Oil Prices on the Rise

After a slow start to the year, oil prices have started to rise, months after OPEC announcements of production cuts and speculation about Chinese and global demand. This poses a challenge for central banks tasked with maintaining low inflation levels, while concerns about an economic slowdown remain.

Oil has reached prices not seen in about 10 months. Towards the end of 2022, there was speculation about a drop in oil prices due to lower demand and a slowdown in the Chinese market. Russia's war against Ukraine, which resulted in sanctions on Russia, led Russia to move its oil to lower prices to target the Asian market, specifically India and China. Looking for diversification, Lukoil, a Russian oil giant, even opened offices in Mexico in September.

Several players bet that oil prices will reach the US$100/b mark by the end of the year, putting greater pressure on central banks which are dealing with inflation. OPEC tried to raise oil prices during the first half of the year by announcing production cuts, which Russia joined. The effects of the recent cuts were expected to be felt by the end of August. This week, oil reached US$95/b, indicating a significant increase after months below US$$70/b.

Mexico's Ministry of Finance and Public Credit (SHCP) expects production will not reach the levels promised at the beginning of the administration, postponing the promise of energy self-sufficiency imposed by the government. Similarly, Mexico speculates that it will capture less oil revenue in 2024 due to fluctuations in the exchange rate and lower hydrocarbon prices, as stated in the 2024 Federal Budget Proposal.

At the end of July, PEMEX revenues amounted to MX$393.2 billion (US$22.9 billion), representing a real annual contraction of 21.4%. This marked the sharpest decline for this period since 2008, according to the SHCP. This difference is partly due to the price variations seen in 2022, as geopolitical issues drove up oil prices.

Ricardo Sheffield, Head of the Federal Consumer Protection Agency (PROFECO), warned about the increase in fuel prices due to the rise in oil prices. As a result, the federal government increased its incentives to support consumers. The current fiscal incentives will be 53.4% for regular gasoline, 31.4% for premium gasoline and 48.7% for diesel.

In light of decreasing OPEC supply, the organization reported that it expects non-OPEC supply to grow in 2024. Flows of Saudi oil into America are projected to plunge in August and September 2023. Nonetheless, US imports of Saudi crude have significantly declined as US shale output surged, denting Saudi Arabia's oil market power, which could explain Saudi Arabia's difficulty in boosting oil prices. The US Energy Information Administration (EIA) has projected the potential for new records in US crude oil production, driven by ongoing global petroleum demand and escalating prices.