Oil, from short-term chaos to long-term uncertainty

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Raw material prices dominate economic discussions on a global scale. In the last two months, an increase in the cost of oil of around 10% has been observed, accompanied by significant volatility. This behavior has a lot to do with short-term chaos. There are several factors that have put pressure on us to reach this situation: OPEC+ affirmed its commitment to maintain crude oil production cuts until next June; Russia saw its refining infrastructure attacked by drones; China reduced its oil imports in the first quarter; The US economy shows unexpected resilience. But perhaps the most relevant of all is the increase in tensions in the conflict in the Middle East with Israel's attacks in Syria and the retaliation of Iran and Israel in recent weeks, although still avoiding energy infrastructure. Already the oil market It suffered from the damage in the Strait of Bab el-Mandeb (entrance to the Red Sea and route for transport through the Suez Canal). Now, with the gradual prominence of Iran, alerts are beginning to be raised about the Strait of Hormuz. About 10% of oil is transported by sea through the first, and about 20% of global oil moves through the second. Both with an important capacity to distort global prices. Now, on this occasion, the chaos of the short term is woven with the uncertainty of the long term. Global initiatives (although not very concrete) to reduce dependence on fossil fuels collide with the inability to scale, at the desired pace, the deployment of renewable capacities. At the same time, investments in oil, given the expectation of lower demand in the future, have been reduced, which keeps the price, in the medium term, relatively high, especially for a fuel that, according to many, is close to its peak. sunset. Added to this is the pressure from authorities in the United States and Europe, mainly, to promote large investments in energy efficiency and renewable energies amid concern about new outbreaks of inflation. The combination, momentarily, leaves a very uncertain future scenario. Thus, the chaos in the short term will maintain volatility in prices (the range of analyst forecasts exceeds 40 dollars per barrel by the end of the year), but perhaps with a bullish tinge compared to previous forecasts, a situation that may once again generate headaches for inflation and activity. But this chaos fuels uncertainty about the future outlook for the sector. Without the guarantee to undertake large investments, although without clear substitutes, prices will surely tend to remain high, although possibly lower than the current ones. Alejandro Reyes, from BBVA Research. Follow all the Economy and Business information on Facebook and xor in our weekly newsletter

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