02-12-2016

Higher Prices, Weaker Currencies Threaten Oil Demand in Asia

oil

Rising oil prices in the wake of OPEC’s production cut could deliver a one-two punch to demand from Asia’s emerging energy consumers, where weakening currencies have already led to higher prices.

China and India, the world’s second- and third-largest oil consumers after the U.S., have each seen declines in their currencies versus the U.S. dollar in recent weeks. The Indonesian rupiah and Malaysian ringgit have also hit the skids.

The currency declines compound the effect of the surge in oil prices following Wednesday’s decision to cut production by 1.2 million barrels a day by the Organization of the Petroleum Exporting Countries, analysts and economists said. Benchmark Brent crude prices are up nearly 7% this week, trading at five-week high above $52 a barrel.

Since oil is priced in dollars, it makes crude more expensive in local currencies that have weakened against the greenback. In terms of Indian rupees, for example, the price of a barrel of oil has actually risen 8% last month.

“You have the negative compound effect of a weaker currency and higher oil prices,” said Virendra Chauhan, oil analyst at the research firm Energy Aspects. “It could dent demand at the margin.”

Emerging-market currencies have fallen sharply in the past month against the dollar, with investors placing bets on higher interest rates in the U.S. and the prospect of reduced global trade under a Donald Trump presidency. The rupee fell 2.7% in November against the dollar, while the Chinese yuan lost 1.6%, the Malaysian ringgit is down 6.1% and the Indonesian rupiah is off 3.9%.

Asia is a crucial market for OPEC as the cartel contends with declining market share and rising competition from domestic production in the U.S. But even in Asia, OPEC is fighting to maintain its hold amid growing competition from Russian crude. OPEC accounted for 59% of China’s oil imports in September, down from an average of 66% four years ago, according to Chinese customs data.

Asia is home to some of the world’s fastest-growing economies and energy consumers, though the pace of the expansion has decelerated alongside economic growth. The International Energy Agency in November highlighted a slowdown in oil demand in China and India in recent months, which it said is contributing to a broader slowing in global oil-demand growth.

Even at $50 a barrel, oil prices are still low compared with a few years ago when $100-a-barrel crude was the norm. Those low prices have been a boon to a region where economic growth has slowed and asset bubbles have rippled across markets.

“There would have been a much sharper economic downturn had oil prices stayed where they were at over $100 a barrel,” said Frederic Neumann, Asia economist at HSBC in Hong Kong.

In China, gasoline demand in October was up 17% to 32.83 million barrels a day from a year earlier, according to consultancy Facts Global Energy. India’s gasoline demand showed the same pattern, rising 13% in October from the previous year.

FGE expects demand in India and China to increase next year, juiced by rising auto sales.

Crude-oil demand by Chinese refiners, however, may slow slightly if prices stay above $50 or higher, as higher crude prices mean narrower margins.

“The ideal crude price range for us is between $42 to $48 a barrel,” said Zhang Liucheng, vice president of Shandong Dongming Petrochemical, one of China’s biggest independent refiners.

But while higher prices usually stunt buying, as long as the increase is between 10% and 15%, Asia demand will be remain largely unaffected, said Jeff Brown, president of FGE.

“If oil level remains in the $50s, it is actually indifferent in terms of economic growth and oil demand. But if you start getting more extreme, like going down past $40 and above $60, then it starts to be more of an issue,” said Scott Darling, head of oil and gas research Asia Pacific at J.P. Morgan.

Source: Wall Street Journal

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