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Crude price concerns

Monday, December 20, 2010

The $100 mark has lost its sanctity for crude, having crossed it by a huge margin a few years ago, and also having bounced back to its vicinity again now, following the collapse to $30.

That prices have been floating well above $80 lately reflects on the resilience of the global economy despite stuttering recently, amidst the financial turmoil that shook economies worldwide. The firmness in prices also reflects on the inability of governments worldwide to find a viable alternate source of energy. The rise in crude oil prices have steadily translated into rise in the prices of downstream products as well. The immediate fall out would be the rise in prices of gasoline and distillates, which are used in the transportation/heating applications world wide.

India had responded to the possibility of a continued rise in oil prices, by decontrolling fuel prices in June, and allowing the market to respond better and faster to the effects of price rises, which have put an upward pressure on inflation in both China as well as India, whose economies have shown amazing resilience during the 2008-2009 economic meltdowns. However, population in both these countries continue to be on the rise, and should keep fuel prices trended northward. With rise in number of Indians opting for air travel it could put upward pressure on ATF/distillate prices.

However, higher Naphtha prices should see consumers favouring Natural gas in many applications. India could see more exports of Naphtha especially in anticipation of Krishna Godavari Basin’s supply.

Another fallout of the high crude oil prices would be a firmness in synthetic rubbers and polymers prices. Synthetic rubbers and polymeric materials are used in Tire building have been on a rise as supply disruptions in major producing countries of Natural Rubber kept prices on an upward trajectory.

A firm auto demand has also ensured that the key tyre building elements’ remain firm, and oil above $100 should keep this trend firmly entrenched. Another industry, often eclipsed by the hue and cry over high fuel prices is the electronic industry, which is very reliant on polymers for making printed circuit boards to chips. With innovation in electronics changing immensely the way we conduct our daily lives, higher oil prices may, at least to an extent influence the advance in such growth.

From recent price trends, it becomes quite evident, that consumers have absorbed and adjusted to prices in the $70-80 band.  However, there are few signs of consumption tapering off in the $90 vicinity. To this end, even while speculative in nature, it is fair to assume that oil prices may rise above the $100 mark in the coming years.

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