A barrel of Brent oil was worth $71.29 at the end of 2021. It is now above $115, an increase of more than 50% in the first five months of the year. If this rise is significant, the most important thing is what is coming for the second half of the year. It could reach $150 a barrel, warns Jeremy Weir, the CEO of Trafigura, a Swiss company that is among the world’s leading commodity traders.
Jeremy Weir has released one of the boldest “serious” forecasts about the immediate future of oil. He stresses that the world has not seen the worst of the energy crisis. In this vision, he is “accompanied” by Jamie Dimon, CEO of JP Morgan, who argues that prices could be in a range of 150 to 175 dollars. He speaks seriously because there is a parallel reality where others speak of a barrel of oil at 200 or 250 dollars. The important thing is that Weir and Dimon are not the only ones who believe that oil will remain very expensive. Goldman Sachs projects a price of 140 dollars per barrel in the third quarter of the year. Citi and Barclays, two other financial groups, have also just revised their oil prices upwards: they think they will not go down and will remain comfortably above $110.
The forecasts oscillate in a band of more than 40 dollars, but all put on the table the accumulation of factors that are disordering the oil market: the sanctions against Russia translate into 1 million or 1.5 million barrels of oil less available per day. These cannot be offset by OPEC+ commitments, nor by invitations to countries like Iran and Venezuela to produce more. The challenge of raising production in the short term is very complicated. OPEC+ mentioned 680,000 barrels per day of additional production, but in practice the amount will be considerably less.
On the demand side, experts and common sense advise taking into account the role that China will play. In April and May it slashed its oil purchases as it focused on fighting Covid through a draconian lockdown. From June it will be resuming the normal rhythm of activities. They bought in 2021, around 10 million barrels per day. Last year they spent $257.3 billion on crude oil imports. For this reason, what happens in China will be fundamental for the future of the price of black gold. It is a market where the producers rule now, but the big consumers also have a lot to say. Three questions: how much will China buy from Russia? How much are you willing to let the price of oil rise? What can China do to stabilize the world oil market?
The previous record in oil prices corresponds to the third quarter of 2008. At that time, Brent crude touched 147 dollars. In September of that year a huge world crisis broke out, after the bankruptcy of the financial institution Lehman Brothers.
For Mexico, as for the rest of the world, a scenario with very high oil prices represents more threats than opportunities. If it continues above 100 dollars, it will make the current policy of subsidies to the price of gasoline and diesel much more complicated, warned the rating agency Fitch. Public finances would be under enormous pressure, even though Pemex would have a championship year. For the economy as a whole, the higher income from the sale of crude oil is not enough to offset the higher expenses from imports of petroleum products. We have an oil balance with a deficit of 2,000 million dollars per month.
On top of all this, super expensive oil could derail the global economy and make the risk of a global recession a reality. Mexico is not armored, and would suffer strongly from a global crisis. It exports oil, but it stopped being an oil country a long time ago. Crude represents barely 8% of an export basket of more than 50,000 million dollars per month. If crude oil reached $150, we would have Stagflation Plus. More inflation and less growth. That means less remittances, less tourism and less exports. So don’t smile when you’re told that the Mexican blend is about to break its record.
General Editorial Director of El Economista
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Degree in Economics from the University of Guadalajara. He studied the Master of Journalism in El País, at the Autonomous University of Madrid in 1994, and a specialization in economic journalism at Columbia University in New York. He has been a reporter, business editor and editorial director of the Guadalajara newspaper PÚBLICO, and has worked for the newspapers Siglo 21 and Milenio.
He has specialized in economic journalism and investigative journalism, and has carried out professional stays at Cinco Días in Madrid and San Antonio Express News, in San Antonio, Texas.