Let’s sPEAK a bit about OIL...
Sagging oil prices, of late, have been a phenomenon that has defied fundamentals; but then it’s temporary too

(column by Bikram Keshari Jena)

Oil prices have been quite giddy in the recent past. Any course taken by it has rocked markets, left countries and corporations shivering, and made the world economy dance to its cacophonic tunes. Crude oil seems very much living up to its characteristics – slippery, explosive and, not to mention, crude, really crude!

Past few days have seen oil prices slip off from the highs of $75 per barrel to a low of $57 per barrel (now trading at $60 per barrel); and many have gone to the extent of naming it as a crash. This has left the debate on Peak Oil – which says that the world has reached the peak of oil production (if not, it will soon happen in the near future) and the era of cheap oil is over – further intensified. But before blindly subscribing to any such analysis, certain factors should be considered that may force one to believe that it’s not the end of any rally, but just might be the beginning of another crude one.

Well, first questions first. Was the recent rally a bubble? A look at crude oil’s history shows that the past levels reached by it, certainly dwarfs the current price rise to $75 barrel. If you have forgotten, then just to remind you, in real terms, crude oil prices touched $100 per barrel during the 1979-80 Iranian crisis, much above the current high. Moreover, during the 1970-80 decade, oil prices rose by more than a staggering 1200% as compared to a rise of about 600% during the current rally. So, it’s clear that the recent rally was not a bubble.

Now the question arises about why the prices have retreated, of late. First of all, tensions in the Middle East have begun to settle, which has led to a fall in the oil prices as a large premium was being factored in on Iran conflict. As Thorsten Weinelt, MD, Markets & Investment Banking, Bayerische Hypo-und Vereinsbank AG, puts it, “One major reason for this development is the drop in energy prices, which in our opinion, was exaggerated by speculative forces. Nearly $10 billion have been invested in oil and gas futures in the US, speculating on an escalation of the hurricane season and the nuclear conflict with Iran.” Secondly, easy money due to loose monetary policies that fuelled speculation is now starting to dry up from the global financial system, leaving the markets suffocating for liquidity. This has adversely affected financial markets’ both equities and commodities, including oil. Thirdly, there are instances in the short-term where supply outstrips demand and prices fall momentarily; but the long-term scenario remains quite conducive for rise in oil prices.

Definitely, a rise in oil prices seems more than likely, as very rightly the peak oil concept puts forth the depleting production capacity – if one takes a look around from Ghawar in Saudi Arabia to Cantarell in Mexico to Daqing in China, one will find a symmetric depletion of production in these oil fields – the largest in the world. Well, this has quite an implication on the prices – not because of speculation, but due to a rise in the cost of production of oil. It’s in the nature of humans to go for things which are easily accessible. So, once we run out of these available supplies, we will have to move into wells that are less feasible and less economical. More money will have to be spent to pump out the same barrel of oil and transport it to the market place, thereby, jacking up the prices further.

Furthermore, ever increasing demand for oil on the back drop of Peak Oil will constantly push oil prices upwards. There’s a lot of new demand to come from China and other emerging economies, which will see the oil prices recuperate. As Weinelt adds, “The International Energy Agency expects demand for crude oil to increase by 1.7% as compared to last year, mainly due to the demand from China and the Middle East.”

And most compelling of them all, declining Energy Return on Energy Invested (EROEI), which is used to measure how much energy is generated by the amount of energy invested. It is to be noted that few oil wells at present are at an EROEI of 5 and interestingly, these oil wells had an EROEI of 200 in the past. Logically, and in true economic sense, this declining EROEI can only be sustained if energy prices rise and rise higher than other items.

So, whatever may be the case, it should not be taken as a crash. Fundamentals show that, day after day, we are running out of oil and cost of producing it is rising and above all, an ever increasing demand. Well, this might be enough to figure out what a crude future awaits.

(End of Bikram Keshari Jena column)

Up above the world so high...
Italy must offload its soaring debt burden to improve its credit ratings

(column by Deepak Ranjan Patra)

While hanging in the parliament with just a single vote majority, the Italian Prime Minister Romano Prodi mustn’t have expected in his wildest dreams that the international ratings agencies will add to his woes. But for unfortunate Prodi, it did happen. World’s two most renowned credit rating agencies – Standard & Poor’s (S&P) and Fitch – on October 19 declared of cutting down Italy’s credit ratings, citing the country’s insufficient measures to control debts and deficits as prime reason. And the result is anything but welcomed, as the Italian interest cost is bound to soar further from current 107% of GDP.

