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Crude crunch

Crude crunch

Ehtesham Shahid explains the effects of oil’s yo-yoing price on the world’s markets

January 27, 2009 1:03 by

The US government’s Energy Information Administration (EIA) expects oil prices to average $51 per barrel in 2009. This takes into account the current economic conditions and assumes that no major crude oil supply disruptions will occur. Considering OPEC expects bigger returns, the signs are not promising. And the Middle East’s assets are bound to be affected. Henry Azzam, the chief executive officer of Deutsche Bank MENA region, expects the asset losses of Gulf sovereign funds to reach $450 billion. “This loss is equivalent to the region’s oil income for a whole year,” says Azzam.

However, these projections largely fail to take into account that the dynamics of oil prices still remain largely incomprehensible. R. Seetharaman, the chief executive officer of Doha Bank, says one cannot take oil prices on their face value because of the dollar factor.

“At $147 per barrel it was the oil futures and not the demand which was exponentially up,” he says. “If you take a three year end-to-end comparison at that time, conceptually the dollar was weak and oil futures were 365 percent up while the real demand was up only 8 percent.”

According to Seetharaman, the same effect would occur in a reverse case scenario. “Now the oil futures are zero and the dollar has strengthened by around 28 percent. So when you denominate a commodity by the dollar it gets a different value because, at $147, discounting the dollar weakness, it was only at around $105,” he says.

Since the crude price is now around $40 and the dollar has strengthened considerably, the real regression of oil from July to December 2008 can only be estimated at around $100 to $50.

The common view is that commodity driven economies – such as those in the region – will continue to witness basic growth even if they price their budgets at $50 for the next year.

“If you look at the macroeconomic fundamentals, even with oil at $40-$50 per barrel, in 2009 we should be generating not less than $250 billion of current account surplus for the entire GCC. That apart from individual components such as Qatar’s natural gas,” Seetharaman says.

But what if the dollar weakens again and OPEC chooses to cut further? Wouldn’t we be back to square one? There are two simple lessons for me in this – stick to my sedan and go abroad only on business trips.

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