Is Only Food Burning ?....... Have A Look At Crude Than

Crude Oil Prices in NYMEX set new records spiking to $119.90 a barrel on 22nd April 2008, this has augmented uncertainties in the minds of economists who were so far been finding Food as a hot topic.

Crude oil prices have oflate been on the hit list of many Governments and Economists, as one of the cause of inflation. The rise in Crude has been well supported by a variety of news, summer driving season in US, Dollar touching all time lows against the EURO, OPEC stance of not to increase the supply of Oil and if this was not all the dicey nature of Crude surprised everyone especially those who were predicting a constant rise in inventories.

The Energy Information Administration data indicates that the US Crude Oil ending stocks since 1999 have been on the rise barring a fall in the year 2000 in stockpiles by 4.6% to 10232.92 per thousand barrel as against 10726.80 per thousand barrel. Till the end of 2007 the increase in US Crude Oil ending stocks have rose to 12182.78 per thousand barrel marking a rise of 13.5%. In the first month of 2008 US crude Stocks were 994.771 per thousand barrel a decline of almost 2%.

The latest EIA report on oil inventories in the week ended April 18th, demonstrated that crude oil inventories increased by more than expected after falling in the two previous weeks. The report showed that crude oil inventories increased by 2.4 million barrels, offsetting the 2.4 million barrel decrease seen in the previous week.

Crude Prices normally rise in the spring as suppliers stock up in advance of peak summer driving season, and as refiners switch over from making winter grade gasoline to the more expensive, but less polluting, summer version of the fuel. As they perform this switch, refiners try to sell off all of their winter grade fuel, driving overall supplies down. This year, refiners are also facing short supplies of alkylate, a key ingredient in summer grade fuel.

Tensions in Nigeria also ignited the prices. Nigeria is the fifth-largest exporter to the U.S. last year and produces low-sulfur crude highly valued by refiners because of the proportion of high-value gasoline it yields. The country pumped 1.96 million barrels a day of crude in March down from 2.4 million barrels a day at the end of 2005 as militant attacks have increased.

World finest variety The West Texas Intermediate (WTI) also known as Light Sweet Crude due to its low sulphur contents was $ 19 per barrel in the year 1999, now the same trades at $ 118 per barrel in 2008, registering a rise of more than 500% in 10 years. If one compares it with EURO- Dollar exchange rates the relation is clear as the Dollar subdued its position against the EURO since 1999, when EURO came as the single currency for all the member countries, Crude has inched up. It therefore signifies the fact that Dollar moves in inverse proportion as that of Crude Oil and whenever Dollar is declining it augments the lure of Crude for the traders and participants as Dollar denominated currencies become cheap. Dollar has lost by 50% since the initiation of EURO in 1999, however in case of Crude several other factors act as triggers which determine the trend from time to time.

In Domestic Markets MCX Benchmark Futures for June expiry touched a high of Rs 4734 per barrel on 22nd April 2008. The prices were hovering in the range of 3718 per barrel at the start of this year, marking a rise of 27% in barely four months.

The immediate move of the rising Crude Prices came from Venezuelan President Hugo Chavez, Venezuela began taking a bigger cut of foreign oil company’s windfall profits, applying a new and higher tax on earnings. Under a law approved on 16th April 2008 by the National Assembly, Hugo Chavez's government started charging a 50 percent tax on additional earnings when crude prices pass $70 per barrel in U.S. dollars and 60 % on additional earnings when prices top $100 per barrel. The new levy came on top of income taxes currently set at 50 percent for foreign oil companies. The amounts paid will be deductible from the oil companies' income tax payments.

Outlook:

As per Energy Information Administration, the global oil market remains fundamentally tight entering the second quarter of 2008, despite a slowdown in U.S. oil consumption and growing risks to global economic growth, the combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.

World oil consumption is expected to grow by 1.2 million billion barrel per day in 2008. Non-OECD countries are expected to account for over 1 million billion barrel per day of world consumption growth, while OECD consumption is expected to climb by 90000 billion barrel per day. Higher oil prices and slower economic growth have dampened consumption in the United States, but global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East oil-exporting countries. OPEC crude oil production is expected to average 32.3 million billion barrel per day during the first quarter of 2008, or about 700000 billion barrel per day above fourth quarter 2007 levels.

