INDIAN BONDS and Petroleum news

Oil Price Hike: Reasons and ImpactsDr. Ibrahim ibn Abdul Aziz Al Muhanna RIYADH, 6 September 2004 - Oil prices soared to historical record levels approaching $50 a barrel two weeks ago, after ranging at about $10 five years ago. Of course when oil prices go up or down sharply, the number of writers who seek to analyze the market situation and who claim to know all its aspects and secrets will increase. There is no doubt that the current surge in prices was unexpected, as most, if not all forecasts by experts, consultancy firms, energy organizations and companies at the beginning of this year were not expecting that prices would reach even $35 per barrel. In fact they were predicting just the opposite but what happened was the contrary as a result of some oil and non-oil developments simultaneously and successively. The most important ones of these developments are:First: The increase of world demand was more than expected, particularly in the United States, China and India and some developing countries. The International Energy Agency predicted at the beginning of this year that the world demand for oil this year would be less than 80 million barrels a day, but it later adjusted its forecast to 82.2 million barrels a day (bpd), with an increase of more than two million bpd.Second: At the beginning of the year, analyses indicated that new quantities of oil would enter the international market, particularly from Russia, Caspian Sea, West Africa, Iraq and others, but this did not happen in the expected quantities.Third: The political and labor situations in some oil exporting countries, as political and security instability and the fear of chaos or security problems affected production of these countries such as Iraq, Nigeria, Venezuela and Saudi Arabia. Apart from that the labor strike in Norway and the problems of Yukos oil company in Russia also contributed to creating a state of panic in oil markets, especially with the limited surplus of world oil production capacity, which is currently estimated at about 1.5 million bpd (about one percent of the international market demand).Fourth: The pressures on the oil products market, particularly in the US, which consumes a quarter of the international production. In the US market, there are problems associated with oil refining and the quality of used oil products. These problems result from the regulations that have affected the establishment of new oil refineries. (Industrialized countries have refining capacities equal to or exceeding the market demand with the exception of the US which has a shortage of up to two million bpd or 10 percent of its needs, and the shortage is met by importing oil that may not always be available at the required standard). These regulations make it difficult sometimes to meet the demands of some US states, thus causing a shortage in the inventory of oil products.Fifth: The situation of financial markets, for there is an important role being played by the international financial market on the world oil market. This mainly takes place through the investment funds and speculators in the future oil market, who contribute to the rise or decline of prices as per their view of the oil market on one hand and the investment opportunities in the different financial channels on the other hand. The decline of interest rates on many of the main currencies, fluctuations in the stock market together with a decline in dollar value and increase in the demand for raw materials pushed some investors in the future market to sign contracts for the purchase of row materials, particularly oil contracts, a matter which has remarkably contributed to the rise in oil prices.There is no doubt that the oil consuming countries - industrialized as well as developing ones - have the ability to cut their dependence on oil particularly when it becomes clear that the price rise is due to deliberate action by the producing countries and that may affect negatively their economies. They can adopt policies that will lead to the reduction of their oil consumption particularly at the medium and long terms, and this, for its part, will affect the income and situation of the main oil producing countries. The effective policies taken by consuming countries, particularly in the previous oil rise periods, such as hiking tax on oil products and encouragement of the use of other alternatives and enhancing efficiency of the use of oil and energy. Those policies proved successful not only in reducing oil consumption but also slashing oil demand. The same thing is applicable to several other industrialized consuming countries. A visitor to Holland today will notice high rate of the use of cycles as a result of a policy encouraged by the government 30 years ago, with the aim of reducing oil imports. The industrialized countries have succeeded in this matter in the previous years, and this success is not limited to the slowdown in the growth of oil demand and shrinking of the positive relationship between economic and oil demand growth. It also led to the increase of production in new areas, as the demand for OPEC oil declined from 31 million bpd in 1979 to 15 million bpd in 1985, i.e. more than half, while the production of Saudi Arabia declined from more than 10 million bpd in 1980 to about three million bpd in 1985.What may lessen the impact of the current crisis and make it different from the previous crises is that most people are aware that the current oil price hike is attributed to several factors, none of them dominant, and it is not an issue of conflict between producing and consuming countries nor has it come about as a result of deliberate actions by producers.The main challenge facing the Kingdom is non-dependence on one commodity - despite of its importance and price - as a single source of national economy with all its dimensions (state budget, balance of payments and gross domestic product), particularly when this commodity is liable to great fluctuation not only in its prices but also in its production. Thus comes the importance of the Kingdom's efforts to stabilize international oil market not only in terms of prices but also in terms of balancing demand and supply. It also works to ensure adequate supply and establish close cooperation with oil producing and consuming countries. This leads us to talk about current prices and the possibility of their remaining high. Talking about the possibility of the continuation of prices at the current level or around it is doubtful especially in the medium term, because market principles are not based on such an assumption.Before concluding this article, I would like to mention that we live in an international market where the interests of all its parties are interrelated and affected by one another. When oil prices increase, they will have negative impacts on the international economy. When the international economy shrinks, the oil demand will decline and vice versa, i.e. when the international economy grows, the demand for oil also grows.The trade logic compel producers to concentrate on their present and future interests, most importantly taking care of end consumers and not to enter into conflicts with others as this may lead to opposite results on the long run. We, as oil producers, should not resort to political assumptions like talking about conspiracy or about assumed political dimensions not supported by known facts as they may keep us away from the economic and technical facts of an important industry and trade like oil.(Dr. Ibrahim ibn Abdul Aziz Al Muhanna is an adviser in the Ministry of Oil and Mineral Resources.)
