Thursday October 28, 2010
IEA warns of asset bubble in commodities
It says investors could divert cheap US cash into commodities
SINGAPORE: Further monetary easing by the US Federal Reserve could cause a rise in commodity prices, undermining the impact of moves aimed at supporting economic recovery, according to an official from the Paris-based International Energy Agency (IEA).
Investors could divert cheap US cash into commodities, triggering a rise in raw material prices and stoking inflation, said Eduardo Lopez, the IEA’s senior oil demand analyst.
Fed officials, at their meet on Nov 23, are widely expected to embark on a second round of monetary easing, dubbed QE2, that may consist of US Treasury bond purchases worth a few hundred billion dollars to push more money into the economy.
However, uncertainty surrounds the scope and pace of the possible bond purchases. Lopez said the exact impact of QE2 remained unclear as it had not started, but it could inflate prices of commodities in nominal terms.
“This could bring about inflation and possibly derail the recovery,” he told a downstream oil conference yesterday in Singapore.
Dollar weakness has helped drive commodity and oil prices upward during the past month. Commodities are most often inversely correlated with the dollar.
A stronger US currency depresses the purchasing power of holders of other currencies, while a weaker greenback renders oil, gold or copper imports cheaper.
Financial markets remain concerned over whether the US currency has fallen too much in anticipation of what the central bank will do.
The central bank has already cut interest rates to near zero and bought US$1.7 trillion in mortgage-related and Treasury debt to further push down borrowing costs.
“The major competitive advantage the Americans have is the production of dollars, and they will flood the market with dollars.
“People will complain that it will create inflation. The imbalances in the market will only worsen,” Lopez added.
Lopez also highlighted divergent views on the outlook for the global oil market next year.
“There are divergent views on whether the market will be tight next year. To us, it will not be the case. According to some banks it will,” he said.
“According to our demandsupply profiles, it does not look particularly tight, but maybe only from the second half of 2011,” he added.
Lopez said the IEA, which advises major industrial countries on energy policy, expected global surplus refining capacity to rise as capacity additions would exceed projected demand growth over 2012-2015.
Global refinery utilisation rates are seen falling to an average of 78% by 2015, versus 84% in 2008.
Meanwhile, world oil demand growth would be heavily skewed in favour of middle distillates diesel and jet/kerosene which would account for 62% of total growth by 2015, he said.
“This would imply massive refining bottlenecks,” he said. “And if the middle distillate market becomes this tight, it may have an impact on the crude market, but it’s difficult to say how much.”
On the other hand, naphtha and gasoline will be potentially oversupplied, with demand set to remain weak, according to Lopez. — Reuters