Crude oil price rally worries BSP

Published February 4, 2018, 10:01 PM By Lee C. Chipongian

https://business.mb.com.ph/2018/02/04/crude-oil-price-rally-worries-bsp/

The central bank is closely monitoring developments in the continuing rally of global crude prices after it breached its estimates for the year as this could affect inflation path.

The Bangko Sentral ng Pilipinas (BSP) has a crude oil price assumption of $50 to $65 per barrel for 2018. But, in recent weeks, the benchmark price reached $70 (Brent) and continued to rally around this level. The February 1 Brent crude was at $69.50 per barrel. With the curbed inventories, the market anticipates crude oil could hover over $70 in time.

BSP Deputy Governor Diwa C. Guinigundo said they are monitoring “very carefully” oil and commodity prices in view of the oil-producing countries’ extended output cutback, which he thinks will have a deep impact on their inflation outlook.

Guinigundo said the continued cutback in the oil production of the Organization of the Petroleum Exporting Countries (OPEC) and Russia has a higher compliance rate than anticipated.

“Oil prices reached $70 per barrel. Our assumption is only $50-$65 per barrel. (We’re watching very closely) because we didn’t realize that both OPEC and non-OPEC countries will agree together for a production cutback and the compliance rate is very high,” he remarked.

OPEC and non-OPEC compliance to limit supply varies, at times it is at low levels and there are more crude oil pumped. In recent weeks however, OPEC and Russia – which produce 40 percent of the world oil – have stuck to their deal to cap production.

Guinigundo noted Russia’s position that crude oil could stabilize at $70 per barrel. “I think it should be stable at that level. So $70 per barrel could be a ceiling.”

This would influence the direction of domestic prices and impact on inflation.

“You will see some pressure building up on inflation,” said Guinigundo.

Still, he observed that while inflation ticked up significantly from the beginning of 2017 until December, derivative oil prices have not moved that much. These are gasoline both premium and regular, diesel, kerosene and LPG. He described price movements of these products – despite the weaker peso – as “remote” since the market is now highly competitive.

For the month of January, with increased excise taxes and volatile global crude oil prices, the central bank forecasts four percent inflation rate which surprised the markets.

The low end of the forecast range is 3.5 percent, still more than December’s actual 3.3 percent.

The central bank noted that the increase in domestic petroleum prices and the higher food prices due to weather-related disturbances will likely pull up inflation to a peak of four percent. Aside from the impact of higher crude oil prices, the higher excise taxes on fuel and sugar sweetened beverages will add pressure to inflation numbers.

At the moment, the BSP’s 2018 inflation forecast is 3.4 percent and 3.2 percent for next year.