Oil prices seen to remain elevated

Philippine inflation could again breach the target in 2024 and 2025, the Bangko Sentral ng Pilipinas (BSP) warned, as it raised forecasts for Dubai crude oil prices for the next three years.

The BSP in its latest monetary policy report said Dubai crude oil would average USD 81.90 per barrel this year, higher than the previous forecast of USD 77.20 per barrel given in May.

It also sees Dubai crude oil slightly higher at USD 82.30 per barrel next year from USD 72.70 per barrel previously, before easing to USD 78 per barrel in 2025.

According to the BSP, the projections were based on the average futures path from July 31 to Aug. 9. This was because the Organization of the Petroleum Exporting Countries (OPEC) and its allies, also known as OPEC+, continued to reduce oil output this year.

“The sharp rise in the global crude oil price path reflects expectation of declining international oil inventories owing to the extended production cuts of OPEC+ countries announced in June and an extension of voluntary cuts through September by Saudi Arabia,” the BSP said.

The BSP said global liquid fuel consumption may also increase this year and in 2024 due to robust demand from non-Organisation for Economic Co-operation and Development countries such as China and India.

The central bank also cited the US Energy Information Administration, which expects global oil inventories to transition to consistent inventory draws until the fourth quarter of 2024 from inventory builds in the first half this year. This may put upward pressure on global oil prices during the period, it added.

The BSP said if average oil prices reach USD 95 per barrel next year and USD 105 per barrel in 2025, inflation may breach the 2-4% target once again.

This was the result of a simulation in which the BSP analyzed scenarios to determine the inflationary impact of several outturn for global oil prices. In the simulation, prices ranged from USD 60 to USD 120 per barrel.

“It should be noted that these oil price scenarios considered only the direct effects and do not incorporate any potential second-round effects on transport fares, food prices, and wage increases among others,” the BSP said.

Last week, the BSP raised its 2023 inflation forecast to 5.6% from 5.4% previously. It also hiked projections to 3.3% for 2024 (from 2.9%), and to 3.4% (from 3.2%) for 2025.

“The upward adjustments in the inflation forecast path over the policy horizon were driven mainly by the significant rise in Dubai crude oil prices in recent weeks,” the BSP said. 

The consumer price index (CPI) slowed for a sixth straight month to 4.7% in July, bringing the seven-month average to 6.8%.

‘Unlikely’
According to analysts, global crude oil prices are unlikely to breach the USD 100-per-barrel level for the next three years.

“It will be difficult for global crude oil prices to breach above the USD 100 mark, unless there are geopolitical risks involving major oil producing countries that would lead to supply disruption globally,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

He noted that economies have reduced their reliance on oil as a major source of energy, reflected by a greater shift towards renewable power sources.

China Banking Corp. Chief Economist Domini S. Velasquez said oil prices will likely stay elevated at USD 80-USD 90 per barrel due to supply constraints and as demand remains strong, but this may be offset by China’s slow recovery.

“For next year, we are assuming oil prices to be below USD 100 per barrel. Unless geopolitical tensions between Russia and Ukraine worsens or other geopolitical shocks materialize, we expect oil prices to be nearer its historical price of USD 80-USD 90,” she said in a Viber message.

A likely stronger peso will also help in stabilizing domestic pump prices, she said.

“For this year, aside from higher oil prices and a recent uptick in key food items, we expect inflation to be slightly higher than BSP’s projections. Our emerging inflation estimate for this year is 5.8% and 3.1% next year,” Ms. Velasquez said.

The BSP sees inflation slowing to 3.4% in the fourth quarter.

Meanwhile, prices of non-oil commodity items are seen to remain stable in the coming years due to good supply conditions amid a weakening global demand, the BSP said.

The BSP cited the International Monetary Fund’s (IMF) World Economic Outlook which projected that non-fuel price inflation globally may decline to 4.8% this year, 1.4% in 2024, and 0.5% in 2025.

“Meanwhile, the potential impact of El Niño weather conditions on global non-oil prices is projected to be muted. This reflects the relatively small weight of global rice prices in the IMF’s non-energy price index at only 1%, which is lower than the weight of rice in the domestic CPI basket,” it said.

According to the state weather agency, El Niño will likely persist until next year. The El Niño weather pattern increases the likelihood of below-normal rainfall conditions, which could bring dry spells and droughts in some areas of the country. — Keisha B. Ta-asan