It's been a memorable week for energy markets, starting last Friday when oil hit a new all-time intraday high of $139.12, surging $10.75 in just one day.
Seven days later, oil is trading at the $136 level. That's 31 percent above its inflation-adjusted record high price of US$104.36 (in April dollars), set in April 1980. Oil is up 42.5 percent year-to-date and up 102.1 percent from 52 weeks ago. And Goldman Sachs is predicting that oil will hit the $150 level sometime this summer.
The surging energy prices have caused great anguish for many Asian governments. Consumers in this region have been shielded to a large extent from soaring crude oil prices by government subsidies. But all that's changing. Taiwan, Sri Lanka, Bangladesh and Indonesia have been forced to review their subsidy policies. And both India and Malaysia did the unthinkable and hiked fuel prices.
Speaking at the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur, Malaysia's Prime Minister Abdullah Badawi aptly summed it up saying, "It was a difficult and agonizing decision to make. Many times, we have been tempted to walk away from such a difficult decision. Certainly, we realized that the decision would be met with great anguish not to mention anger from the people."
Market watchers, traders, analysts and policymakers alike, have been trying to figure out why oil prices are, where they are. Theories abound including speculation, rising Asian demand and supply problems, just to name a few.
Speculation Inflating The Bubble?
Fereidun Fesharaki of FACTS Global Energy Group thinks the markets have been more irrational than it has ever been in its history. "It is absolutely unprecedented and simply cannot stand ... since the price hit $105, everything above $105 is speculation. Something like $50 – $100 billion has poured into the market the last two months", Fesharaki says.
CNBC contributor Daryl Guppy of guppytraders.com in his column Charting Asia, adds that, "The disconnect between oil prices and fundamentals is a disturbing bubble ... analysis of the duration of open interest by fund managers 'investing' in the commodity market suggests this is the gas inflating the bubble."
But others don't see the speculative factor as being that extreme in the ramp up of oil prices. Tan Sri Mohd Hassan Marican, the CEO of Malaysia's Petronas told CNBC he thinks there's only about a $15 element in the price of oil that's due to speculation.
Red Hot Asian Demand
And what of Asian demand? Will it play a continuing role in boosting energy prices? The bears think not. Demand looks like it could weaken in the wake of the price hikes, plus the U.S. dollar seems to be on a firmer note after Bernanke's warning on inflation.
"Already, the Asian tigers have become Asian pussy cats. So what this does is it reinforces the same and makes it difficult for demand to go up," FACTS Global Energy's Fesharaki says. "We don't have much growth in Asia. Maybe 600,000 to 700,000 barrels a day, 800,000 at most – compared with the 1.2/1.3 million barrels that we had before," he adds.
Others disagree. Petronas' Hassan points to the middle income group in China and India which is growing. We're talking about millions of people who want to make the transition from a rural to urban lifestyle. This transition is going to require huge amounts of energy.
Tough Supply Lines
All this talk of demand, but what about the supply side factor? It seems to be the consensus that it's not about the availability of the hydrocarbons that's in question, but rather, the ability to extract these hydrocarbons.
According to BP's research, there's nearly 42 years of oil reserves left in the ground and 60 years of natural gas. Group chief executive Tony Hayward told AOGC delegates that while we've already produced around one trillion barrels of conventional oil, there's another one trillion barrels of proven reserves and another trillion of non-proven resources.
Greg Hill, executive vice president (Asia Pacific) of Shell Exploration & Production qualifies this view. "We believe at Shell, that conventional easy oil and gas is probably nearing its peak. So I think the peak is emerging. Having said that, there's still an awful lot of hydrocarbons to play for," Hill said.
But those hydrocarbons he's talking about, are hard-to-get pockets of energy located in countries like Nigeria and Iran where geopolitics comes into play, or are in deeper water, or trapped in difficult rocks like oil shale or oil sands, or under ice -- which brings up the environment/conservation factor.
Energy Vs. Environment
One of the most controversial issues involving energy resource is the question of whether to allow drilling for oil in the Artic National Wildlife Refuge, located east of Prudhoe Bay in Alaska's "North Slope," which is North America's largest oil field. Environmentalists and many within the Democratic Party are vehemently opposed to any sort of exploration in the refuge. They have successfully prevented drilling through legislative filibusters, amendments, and vetoes.
