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Forget about oil prices, it’s the Inflation you should worry



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Aug 18 2008
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Tropical Storm Fay, the sixth storm of the 2008 Atlantic season, caused some worries that it could disrupt oil operations in the Gulf of Mexico although nobody expect it could match the Katrina. Nevertheless oil prices were up as high as $115.35 a barrel today in electronic trading on the New York Mercantile Exchange. However the main attention should be on 9th Sept 2008 at Vienna – the day OPEC will be holding its next official meeting to discuss about oil production.

With the recent strength in dollar and subsequently the plunge in oil prices, the meeting will generate some serious debate or argument on whether OPEC should agree to cut its official output limit. Iran’s oil minister recently said he thinks the market is oversupplied and that additional barrels should be removed if producers prefer a balanced market while Kuwait’s oil minister said there won’t be any cut in production. Since the decision by Saudi Arabia to raise its output by 500,000 barrels per day in June and July to prevent the oil prices from escalating further, the black gold which hit its peak of $147.90 on July 11 has plunged 24% ever since.

The unknown factor is whether Saudi Arabia will reverse its decision or decide to do something in order for the global oil prices to tumbles further (and affect the kingdom’s profit). OPEC would like to have a steady supply-demand balance and definitely not a ridiculous high price which could lead to demand destruction. Therefore the focus is on the OPEC meeting as well as how the dollar will performs as a stronger dollar will pull down oil prices and vice-versa.

In OPEC’s monthly oil report, the organization forecast world appetite for oil this year would grow by 1 million barrels a day, a reduction of 30,000 barrels a day from its previous forecast for demand growth for 2008. It also said growth for 2009 will be 900,000 barrels a day, which it said would be the lowest growth in world demand since 2002 – reported AP. There are already reports that the demand for steel is already slowing during the current Beijing 2008 Olympic Games and this is yet another yardstick that the demand for oil could just be cooling down.

The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July. It was estimated that by next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007’s 2.85%. What this means are American consumers will be facing double-digit inflation as early as 2009 simply because China is no longer the cheap manufacturer as it used to be.

Under the pressure from U.S. the Chinese government has let its currency float upward by a whopping 21% against the dollar since de-pegging it in July 2005 (followed by Malaysian Ringgit). Oh yeah! If you haven’t been living in a cave for the last couple of weeks you should know that the Malaysian government is set to lower the petrol price – probably by RM0.20 a liter (from the current RM2.70 a liter).





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