While S&P has slashed the Italian rating to A+ (which is now the second lowest among the Euro nations after Greece), Fitch’s new rating reads AA-for Italy as against the previous AA. Though Fitch praised Italian government’s “commitment to fiscal responsibility”, the rating agency clarifies, “The downgrade reflects the deterioration in Italy’s public finances, which has seen public debt rise since 2004 and the primary surplus diminish sharply.” Lowering of ratings surely came as a shock to Prodi and a blow to his draft budget that plans to reduce the debt level by 0.5% of the GDP in 2007 through a tax hike and cutting $43.5 billion in government spending.

But then, Prodi must not forget that as per the government’s estimates, Italy’s debt levels (which are already the highest in Europe) will move upto a mind boggling 108% of the Italian GDP. Looking at his commitpuny strength in the Parliament, certainly, it will be difficult for Prodi to get his proposed tax hikes cleared. Although Prodi might say, “We are certain that the next judgments will register positively’,’ he must be worried about the pressure that will mount soon on the Italian Lira.

Prodi definitely needs to bring in radical changes in ways and means of government spending & receipts in order to avoid the debt trap. If not, then it won’t be much late before the rating trouble will lead to a currency trouble.

Mutually exclusiveDon't take my cheese away...

The early bird gets the worm, but the second mouse gets the cheese. However, these words of Jon Hammond do not seem to be working for the Indian Mutual Funds (MFs) industry. Be it the buying or selling of equities, MFs have been the late movers every time, hence resulting in losses for investors due to the missed opportunities.

Interestingly, although the stock markets have bounced back to new historic heights after the crash in May this year; MF Net Asset Values (NAVs) are still lagging behind their top levels. For instance, NAV for Prudential ICICI Dynamic Plan (Growth), which was at 60.97 on May 10, 2006, is still at 57.74 (as on October 25). SBI Blue Chip Fund, which was at 11.58 o May 10, is still at 11.11. The situation is more or less same with almost all MFs.

A bird eye view on the buying pattern of MFs vis-à-vis the Sensex reveals the losing characteristic of MFs (see chart). Defying the golden rule of ‘buying low and selling high', MFs bought heavily in May and September this year (when Sensex was at 12,000 level) and remained net sellers in June and July (when Sensex was down at around 9,000). K. K. Mittal, Vice President and Head, Escorts Assets Management, attributes such buying pattern to, “The cautious approach of the MFs due to the uncertainties prevailing in the market place at that period of time and the changes in various portfolio mixes.” One may expect the MFs to crawl back to their highest levels. But, with markets tending to be volatile and the MFs reacting very cautiously, MF investors perhaps may not be able to see their NAVs at May heights in the near future.

Definitely, the MF managers have to be proactive in analysing the market trends so that they could act in line with the market swings and deliver what they are supposed to – maximum return on investors' money. Their addiction to react late that seems to be taking away the cheese from investors needs to be changed.

(End of Deepak Ranjan Patra column)

Later on don’t say we didn’t caution...Developed nations are passé, India should hunt for new export markets

(column by Bikram Keshari Jena)

If you have come across Assocham’s recent study, which says that a percentage increase in the India’s trade partners’ GDP increases India’s exports by 14% to those countries, then we have one more viewpoint, or rather a concern, to add to it. No doubt, it’s a great co-relation which has been established, but a closer look will prove that the study only reveals that good times are bidding adieu.

The study states that a percentage real GDP growth in the US, UAE and Germany et al have led to an increase in India’s trade with these countries. Commenting on this Anil Agrawal, President, Assocham said, “Our study reinforces belief in the increasing integration of Indian economy with the rest of the world. Any positive or negative change in economic growth has a direct and consequential impact on the Indian exports.” To be critical, if we consider our trading partners, apart from the Asians, mostly the developed nations don’t sport a very promising economic outlook. US, in particular, led by a slump in housing, is heading for a serious downturn. Even the IMF, in its annual meeting held at Singapore on September 14, cautioned about the US downturn and termed it as ‘a risk to global expansion’. Similar is the case with other developed nations. All this boils down to the fact that India (as per Assocham’s study) needs to look for new export markets.

As Asian nations are emerge as the biggest consumers and have gradually begun to lower trade barriers, India should now focus on expanding its trade within Asia (which is quite low till date). Our policymakers should not mistake by keeping all eggs in one basket, rather lookout for new hunting grounds, which are next door.

(End of Bikram Keshari Jena column)