However, James Slutz, acting principal deputy assistant secretary with the Department of Energy thinks the refuge could be effectively developed in an environmentally responsible way. "While it would take some years to do so, peak production would be almost 1 million barrels a year, that’s what's being projected. We think it would make a lot of sense and is the right thing to do," Slutz said.
It's clear from this crude snapshot of oil issues that the synergies of energy are far-reaching, complex and multilayered. There are many more factors that haven't been discussed here such as OPEC's role in price stabilization and the idea of peak oil.
One thing is certain, as oil prices surge upwards and gasoline prices push past $4 a gallon, consumers are being forced to change their habits. People are now looking to purchase fuel-efficient cars like the Toyota Prius with gas-guzzling SUVs falling out of favor. Usage of public transport systems around the world has jumped. Some folks have even taken to cycling to the office.
Tuesday, July 29, 2008
Inflation here to stay for a while: RBI
The Reserve Bank of India, or RBI, said it doesn’t see any respite from rising inflation — already at a 13-year high — as prices of crude oil, a key contributing factor, aren’t likely to drop much from current levels.The crude price, which touched $145.3 a barrel in July, has come down to $124.6 a barrel, but RBI does not expect it coming down further because of the “relatively tight demand-supply balance”.
Quoting the US Energy Information Administration, or EIA, the Indian central bank’s report on economy, released on Monday ahead of a much-anticipated quarterly review of monetary policy on Tuesday, said the crude prices are expected to remain at $127 a barrel until February, and this is a major inflationary risk.
India did hike the prices of its heavily subsidized fuel in June, but that alone hasn’t fully taken care of the rise in international crude prices and, according to RBI, the “pass-through in case of administered petroleum products is still incomplete”.
The report on macroeconomic and monetary developments, a window to the quarterly review, doesn’t drop any explicit hint on the content of the Tuesday’s policy review, but some bankers and bond dealers say they believe RBI will continue to follow a tight money policy to fight inflation even though the trend in the bond and OIS, or overnight index swap, markets suggests otherwise.
The benchmark yield on 10-year bond, which rose to 9.55% early this month, has come down to 9.10%, and movement in OIS market, too, indicates status quo on the policy front.
In a 28 July report titled Asia’s Inflation Troubles, Sydney-based Sherman Chan, an economist with Moody’s Economy.com, responsible for country analysis of China, Hong Kong, Vietnam and India, said “inflation remains uncomfortably strong across Asia-Pacific region” and she expects RBI to raise the cash reserve ratio (CRR), or the cash that commercial banks are required to keep with the central bank, as well as its interest rate, on Tuesday.
Tushar Poddar, an economist with Goldman Sachs, too, predicts RBI will hike both its policy rate as well as CRR by 25 basis points each. One basis point is one-hundredth of a percentage point.
In its India Views report on Monday, Goldman Sachs said: “We expect RBI to continue the tightening bias but eschew more significant tightening.”
RBI has raised the policy rate by 75 basis points to 8.5% and CRR by 125 basis points to 8.75% since the beginning of this fiscal year to rein in rising inflation and growth in money supply that is stoking inflation.
The Monday RBI report spoke about some correction in asset prices, both equities and gold, but said the growth in money supply, or M3, bank deposits and non-food credit have all been higher than a projection made in its annual policy in April. These, economists say, strengthen the case for continuing with the tight money policy.
RBI also said India’s budget deficit may come under “pressure” this year as the government boosts spending ahead of elections due by May. Government finances will be hit by “higher oil subsidies and the burden of debt waiver to farmers”, RBI said.
A ballooning budget deficit may force the central bank to raise borrowing costs to prevent higher government spending from stoking prices.
Spending by India’s government registered a “sharp rise” in April-May, the first two months of the current fiscal year, according to RBI.
The government’s budget deficit target for this year is 2.5% of gross domestic product. It has kept an oil subsidy bill of more than $40 billion outside its accounts.
The result of RBI’s tight money policy is showing in the decline of business expectations index as corporations are expecting an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June, the business expectations indices, based on an actual assessment for April-June and on expectations for July-September, declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters.
Corporations are less optimistic on the overall business situation, financial situation, production, order books, cost of raw materials, capacity utilization, employment, imports and profit margins than they were in the previous quarter.
According to the RBI survey carried in its report, most of the corporations expect to adjust the rise in raw material prices and the production cost by keeping inventory levels at “below average” and increasing prices.
Incidentally, industry lobby Confederation of Indian Industry’s business confidence index for April-September 2008 declined by 5.3% compared with the past six months, and 2.9% compared with the corresponding period a year ago.
