OIL

OIL closed lower on March 5 in volatile trade, as a soaring dollar and the US pursuit of an Iranian nuclear deal offset earlier gains from supply concerns in Libya and Iraq. Libya’s declaration of force majeure on nearly a dozen of its oilfields due to security concerns and arson attacks by Islamic State militants on Iraqi oil wells helped prices climb during the European session.

In New York trade, the market came off its highs after the dollar hit 11-1/2 year highs against the euro, weighing on oil prices denominated in the greenback.

Washington’s pursuit of a nuclear agreement with Tehran, which could end sanctions against Iran and bring more oil from the Opec member into an already flooded market further dragged on prices. Light, sweet crude for April delivery fell 77cents to $50.76 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, slipped 7cents to $60.48 a barrel on ICE Futures Europe.

Gasoline supplies unexpectedly rose last week as refineries, which buy crude, processed less oil as they perform seasonal maintenance. The US Energy Information Administration said that crude-oil supplies also reached a new record high in the week ended February 27 as refineries operated at 86.6pct capacity, down 0.8 percentage point from the previous week.

On March 5, April gasoline futures fell 3.84cents to $1.8873 a gallon. Gasoline supplies rose last week to 240.1m barrels, the highest level for this time of year since 1990.

In addition, weather-driven demand for heating oil and diesel fuel is expected to fade once spring arrives. Production of petroleum products is likely to increase next month, as more refiners finish seasonal maintenance.

Last week, European Central Bank President said in a news conference that the central bank will start buying government bonds on March 9 in an effort to boost economic growth. The dollar strengthened against a basket of currencies on the news. Oil is traded in dollars, so a stronger dollar makes oil more expensive to buyers using foreign currencies.

Earlier, Brent was up as much as $61.57 as investors brushed aside bearish US inventories data to focus on tensions in Iraq and Libya. A deteriorating security situation led Libya’s state oil company to declare force majeure on 11 of its oilfields on March 4. Libya’s state-run National Oil Corporation has declared itself inoperable at 11 oil fields after a series of attacks by rebels purportedly linked to the Islamic State of Iraq and the Levant (ISIL) group, and threatened to close all oil fields and ports if the country’s security situation does not improve. The force majeure — a legal step shielding the company from liability if it cannot fulfill contracts for reasons beyond its control — was announced on March 4 shortly after gunmen attacked the Dahra oil field near Libya’s central coast.

Billions of dollars are pouring into oil exchange-traded funds as investors, many of them small savers more familiar with stocks than commodities, risk big losses and focus on the chance of huge rewards. Five of the biggest oil ETFs has seen their assets more than quadruple since July to $5.4bn as the oil market has had a roller-coaster ride, collapsing by 60pc then rallying by almost a third.

ETFs, designed for investors who cannot or will not buy and sell oil directly themselves, offer easy access and exposure to oil volatility because they are based on traded futures markets. Many small investors such as pensioners, hobby traders, and savers on fixed incomes are attracted to oil ETFs, which can be designed to take advantage of price rises or falls. But the volatility and structure of the underlying markets also make such investments dangerous for unwary investors.

Rapid expansion of oil supply from unconventional sources, a significant change in Opec’s policy stance, and weak global demand are driving the recent plunge in oil prices, according to the World Bank. These underlying forces are buoyed by a strengthening dollar and the fact that oil production in the Middle East has not been severely disrupted by ongoing conflict, says the WB paper, titled ‘he Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses’.

Oil prices fell almost 50pc between June 2014 and February 2015, possibly marking the end of the commodity price super cycle that began in the early 2000s. Unconventional and higher-cost oil producers (i.e. US shale, Canadian oil sands and global biofuel production) may well become the new swing, or influential, producers in the oil market. While volatility in oil markets will likely persist, prices are expected to remain soft over the next few years.

The paper estimates that an almost 50pc decline in oil prices could be associated with a 0.7-0.8pc increase in global GDP over the medium- term.

Gold

GOLD eased on March 5, changing direction and falling below $1,200 an ounce as short-covering dried up after buoying prices following the European Central Bank’s announcement that it will lift its 2016 inflation forecast. The ECB held interest rates unchanged at record lows while raising next year’s inflation expectation to 1.5pc from 1.3pc and predicting 2017 inflation at 1.8pc. Spot gold was down 0.04pc at $1,199.45 an ounce. US gold for April delivery settled down 0.4pc at $1,196.20 an ounce.

Gold has also been under pressure as a rally in US stocks lured away investors in recent months. The S&P 500 index and the Dow Jones Industrial Average both closed at fresh records on March 2, while the Nasdaq Composite rose above 5000 for the first time in nearly 15 years.

India will introduce a sovereign gold bond as an alternative to physical gold, as well as a new Gold deposit scheme to replace its existing ones, India’s finance minister said over the weekend as part of the FY15-16 Indian Budget.

The bonds will carry a fixed interest rate, and will be redeemable in cash pegged to the face value of gold at the time of maturity. Other than giving investors a long exposure to gold, it also provides the advantage of earning a fixed interest rate as gold typically has no direct yield.

Published in Dawn, Economic & Business, March 9th, 2015

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