G-secs yield seen stabilising at 6%
Government bond yields are likely to stablise around 6 per cent level during the week after some mild early volatility, dealers said. The weekend rally in bond prices after the relaxation of accounting norms of gilts portfolio by the central bank, could not be sustained with the inflation jumping to a four-year high of 8.17 per cent and oil prices still at higher levels, dealers said. Further, the spectre of an interest rate on the back of the rising inflation, would discourage players to take long positions in bond markets, they said. The latest Government data showed that inflation shot up to a four-year high at 8.17 per cent for the week ended August 21 despite a number of steps, including duty cuts on petroleum products and steel, taken by the government to rein in prices. The inflation on point-to-point basis stood at 7.94 per cent in the previous week and was more than double the 3.82 per cent a year ago. The interbank call rate is expected to be range-bound at sub-repo level, amid comfortable liquidity and heavy subscriptions to the RBI repos. During the week just ended, call rate stayed easy at 4-4.40 per cent range, amid ample liquidity and subdued demand for funds in the second week of the reporting fortnight. Reflecting the ample liquidity, RBI received and accepted bids for Rs1,61,310-crore in 1-day repos and Rs11,385-crore in 7-day repos during the week. Government bond prices ralled smartly during the week, pulling down the yields curves below the 6.00 per cent to end at a six-week low of 5.88 per cent, despite the rise in inflation. The fall in oil prices from record highs, abundant liquidity in the system and RBI's measures to relax rules governing the investment portfolios of banks, sparked heavy buying interest. RBI, on Thursday, relaxed rules governing the investment portfolios of banks, in a move to cushion the balance sheets of these banks from huge losses following a recent spike in government bond yields. Effectively, RBI's new norms allow banks to defer booking paper losses on depreciation on their investment in government bonds. Banks which were facing a serious threat of a hit to their bottomlines due to the rise in yields of government bonds over the last five months, have got a much needed relief following these relaxation. The 10-year yield on the 7.37 per cent, 2014, bond closed the week at 5.88 per cent, 24 basis points lower than previous week's close of 6.12 per cent.
Gilts Celebrate RBI Move, 10-yr Yield Falls To 5.88% Despite a rise in inflation to a new four-year high of 8.17 per cent and rising oil prices, the money market was positive all along on Friday, thanks in the main to Thursday’s overnight relaxation of norms on investment portfolios for banks by the Reserve Bank of India (RBI). The benchmark 10-year 7.37 per cent 2014 stock rose by 150 paise to close at Rs 110.78/80 with the yield falling 14 basis points to 5.88 per cent. RBI relaxed the 25 per cent cap on banks’ investments in the held-to-maturity category as a one-time measure in 2004-05.
“There was a distinct impact of the new RBI guidelines on banks’ gilts investments. The market would have celebrated further if the RBI hadn’t stipulated that the transfer to the held to maturity category would have to be at the market price and the difference would have to be provided for,” said a treasury manager at Bank of India.
Frontline gilts registered sharp gains of over 40-120 paise on a fresh round of hectic buying even as profit-taking at higher levels partly trimmed the steep gains, dealers said.
Call rates fell to a low 3.00-3.25 per cent in intraday deals in the absence of adequate demand on the last day of the reporting cycle.
The rupee was virtually flat despite the flutter on the inflation front and was trading at 46.3125/3200 per dollar.
The yield on the benchmark 10-year bond fell to 5.9148 per cent from 5.9601 per cent in early afternoon deals and off 6.0122 percent hit immediately after inflation data was released.
The bond had been trading at a yield of 5.9926 per cent before the government released inflation data shortly before noon. Dealers said the new situation in the money market will help the banks to protect their bottomlines which were earlier hit by the rising yields. “It may not help those banks which have execess of statutory liquidity ratio (SLR) securities,” said dealers.
“The RBI is also preparing the ground for the banks to adjust to a possible interest rate rise in the near future,” said another dealer.
The 7.38 per cent, 2015 bond gained 138 paise at Rs 110.80/85, the 7.46 per cent, 2017 gilt shot up by 70 paise to Rs 107.65/70 and the actively traded 8.07 per cent, 2017 paper gained over 55 paise at Rs. 113.50/55.