Rand, oil neu­tralise each other

Weak de­mand con­di­tions likely to pre­vail in fuel mar­ket

Finweek English Edition - - News -

ANY­ONE WHO WATCHED the rand break through the US$1/R9 level on 6 Oc­to­ber would im­me­di­ately have been wor­ried about inflation. But con­cerns about the rand’s ef­fect on inflation may be slightly over­done for now, given the fall in the oil price. The rand’s per­for­mance has largely been a story of US dol­lar strength; against the euro and the pound the lo­cal cur­rency has not fallen as sharply.

The dol­lar’s strength may seem a weird phe­nom­e­non, given the dire straits in which the US econ­omy finds it­self. How­ever, mar­ket play­ers world­wide still be­lieve the US ad­min­is­tra­tion will never de­fault on its debt and are seek­ing the safe haven of US Trea­sury bonds.

One of the main ways in which the US dol­lar/rand ex­change rate hits inflation is via a higher petrol price. But the oil price has dropped sharply, fall­ing to be­low US$90/ bar­rel at the time of writ­ing. The move­ments of the dol­lar/rand ex­change rate and the oil price have largely neu­tralised each other.

For SA’s inflation out­look much rides on the fu­ture of the oil price. Rand Mer­chant Bank an­a­lyst Josiah Oliphant, in an anal­y­sis of the oil price, notes that dur­ing first half 2008 com­modi­ties ex­tended their seven-year bull run with en­ergy prices at the fore­front of the rally, as low OPEC spare ca­pac­ity, short­term sup­ply dis­rup­tions and weak­ness in the US dol­lar boosted oil prices. How­ever, in a change of sen­ti­ment, the mar­ket shifted its at­ten­tion away from sup­ply short­ages to de­te­ri­o­rat­ing de­mand con­di­tions in the ma­jor economies. That saw Brent crude plum­met­ing more than 35% from its record high of $145/bar­rel reached dur­ing July.

Oliphant notes the US dol­lar strength­ened more than 8% against the euro in the third quar­ter, prompt­ing in­vestors to move funds out of com­modi­ties. The price of crude tracked move­ments in the dol­lar 92% of the time dur­ing that pe­riod com­pared with a 70% cor­re­la­tion in the first half of the year. The av­er­age price of crude oil de­creased from $133/bar­rel in July to $113/bar­rel in Au­gust to $99/bar­rel dur­ing Septem­ber. “The re­cent slump in the oil price has been a re­flec­tion of both the mar­ket’s ex­pec­ta­tion that slow­ing global growth will dampen world oil con­sump­tion and the re­lated strength in the dol­lar,” says Oliphant.

Crude fu­tures also plum­meted dur­ing Au­gust, de­spite news of hur­ri­canes Gus­tav and Ike halt­ing crude oil op­er­a­tions in the Gulf of Mex­ico (home to a quar­ter of US oil pro­duc­tion.) The oil mar­ket also shrugged off news of the con­flict be­tween Ge­or­gia and Rus­sia, while the de­ci­sion by OPEC to cut sup­ply by 500 000 bar­rels/day had no sig­nif­i­cant im­pact, fur­ther il­lus­trat­ing the mar­ket’s un­re­spon­sive­ness to sup­ply con­straints.

Fig­ures on fuel con­sump­tion il­lus­trate the fall in de­mand. Oliphant notes that, ac­cord­ing to the US Depart­ment of En­ergy, to­tal gaso­line and dis­til­late de­mand in the world’s largest en­ergy con­sum­ing coun­try has fallen by more than 7% since the start of the year, whereas de­mand in­creased by 3% dur­ing the same pe­riod a year ago. In ad­di­tion, Chi­nese cus­toms au­thor­i­ties re­ported that dur­ing Au­gust China’s im­ports of diesel and gaso­line fell by 9% and 37% re­spec­tively.

Oliphant says a com­bi­na­tion of weak­en­ing global de­mand and prospects of ris­ing sup­plies from non-OPEC pro­duc­ers had weak­ened oil mar­ket con­di­tions. A re­bound in global sur­plus pro­duc­tion ca­pac­ity is also ex­pected to buf­fer the mar­ket against any sup­ply dis­rup­tions in the near term. In ad­di­tion, the lagged ef­fect of record high oil prices ear­lier in the year is still ex­pected to fil­ter through the global econ­omy, fur­ther damp­en­ing con­sump­tion de­mand world­wide.

“It seems on bal­ance that weak­en­ing de­mand against the back­drop of ris­ing sup­ply con­di­tions will de­ter­mine the di­rec­tion of the oil price for the re­main­der of this year. Con­se­quently, we ex­pect the oil price to trade within an $85/bar­rel to $115/bar­rel range over the next six months. The lower end would be con­sis­tent with a more pro­nounced slow­down in the global econ­omy, while a se­vere sup­ply dis­rup­tion or re­bound in global de­mand could see oil test­ing the $115/bar­rel level,” Oliphant says.

RMB econ­o­mist Kay Walsh, in an ex­er­cise con­ducted be­fore the lat­est mar­ket tur­moil, found that with an oil price of $85/ bar­rel and a US$1/R8,60 ex­change rate by April next year inflation would en­ter the tar­get range in June 2009. How­ever, the rand was al­ready weaker at the time of writ­ing at around US$1/R8,80.

Ned­bank econ­o­mist Nicky Weimar says the petrol price is likely to re­main un­changed – de­spite the sharp fall in the oil price – due to the rand’s dra­matic weak­en­ing. ETM econ­o­mist Rus­sell Lamberti says the petrol price is likely to re­main flat to slightly weaker, as rand weak­ness and the oil price de­cline ap­pear to have neu­tralised each other.

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