Posts Tagged ‘petroleum’
The fuel favour year for India
The US$ per barrel (red line) and the rupee-dollar exchange rate (green line) are plotted to the left scale. The rupee per barrel (blue line) is plotted to the right scale. I have used data from the Petroleum Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas – the global crude oil price of the ‘Indian Basket’ in US$ per barrel.
It started in early August, the extraordinary slide in petroleum prices. Until then, the international crude oil price of the ‘Indian Basket’ (of crude oils, as it is called) had swung between US$ 110 and US$ 105 per barrel.
The rupee-dollar exchange rate, and the effective price of a barrel of crude oil in Indian rupees (both measures also appear on this chart), fluctuated but little for most of the first half of 2014. In early June 2014, the rupee-dollar rate turned around from 59 and has been rising since, while in early July the rupee price per barrel descended from its plateau of 6,300-6,600 and has been dropping since.
The cost of oil-derived energy has had a number of effects upon our everyday lives in the second half of 2014. It has helped the new NDA-BJP government during its first year by dampening overall inflation (the consumer price index) and particularly food price inflation. This has been particularly fortunate for the NDA-BJP government as the deficient monsoon of 2014 has meant a drop in the production of food staples, and market forces being what they are, food price inflation especially would have been well into the 13%-14% range (last quarter 2014 compared with last quarter 2013).
Galloping consumer price inflation has been forestalled by the plunging price of crude oil. The data I have used for this startling chart is courtesy the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas which computes several times a week the “global crude oil price of Indian Basket in US$ per bbl” – which means the average price we pay per barrel for the various kinds of crude oil we purchase.
A barrel of crude oil is 42 gallons or around 159 litres. This crude, when refined, is turned into diesel, petrol, lighter fuels, feedstock for the manufacture of various plastics, and other products. Typically, up to 70% of the oil we buy is converted into diesel and petrol (and carbon from all those exhaust pipes). Also typically, a barrel of crude oil (which is an extremely dense form of packaged energy) contains around 5.8 million BTUs (British thermal units). More familiar to us is the kilowatt hour (or kWh) and these 5.8 million BTUs are about 1,700 kWh – at current national average rates of per head electricity consumption this is worth about 26 months of electricity!
From early August till the end of December the price we paid for a barrel of crude has dropped from around US$ 103 to US$ 54 and correspondingly (factoring in the rupee-dollar exchange rate) the rupee price of a barrel of crude has dropped from 6,300 to around 3,500. Put another way, the INR 6,300 we paid in early August for 5.8 million BTU could buy, in mid-October 7.1 million BTU and by end-December, 10.4 million BTU.
Most of us tend not to be profligate with energy (our electricity comes mainly from the burning of coal, but the sale of automobiles has continued at a steady pace, or so the industry tells us). The question is whether this windfall energy saving (in terms of petroleum energy units per rupee) has been well used by the sector that can spread the benefit the most – agriculture and food. It will take another three months to judge, and we will keep a wary eye for the next quarter on the Indian crude oil Basket.
Why the FAO food index is also an oil gauge
The revealing relationship between the FAO cereals price sub-index, the OPEC Reference Basket price of a barrel of crude oil, and the Baltic Dry Index (right scale).
The Food and Agriculture Organisation (FAO) of the UN has released its food price index data and commentary for 2014 October. This would be of considerable interest if only the index described the tendencies of food prices as experienced by consumers. Alas FAO’s food price index, as we have remarked upon several times in the past, pays no attention to the true cost of food staples.
Of what use is the FAO index, which is used as a reference by any government (and UN member state) to judge the value of its food exports (or to judge whether when importing grain it is paying what seems to be a fair price)? In the first place, the index (which itself is composed of separately calculated cereal, vegetable oil, dairy, meat and sugar indices) is not a consumer food price index.
The FAO food price index and its component sub-indices for the period 2012 January to 2014 October. A general downward trend, says the FAO, but this is the picture for international food trade and not consumer food retail price.
The FAO has not claimed it is, but neither has the agency clearly and plainly said it is not. It should, because financial and general interest media all over the world report the ups and downs of this index as if it portrays how local food prices move, and of course it does not.
The FAO index is used by international traders whose business it is to buy and sell food staples (including cereal, vegetable oil, pulses, dairy, meat and sugar). Perhaps some of them use it as a benchmark while others forecast trends from its sub-indices. It may be used to validate the accuracy of a particular kind of agricultural commodity futures index, and help judge whether an investment in the production of food, its movement, its stocking or its trade is going to be a good investment or not. As you can gather, it is not an index that consumers can use, because consumers are local and this is assuredly not.
What pulls the FAO food price index up, down or sideways? There are two important factors at work on the main index. One is the price of petroleum products, the other is the cost of moving grain (or any other food staple). You may assess the short or long-term trend of the food index against the current or projected price of Brent crude (preferred in Europe), West Texas Intermediate (preferred in the USA) or the OPEC reference price (preferred almost everywhere else).
The FAO food price index and its component sub-indices for 2014 till October. The downward trend of the last six months, which the FAO commentary is faintly praising, mirrors the trend of crude oil prices over the same period.
And then you will assess what the food price index describes against the cost of moving a large quantity of the agricultural commodity to be traded across an ocean, for which the Baltic Dry Index will be consulted.
[If you are a trader and want the FAO food price data and movements, go here. The usual commentary can be found: “The FAO Food Price Index averaged 192.3 points in October 2014, marginally (0.2 percent) below the revised September figure but 14.3 points (6.9 percent) short of its corresponding level one year ago” and so on.]
