What Glut?

Discussion in 'Economics' started by ShoeshineBoy, May 30, 2008.

  1. I did not realize Asia so heavily subsidized oil. It looks the wheels are coming off the freebie cart and oil prices might be showing a few signs of cracking thanks? Will it last long tho?


    Asian countries begin to burst the oil bubble
    By Ambrose Evans-Pritchard
    Last Updated: 12:37am BST 30/05/2008

    One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bringing hundreds of millions of consumers face to face with the true market cost of oil. The effect has already begun to chip away at world demand and may ultimately trigger a slide in crude prices.

    Egypt - the most populous Arab state - has raised petrol prices by 40pc, despite protests in Cairo. Sri Lanka lifted diesel and petrol prices by 25pc over the weekend. India may have to follow soon to prevent its trade and budget deficits climbing to dangerous levels. "The situation is alarming. We need to stem the rot," said India's energy secretary, MS Srinivasan.

    Indonesia has raised petrol prices by 33pc in order to restore fiscal discipline (subsidies are 3pc of GDP). Taiwan has mooted a 20pc rise, and Malaysia is to peel back controls. While China has so far resisted calls for price freedom, the policy is becoming unsustainable. Analysts predict a change in tack after the finish of the Beijing Olympics at the end of August.

    The fast-changing politics of the emerging world has started to chill enthusiasm in New York and London for oil futures contracts. West Texas Intermediate has so far slipped $5 a barrel from its all-time high of $135 last week as hedge funds lock in profits, although analysts warn that it is too early to tell whether the 30pc spike in oil prices since March has burned itself out.

    Gold, industrial metals and corn (a biofuel substitute for oil) have all fallen hard in recent days as investor sentiment turns cautious towards the whole nexus of commodities.

    The drip-drip effect of grim data from the United States, Britain and parts of Europe has sapped confidence, causing many investors to question the whole assumption of a rapid "V" recovery powered by low interest rates in the US. The number of miles driven by Americans fell in March at the steepest rate ever recorded. Oil use in the OECD club of rich states has been falling for more than two years.

    Stephen Jen, currency chief at Morgan Stanley, says half the world's population now enjoys fuel subsidies of one sort or another. Petrol costs 5 cents a litre in Venezuela, 12c in Saudi Arabia, 64c in China, $1 in the US, and $2.16 (£1.10) in Britain. It is heavily subsidised in Mexico, Iran, central Asia and the Gulf states.

    More from Ambrose Evans Pritchard
    The result has been to encourage promiscuous use of fuel. It has masked the underlying rate of inflation in emerging markets, and flattered the economic growth rate.

    Mr Jen says the game is largely over. "The subsidies will need to be rolled back, especially for governments with fragile fiscal positions. They face a stagflationary shock," he said.

    Michael Waldron, an oil analyst at Lehman Brothers, said the bullish case for oil over the next year or so rests on an ever narrower group of countries - essentially China and the Gulf states.

    "Are they really enough to support oil prices at this level? Inventories are building up at 600,000 barrels per day [bpd] across the world," he said.

    Lehman Brothers estimates that supply will average 86.2m bpd in the second quarter, while demand slips to 85.6m. The surplus will widen to 1m bpd later in the year as new oil comes on stream from Brazil, Azerbaijan, Kazakhstan and the Sudan. The US Energy Information Agency expects US output to rise by 400,000 bpd by the winter.

    A cyclical correction as the global economy slows would not necessarily invalidate the Peak Oil theory. There can be powerful ups and down with an upward "supercycle", even if the world is gradually running out of fossil fuels.

    For now, traders are keeping a careful eye on politicians in Europe and the US as they call for curbs on the derivatives market for oil futures. The Hunt brothers in Texas were ruined attempting to corner the silver market in 1980 when the COMEX exchange suddenly changed margin requirements, and then suspended trading altogether. The pair failed to heed the warning signs.

    It is unclear whether the US Commodity Futures and Trading Commission would resort to such methods if oil keeps rising. The key players these days are pension funds and investors building up positions in long-term futures contracts through commodity index funds, now worth some $250bn.

    They are encouraging oil companies to invest in exploration by guaranteeing high prices five or 10 years ahead. Arguably, they are performing a public service.