Prices are in unchartered zone from where further triggers will enthuse more consolidation at the upper levels.

Asian Economies- Spiraling Food and Oil Prices Will Keep Fuelling Inflation

Recently Asian Development Bank released its Outlook on Asian Economies for the year 2008. The key factors of the report suggested that although the Credit markets will be working in a sound manner in the Asian Economies, Inflationary risks will keep hovering over these economies lead by spiraling Food and Oil Prices.

Developing Asia registered its highest growth in 20 years averaging around 8.7% in the year 2007. This year the growth is likely to be at 7.6% as per expectations, this will be because of the trend prevailing in the Global markets including surging Food and Fuel prices. The report suggested that the road to success is dependent on how successfully the countries manage these constraints.

Signs of overheating are prevalent in China where the Inflation figures touched a 11 year high in November 2007, India was no different with Inflationary figures reaching to as high as 7%, a three-year high in the week ended March 22 as against 6.68% in the previous week. The WPI for all commodities rose by 0.5% to 224.8 from 223.6 in the week ended March 15, the Commerce & Industry Ministry said. The latest inflation rate was above the average forecast of 6.62% and is the highest reading since Dec. 4, 2004 when it was 7.07%. The annual inflation rate was 6.54% during the corresponding week of the previous year.

Inflation pressures were also very high in Sri Lanka, and inflation accelerated to 20%. Bangladesh and Pakistan also had comparatively high rates of 7.2% and 7.8%, respectively.

Road Ahead:

Commodity market prices have also soared again testing new highs, Food Prices have been on a roll with Rice, Soybean and Wheat all touching new resistances in International markets. Crude Oil is also near to its all time high figure, and with summer driving season in picture the demand is expected to emerge from the US, with Dollar trading near to its lows against the majors is making the traders of Black Gold attracted towards the prices.

Hue and Cry emerged in Rice markets in Asia after the prices touched to as high as $ 20 in Chicago more than double of what it used to be in the year 2007. India, the world's second-biggest rice producer, increased the minimum export price for the grain to boost local supplies and curb inflation. The minimum price for non-basmati rice exports were raised to $1,000 per tonne from $650 per tonne free on board, in a move to slow down exports and to tame rising inflation. Most of the other major’s producers and consumers of Rice have banned the exports of Rice in order to supply the commodity to its hungry economies. Incessant rains in India have damaged the standing crops of Wheat in North and South India and this will adversely affect the prices in the country where the Inflation is as it is on a higher end.

However, the turmoil in Global Financial Markets especially in US, European Union and Japan will bring slowdown in growth prospects of other emerging economies. First half of the financial year 2008 is expected to be weak, but the performance of the second half especially in the US can pick up after the aggressive rate cuts and financial stimulation strategies. Fed is likely to cut interest rates several more times this year but the counter affects will only be clear in the second half of 2008.

Concerns about the outlook for the economy contributed to the Federal Reserve’s latest decision to cut interest rates, according to the minutes of 18th March 2008 Federal Open Market Committee meeting released on 8th April 2008. The minutes showed that most members of the committee determined that a substantial easing in the stance of monetary policy was warranted in light of the belief that the outlook for economic activity had weakened considerably since the January meeting.Some members viewed the downside risks to economic growth as having increased and some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market.

The Fed acknowledged that the outlook for economic activity has weakened further, with consumer spending and the labor market decelerating in reaction to the slowdown. The central bank also cautioned that the financial market stress, tighter credit conditions and the deepening housing market contraction will weigh on growth over the next few quarters


Outlook:

The anticipations in the report are that the Trade Deficits are likely to move up in the developing nations due to there voracious appetite for the commodities. The subsidies provided to ease the pressure of price rise will keep on hurting the governments in the days to come. Inflationary pressures should recede slightly in 2009. The forecast deceleration in inflation is based on an assumption of some moderation in commodity prices through 2009 and monetary policies that lean against inflation pressures. Current account surpluses are expected to narrow further in 2009, and should help rebalancing, and at an aggregate regional level may fall below 5% of GDP. Even if global demand growth recovers, it is likely to be modest, and real exchange rates are expected to appreciate for many Asian economies.”