A report from Morgan Stanley thinks that although it cannot be proven from figures, but there is a certain 'inverse relationship' between the US dollar and crude oil price. Although before this the US government has been saying that the high crude oil price is because OPEC refuses to increase production capacity, but Morgan Stanley's report says that the high crude oil price rise has relationship to the poor performance of the US dollar.
At the same time, Morgan Stanley also pointed out that the recent drop in crude oil price and the strong US dollar is good for the global economy, stating that the drop in crude oil price has given the various countries central banks more flexibility to tackle the inflation problem.
See-Saw Action Between US Dollar and Oil Price
Because the US dollar is the main currency used for global crude oil trading, under the condition that supply does not change, strong or weak US dollar movements have a negative correlation with oil price fluctuations. However, a Chinese analyst says that the main reason for the drop in crude oil price was that the economic outlook for US, Europe and Japan is not good and the expected demand will thus decrease.
Of course, other then the slow down of the economy causing a slide in demand, oil's price decline has other reasons.
Credit Suisse in its report says that the recent big drop in oil price is due to 4 reasons. 1) Drop in demand. 2) Weakening of the Euro. 3) Increase in supply. 4) Decreased speculation activity.
Credit Suisse oil and gas analyst Prashant Gokhale says that the non-OPEC countries increase in oil output cannot be ignored. According to his estimates, non-OPEC countries oil supply amount will continue to increase between September this year to August 2009. Especially so will be in 1Q 2009, the non-OPEC countries daily oil output is expected to increase about 1 million barrels.
That expectation has strong support from IEA's figures. IEA's related department also estimated that beginning 4Q this year, non-OPEC countries daily out output volume is expected to increase and will continue to 3Q 2009. In between Januuary and March 2009, daily output volume is expected to be over 1.5 million barrels.
Less Speculation of Crude Oil Futures
The backing off of speculators from the crude oil futures trading is also one of the reasons for the decline in crude oil prices.
Prashant Gokhale, quoting figures from NYMEX, believes that non-commercial related speculation has greatly reduced from that in 2007.
In addition, Morgan Stanley's report believes that there is a 'reverse relationship' between the US dollar and oil price from 6 points. 1) Preference for US dollars of countries producing crude oil and denominated by US dollar drops. 2) Various countries central banks reactions for the high crude oil price crisis are different. 3) High oil price damages the various US projects. 4) US dollar based countries increases its export competiveness because of the drop in US dollar. 5) Big investments in bulk commodities. 6) Although the US dollar weakens but the demand for oil does not.
Credit Suisse report shows that in the first 7 months this year, the correlation between global oil price and the exchange rate between Euro and US dollar reached 77%. The most surprising coincidence is that in mid of July this year, when the exchange rate between Euro and US dollar was at the lowest, crude oil price have also fallen to the lowest at the same time.
Low Oil Price Benefit Fight Against Inflation
Another Chinese analyst says that the coming down of oil price is good in easing of China's domestic inflationary pressure. Imported inflation will decline following the drop in oil price. Production costs will also decrease and is good for the country's economic development. Also, if oil price were to maintain at current relatively lower price range level, it will provide more room for manoeuvre for China's macro economic controls.
According to his analysis, there is a break in relationship between oil price in China and outside of China. But if global oil price were to be cheaper, oil related inustries in China losses will also decrease and will resolve the oil and power shortage problem in China. Although China's oil price control has made oil price effect towards the CPI to be relatively small, but considering the changes in supply and demand, the possibility of adjustment to the oil price in China in the later half of the year will be greater.
If the oil price in China maintans unchanged, he predicts that CPI for 3Q in China to be about 6%, CPI for 4Q in China to be about 5%. So adequate adjustments to the oil price in China is feasible.
If bulk commodities prices, with crude oil as the main representative, can stabalize down, China's economic growth pressure could be lessen next year.
A report by BOC International Securities estimates that with the decline in price of agricultural products, CPI for August will go down to about 5.4%. And PPI will see a peak in the coming 2 months.
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5 September 2008
- Oil prices fall as dollar surges
NEW YORK - OIL prices fell on Thursday as the dollar strengthened against the euro on eurozone economic woes and the market shrugged off a larger-than-expected decline in US energy stockpiles.New York's main contract, light sweet crude for delivery in October, slid US$1.46 (S$2.10) to close at US$107.89 a barrel.
In London, Brent North Sea crude for October dropped US$1.76 dollars to settle at US$106.30.
New York crude oil prices rose early in the session but lost momentum as the euro sank against the dollar after the European Central Bank cut its eurozone growth forecasts for 2008 and 2009.
The European single currency fell briefly to its lowest level against the dollar since December 21, 2007 at US$1.4326 dollars.
The dollar also found support in an Institute for Supply Management survey showing US service sector activity rebounded unexpectedly in August.
A stronger dollar makes dollar-priced commodities more expensive for buyers using weaker currencies.
Many analysts expect crude oil prices to continue to fall due to declining demand in the slowing global economy.
Crude oil, which had hit a record-high US$147.27 on July 11 in New York, has lost nearly US$40 in less than two months.
In this context, the market dismissed an unexpected decline in US oil stockpiles last week.
The US Department of Energy (DoE) said crude stockpiles had dropped by 1.9 million barrels in the week ended August 29 instead of the consensus forecast of 300,000 barrels.
Distillates, which include heating fuel, fell by 400,000 barrels last week, less than the expected drop of 600,000.
Distillates are being watched closely by the market ahead of the northern hemisphere winter.
The latest DoE weekly report on energy stockpiles was published a day later than normal because of Monday's Labour Day holiday.
The oil market was looking ahead to Tuesday's meeting of the Organisation of the Petroleum Exporting Countries (Opec) amid speculation the cartel could cut output if prices hit US$100 or below.
'The rapidity of the price slide should provoke an aggressive reaction from Opec. Actually, there now appears to be a consensus building within the group for a production cut. The debate at next week's meeting in Vienna will be the size of a cutback,' said Mr John Kilduff at Alaron Trading.
Opec member Nigeria said on Thursday that it was keeping its options open on output quotas in the wake of falling oil prices.
'I'm keeping an open mind,' the junior minister for petroleum Odein Ajumogobia told sources ahead of Tuesday's gathering in Vienna, where Opec headquarters are located.
'We haven't seen the end of the volatility and I think we should wait and see how things settle down ... before we take a step to intervene.'
The Opec cartel of 13 countries produces 40 per cent of the world's oil. -- AFP
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