23.6.08

Why is Oil on the Boil?

A very interesting article....Definitely defies logic.
Observers can’t agree on the reasons for the rise in oil prices. Some blame speculators, others say the oil producers aren’t pumping enough crude and some blame the falling dollar. Another widely held opinion is that demand from countries such as China and India is the culprit.) So who’s right? Or is a combination of all the above factors to blame? There’s no denying, however, that one aspect of the recent surge in oil prices is rather curious. The price of light, sweet crude has gone up to around $134 (Rs5,758) a barrel at present from around $80 a barrel at the end of September. Yet growth in most parts of the world has slowed over the period. Consider the numbers. Year-on-year gross domestic product growth in the July-September quarter of 2007 was 2.8% in the US, 1.9% in Japan, 11.5% in China, 2.7% in the euro area and 9.3% in India; in the first quarter of 2008, however, those growth rates slowed to 2.5% for the US, 1.3% for Japan, 10.6% for China, 2.2% in the euro area and 8.8% for India.
Two countries that have seen higher rates of growth in the first quarter of 2008 compared with the third quarter of 2007 are Russia and Brazil, but that’s nowhere near offsetting the slowing growth seen elsewhere. The question is: Why have commodity prices risen by 67% since last October, in spite of a clear deceleration in global growth?
One argument has been that commodity prices are a hedge against a falling dollar, but the commodity price index in euros too has gone up from 141.8 on 25 September to 159.7 now. In fact, a closer look shows an even more intriguing trend.
Over the same period, the metals price index (in dollars) has fallen from 281.4 to 278.9, a small drop, but it’s very different for what’s happening in oil. In short, while slowing growth has led to lower prices for metals, which is what common sense tells us should happen, the same logic hasn’t held true for crude oil. The indices for food and non-food agriculturals too have risen by 40% and 25%, respectively, illustrating the close link between crude oil and food prices, the result of land being diverted to the production of ethanol.
The data indicate that something very special is happening in crude oil. What seems to be clear is that runaway demand growth is not responsible for the price spurt.
The macro backdrop in the developed world is not conducive to sustained underlying price pressures. The US and Japan are close to or in recession, the UK economy is heading there rapidly, and the euro area is on target for a period of below-trend growth.

No comments: