Uncertainties abound global crude price movement

Uncertainties abound global crude price movement Don hold your breath as yet, as crude oil prices in CY12 are likely to remain higher than CY11. In its recent short-term outlook, US Energy Information Administration (EIA) has spelled out a tight market for global crude oil in spite of the recent slackening of the prices. Moreover, EIA has warned against the volatility of the oil price movement in terms of both magnitude and direction. There are risks identified that could drive up price or pull them down altogether such as supply disruptions in Syria, Brazil, Yemen, Sudan and other Non-OPEC producers. Amongst the top qualms that could drag prices down are the fears of economic slowdown which would result in reduced consumption. This may not come as a surprise from Europe that is facing tougher times. On the other hand, prices could shoot up leaving the world spellbound with intensifying and further disruptions, and effects of EU embargo and recent sanctions on Iran. On the demand side, global crude consumption is expected to be affected by the flat demand from most of the developed nations like that in the eurozone. In CY12, the global consumption is estimated to notch up by 1 million barrels of oil per day compared to 0.8mbpd of CY11, with major share likely from China, South and Central America and Middle East. On the production side, supply is expected to definitely outpace the projected 1mbpd rise in consumption only to an extent where "global oil inventory and spare production capacity levels are projected to be tight enough to support higher average crude oil prices in 2012 than in the previous year." During 1QCY12, supply exceeded demand by 0.6mbpd YoY. Despite OPEC countries especially Saudi Arabia trying its best to make up for the Iranian supply disruption, projections tell that the production from OPEC would fall in CY13 due to the inching up of non-OPEC production, stagnant inventories and a further drop is supply from Iran by the end of CY12. A note of caution in case Iran shuts down its production as sanctions kick in: the sanction-ridden spare capacity that would result would not be as easily available as the like in ordinary situation. Summarily, crude oil prices have dived in recent month or so due to supply overhaul by 0.6mbpd during 1QCY12 and inventory build up as a result. EIA has set forth a trimmed forecast for West Texas Intermediate averaging approximately to $104 for both CY12 and CY13 - Still $8 higher than CY11 average price. Alladmin Food price volatility and poverty in sync Having suffered two floods in succession since 2010, food prices in Pakistan have seen quite the ups and downs that can dread any nation with nearly a quarter of the population living below the benchmarked $1.25 a day poverty line. ADBs latest report, Food Security and Poverty in Asia and the Pacific highlights how the challenges of a rising population, market inefficiency and the resultant food price volatility can take a toll on the poverty-stricken in any country. It is a no-brainer that food prices disproportionately affect the poor. ADB estimates that poor households tend to spend between 60 to 70 percent of their incomes on food. Unsurprisingly, the bank also holds rising food prices accountable for slowing the pace of poverty reduction in Asia since the late 2000s. "According to an ADB study, a 10 percent rise in food inflation is likely to deteriorate poverty situation by 2.7 percentage points," says Pakistans latest available Economic survey for 2010-11. Food inflation in Pakistan has been particularly steep over the last few years, with rising food prices accounting for a significant chunk of increases witnessed in CPI. During most of FY11, flood-related supply disruptions rendered food a major driver of the overall inflation in the country. In fact, overall CPI data charted against food inflation testifies to the strong link between food prices and general inflation in Pakistan (see graph). What makes the scenario more worrisome for Pakistan is the persistent volatility seen in food prices. In fact, after Sri Lanka, food price volatility is the highest in Pakistan amongst key Asian countries. Much of the volatility in food prices can be accounted for by supply-side constraints, with market inefficiencies in transporting and processing perishable commodities striking out as key factors contributing to unstable food prices. To top it off, unexpected climatic changes and consequent natural calamities, such as floods, play their part in worsening the already grave food supply dynamics. For the poverty-stricken, the rampant food price volatility means a sever strain on already-limited resources, hindering investments in education, health care, etc, to shield themselves from any unpredicted rise in food prices. ADB estimates that the annual percentage change in poverty in Pakistan is also quite appalling relative to South Asian peers and some other Asian countries (see table). So what can be done to control the seemingly uncontrollable spiral of food prices and poverty? Food-based safety nets for the poor instead of blanket subsidies, enhancing agricultural production through agricultural research and technology and implementing a rural-based growth strategy are a few suggestions by the ADB. Its up to the relevant authorities to pay heed to the suggestions and turn them into workable options for feeding the ballooning local population.

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               Food price   Change in
               volatility   % of poor
                 2000-10  due to food
                               prices
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Bangladesh          3.17         7.77
India - rural       4.76        11.47
India - urban       4.28        11.42
Nepal               5.06         6.15
Pakistan            7.23        26.71
Phillipines         3.11         8.71
Sri Lanka          10.03        15.61
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Source: ADB report Food Security and Poverty in Asia An end to austerity? A tsunami is sweeping through, but not in Pakistan. Elections in Greece and France over the previous weekend have brought a fresh wave of volatility and turmoil to international markets. In France, the anti-austerity campaign promises of the Socialist Party contender Francois Hollande have ousted Nicolas Sarkozy, whose exit appears to have slammed the brakes on the EUs drive to austerity that was spearheaded by Sarkozy and German Chancellor Angela Merkel. After protesting in the streets against fiscal tightening by the government, Greek voters have also made their voices heard in that countrys elections. Among the major gainers is leftist leader Alexis Tsipras whose coalition has secured about 17 percent of the countrys votes and has been offered a chance to form the new government. Far from ushering in stability, the elections have heightened chances of Greeces exit from the European Union. Such an occurrence could have far-reaching and drastic effects not just for that country, but for other EU member-states as well because the exit would almost certainly be followed by the nationalisation of Greek banks, restrictions on the movement of currency and stoppage of repayment of support funds received for economic stabilisation. Sensing these dangers, Germany has already ratcheted up pressure on Greece. Europes largest economy has been the biggest contributor towards Greeces bailout, but on Tuesday Reuters reported that German politicians are now warning that Greece "would not receive a cent more of aid unless it fulfills all the conditions of its international bailout". The EU is wobbling and international markets are feeling the jitters. European stocks including Germanys DAX and Frances CAC indices closed at their lowest levels in four months. Investors appear to be moving out of the euro and commodity prices including crude oil and gold are all softening. Even the markets of the Far East have not been able to escape the paranoia as the Nikkei started the week at a three-month low. If the emerging left-wing coalition in Greece remains unable to form a government, or for that matter if it forms a government that is loath to austerity, the EU could soon see its geographical boundaries altered. That could sweep the rug from under the feet of international investors and European economies alike.