To help determine what the FAO food price index is depicting, I have made charts for the index (and sub-indices) for the period 2012 January to 2014 October; for the index (and sub-indices) for 2014 till October; a chart that shows the FAO cereals sub-index together with the OPEC Reference Basket Price for a barrel of crude oil and the Baltic Dry Index (this is the shipping index most commonly referred to for the movement of dry goods by sea) for the period 2012 January to 2014 October; and a chart that plots the changes (from month to month) in the three indexes taken together (FAO Cereals, OPEC Reference and Baltic Dry).
The FAO food price index and the OPEC Reference Basket price of oil have much more in common than the Baltic Dry Index, which has swung with volatility since 2012 January.
What they describe can be found in the captions, but it becomes clear from a glance at the FAO-OPEC-Baltic charts that the food price as calculated by FAO has very much more to do with how energy is used to produce food staples (that is, the use of petroleum products directly, and the use of fossil fuels-derived energy) and how energy is used to transport, store, process, transport it again and retail it.
I see it as an index that describes the energy quotient of industrially produced food staples, and so it has little if anything to do with any other form of agriculture, in particular the smallholder, family-oriented and organic agriculture that the FAO advertises its concern about.
Oil’s up, oil’s down, it’s France, it’s China
It’s up. Crude oil rose on speculation that growing French demand for imported fuel because of a strike will reduce stockpiles elsewhere, reported Bloomberg. France is importing “massive” amounts of fuel and tapping reserves to alleviate service-station shortages, Environment and Energy Minister Jean-Louis Borloo said today. The French government last week authorized the use of fuel reserves after Total SA announced it would halt its five active refineries in France and other refiners took measures to reduce output. Workers at the country’s 12 crude-processing plants have extended their labor action since Oct. 12 to protest a plan to raise the minimum retirement age.
It’s up. Crude oil is poised to reach $90 a barrel by the middle of December, according to technical analysis by Lind-Waldock in Chicago. The December contract, which became the front-month contract yesterday, has been trading in an uptrend, a pattern of higher peaks and higher valleys, since touching a low of $75.10 on Sept. 23, Blake Robben, a strategist at Lind-Waldock, a division of MF Global Ltd., said in an interview.
It’s down. Crude oil may decline next week after China’s oil processing grew the least in 18 months as government measures to cool the economy reduced fuel demand, a Bloomberg News survey showed. Fourteen of 30 analysts, or 47 percent, forecast crude oil will fall through Oct. 29. Eleven respondents, or 37 percent, predicted prices will be little changed and five estimated an increase. Last week analysts were split over whether futures would drop or climb. Data from the China Mainland Marketing Research Co. yesterday showed that refineries in the world’s biggest energy- consuming country processed about 8.5 million barrels a day in September. That’s a 6.6 percent gain from a year earlier, the smallest increase since March 2009.
It’s down. Saudi Arabia has rejected claims that the era of cheaply produced oil is over, saying the world’s largest field in the kingdom’s eastern province still holds more than many countries. Many of the largest oilfields in Texas and the North Sea have passed their prime, forcing companies to target more costly prospects such as bitumen deposits in Venezuela, Canadian tar sands and ethanol. But Ali al Naimi, the Saudi Arabian oil minister, pointed to the Ghawar field’s 88 billion barrels of remaining reserves and the kingdom’s large cushion of spare pumping capacity as signs that oil was still abundant. “”I am sorry to disappoint people but the era of easy oil is not over,”” al Naimi said at a conference held in the Saudi capital to celebrate the 50th birthday of OPEC. “”How can you say the era of easy oil is over when we still have 88 billion barrels in the Ghawar field? That is more than many countries in the world. You can dismiss the notion that easy oil in Saudi Arabia is gone.”” The Ghawar field, measuring 280km by 30km, is by far the largest conventional oilfield in the world. Although details of the field’s performance are not made public, it is believed to have produced more than 65 billion barrels already since production began in 1951.
It’s up. Any oil price fall should be seen as an opportunity to buy the contract as the next move in the market is likely to be a rally, JPMorgan Chase & Co. said.“The signal that the next leg higher is imminent will be tighter Dubai forward spreads and a narrower Brent-Dubai spread,” Lawrence Eagles, head of commodity strategy in New York, said in a monthly oil market report. JPMorgan said it expects the dollar to weaken by four to five percent over the next six months, giving oil a boost. A declining dollar increases the appeal of energy as an inflation hedge. The strength in crude is also bolstered by rising demand in several regions, the bank said. A narrowing spread, when Dubai oil rises closer to North Sea Brent, typically shows increasing Asian demand. The Brent-Dubai exchange for swaps, or EFS, for December narrowed 12 cents to $2.40 a barrel today, according to data from PVM Oil Associates. The EFS is the price difference between Brent futures and Dubai swaps contracts and signifies Brent’s premium relative to the Middle East grade. The December-January Dubai spread shrank to minus 36 cents from minus 80 cents on Sept. 27, according to data compiled by Bloomberg. “The key risk is that we are being too cautious and that the threat of $100 a barrel oil that is implicit in our fourth- quarter 2011 oil forecast arrives much sooner than we expect, driven by not only a weak dollar, but also by rampant Chinese and emerging market demand, the rebuilding of French strategic stocks, and an upward bias to food prices,” Eagles said in the report.
Shaktichakra, the wheel of energies 