The decline was on account of uncertain global economic outlook and concerns about high interest rates.
The RBI report also said a professional forecasters’ survey, conducted by the Indian central bank in June 2008, suggests moderation in economic activity for next three quarters and fiscal 2008-09 as a whole.
“Between the...survey conducted in March 2008 and...in June 2008, forecast of real GDP growth for 2008-09 was revised downward to 7.9% from 8.1%,” the RBI report said.
The central bank’s projection for growth in fiscal 2009 is 8-8.5%, and there has been no change in this yet.
Quoting the US Energy Information Administration, or EIA, the Indian central bank’s report on economy, released on Monday ahead of a much-anticipated quarterly review of monetary policy on Tuesday, said the crude prices are expected to remain at $127 a barrel until February, and this is a major inflationary risk.
India did hike the prices of its heavily subsidized fuel in June, but that alone hasn’t fully taken care of the rise in international crude prices and, according to RBI, the “pass-through in case of administered petroleum products is still incomplete”.
The report on macroeconomic and monetary developments, a window to the quarterly review, doesn’t drop any explicit hint on the content of the Tuesday’s policy review, but some bankers and bond dealers say they believe RBI will continue to follow a tight money policy to fight inflation even though the trend in the bond and OIS, or overnight index swap, markets suggests otherwise.
The benchmark yield on 10-year bond, which rose to 9.55% early this month, has come down to 9.10%, and movement in OIS market, too, indicates status quo on the policy front.
In a 28 July report titled Asia’s Inflation Troubles, Sydney-based Sherman Chan, an economist with Moody’s Economy.com, responsible for country analysis of China, Hong Kong, Vietnam and India, said “inflation remains uncomfortably strong across Asia-Pacific region” and she expects RBI to raise the cash reserve ratio (CRR), or the cash that commercial banks are required to keep with the central bank, as well as its interest rate, on Tuesday.
Tushar Poddar, an economist with Goldman Sachs, too, predicts RBI will hike both its policy rate as well as CRR by 25 basis points each. One basis point is one-hundredth of a percentage point.
In its India Views report on Monday, Goldman Sachs said: “We expect RBI to continue the tightening bias but eschew more significant tightening.”
RBI has raised the policy rate by 75 basis points to 8.5% and CRR by 125 basis points to 8.75% since the beginning of this fiscal year to rein in rising inflation and growth in money supply that is stoking inflation.
The Monday RBI report spoke about some correction in asset prices, both equities and gold, but said the growth in money supply, or M3, bank deposits and non-food credit have all been higher than a projection made in its annual policy in April. These, economists say, strengthen the case for continuing with the tight money policy.
RBI also said India’s budget deficit may come under “pressure” this year as the government boosts spending ahead of elections due by May. Government finances will be hit by “higher oil subsidies and the burden of debt waiver to farmers”, RBI said.
A ballooning budget deficit may force the central bank to raise borrowing costs to prevent higher government spending from stoking prices.
Spending by India’s government registered a “sharp rise” in April-May, the first two months of the current fiscal year, according to RBI.
The government’s budget deficit target for this year is 2.5% of gross domestic product. It has kept an oil subsidy bill of more than $40 billion outside its accounts.
The result of RBI’s tight money policy is showing in the decline of business expectations index as corporations are expecting an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June, the business expectations indices, based on an actual assessment for April-June and on expectations for July-September, declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters.
Corporations are less optimistic on the overall business situation, financial situation, production, order books, cost of raw materials, capacity utilization, employment, imports and profit margins than they were in the previous quarter.
According to the RBI survey carried in its report, most of the corporations expect to adjust the rise in raw material prices and the production cost by keeping inventory levels at “below average” and increasing prices.
Incidentally, industry lobby Confederation of Indian Industry’s business confidence index for April-September 2008 declined by 5.3% compared with the past six months, and 2.9% compared with the corresponding period a year ago.
The decline was on account of uncertain global economic outlook and concerns about high interest rates.
The RBI report also said a professional forecasters’ survey, conducted by the Indian central bank in June 2008, suggests moderation in economic activity for next three quarters and fiscal 2008-09 as a whole.
“Between the...survey conducted in March 2008 and...in June 2008, forecast of real GDP growth for 2008-09 was revised downward to 7.9% from 8.1%,” the RBI report said.
The central bank’s projection for growth in fiscal 2009 is 8-8.5%, and there has been no change in this yet.
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