reserves of 172 billion barrels as of 2009. Current proved reserves total 15.986 billion, +7.5 percent for the year. Petrobras expects to boost recoverable reserves to up to 35 billion barrels by 2014. Pre-Salt contributed 1.071 billion barrels of oil equivalent (BOE) in the Santos Basin and 0.210 billion of Bacia do Campos in 2010. Both higher oil prices and higher volume of oil production and exportation will support terms-of-trade and the current account: curbing its widening trend (we estimate at +34 percent year-over-year in 2011) and attracting increased levels of FDI (currently 2.34 percent of GDP, fully covering the CA deficit). We do think this will be a good year for heavyweight Petrobras (15 percent of IBOV) since the name had a 20 percent negative return in 2010 after its dilutive issuance while oil prices rose 10 percent.
These aforementioned factors appears to make Brazil a “winner” in the rising oil price scenario, however, Brazil straddles the fence. Inflation is already running above the BCB’s midpoint of 4.5% (band of +/- 2 ppts). We think inflation could breach the upper limit of the BCB’s targeted band this year before receding to 6.3% year-over-year by Dec 2011.
Complicating the picture and making Brazil a “straddler”:
1) Brazil’s large component of food and oil prices in the CPI basket not only in Brazil, but throughout Latin America, on average 25 percent of CPI baskets and in Brazil’s case some 5 percent of total imports
2) The need for aggressive spending cuts to stem inflationary pressures, hard to do after recent years’ increases in mandatory current spending. Authorities wish to keep Selic from heavy increases which send up real rates and threaten economic growth but a lack of sufficient tightening would push second round effects of higher oil to the forefront of policymaking in a rapid fashion.
3) A domestic economy growing robustly, coming up against supply constraints with retail sales rising at 10 percent annual rates and IP rising at only 2.3% year-over-year with deficiencies in infrastructure and construction investment causing bottlenecks and
4) An aggressively appreciating currency weighing down non-commodity export sectors hurting competitiveness and depressing IP numbers that will be fought by authorities with FX interventions and capital controls, themselves inflationary.
The IMF estimated that every $10 increase in the price of oil takes off 0.2 percent - 0.3 percent off world GDP. Rising oil prices would then hurt demand for Brazil’s exports globally and send domestic expectations shooting higher, stunting growth in the internal market as consumers adjust other spending and investment for the inelastic demand for higher food and fuel prices.
Assuming on average some $100/barrel oil in 2010, we expect inflation expectations, high and rising, to maintain that general trend and consumer expectations to begin to reflect that. However, this will be welcome deceleration as credit growth +20 percent year-over-year on average in 2010 and domestic inflation a significant contributor to headline CPI.
Petrobras will have a stronger year, and higher commodity prices will push up that segment of the IBOV, however, the consumer-related sectors will slow as the government combats inflationary pressures. With the assumption of $100 oil on average in 2011, we maintain our call for growth of 4.5 percent this year after 7.5 percent last, and inflation ending at 6.3 percent year-over-year with the Selic inevitable set to rise as most likely insufficient fiscal restraint executed.
The “losers” in an environment of high oil prices:
The Central America and Caribbean region take first place as these countries import virtually 100 percent of their energy needs are not significant commodity exporters. The Caribbean region is addition a net food importer and relies on tourism for economic growth, which could be adversely impacted by elevated international oil prices as consumers cut back on discretionary spending to cover rising food, fuel, and other associated costs.
Within South America, Peru and Chile are net oil importers. A rise in oil prices to $100 on a sustained basis would act as a consumption tax and curb the robust rates of domestic absorption seen so far in 2010 and evidenced in high frequency data so far for 2011 potential implying the need for sustaining easing monetary and fiscal policy. However, higher oil means higher food prices, and in the case of Peru food comprises nearly 40 percent of the CPI basket (Chile some 20 percent) meaning rising prices. CPI is already steadily ascending in these names not least because of soaring commodity prices, a positive for net terms of trade but also too as these names see robust domestic economic expansions. Peru is already operating above capacity and Chile, set to grow 6.5 percent this year is set to close its output gap in short order.
These names benefit from rising demand and prices of base and precious metal exports. However, a risk comes in the event that oil sees a sustained rise and base metal prices decline as a result of expected slowing in global growth and demand, we see both names as losers in this scenario as higher input costs for the mining industry curb terms of trade gains. Indeed, already trade dynamics are showing the effect of higher oil prices as the surplus collapsed to $234 million from $1.077 billion the month prior on the back of higher cost of crude oil imports as total imports jumped 31 percent year-over-year as exports rose a slower 17 percent year-over-year.
These economic recoveries have been driven not only by rising commodity exports but also by a strong rebound in domestic absorption rates as investment and consumption rise on the back of 2009 recessions and in Chile’s case, a natural disaster. Rising oil prices could blunt that recovery, sending these economies back to sub-potential growth rates. Policy responses will be important since, as high oil could be viewed as transitory and thus a “one off” event where the boost to inflation is only temporary and more aggressive policy rate hikes are not needed. However, inflation in Chile and Peru is running up against the central bank mid-points as Peru, similar to Brazil, has already closed its output gap and is expanding above potential rates…Meanwhile, global commodity prices have already been soaring (CRY +80 percent since mid-2009), and both ongoing currency intervention and domestic demand rates push up the specter of dramatically higher inflation.
Bottom-line, while net oil importers such as Chile and Peru stand to lose from higher oil prices in terms of more costly fuel imports and greater inflationary pressures, strength in other commodity exports should mitigate the deterioration in terms of trade and keep trade dynamics in positive territory. Credible monetary policy and strong institutional frameworks will be supportive in these names in a more difficult external environment.
Alberto J. Bernal-León is Head of Research at Bulltick Capital Markets and Kathryn Rooney Vera is Senior Macroeconomic Strategist at Bulltick Capital Markets. This column is an excerpt of a research paper for Bulltick clients. Excerpted with permission from Bulltick.