Now, Saudis want oil prices to fall

The Saudis, the world’s largest oil exporters, are as stunned as anyone by black gold’s rocketlike rise in price. Just a decade ago, Saudi Arabia nearly was brought to its knees by prices averaging $14 a barrel. While their coffers have since filled to overflowing, the Saudis worry about the impact of $130-per-barrel oil on their customers’ economies as well as the opening that high prices are giving to alternative fuels. "We don’t like it," says a Saudi source, of the recent, fevered market.

The Saudis want to cool the red-hot oil market and are investing heavily in new fields to meet future demand. They already plan to increase production by 300,000 bbl. per day in June, to 9.45 million bbl. This decision is more a response to customer orders than to President George W Bush’s recent pleading for more oil (the government of King Abdullah sees Bush as a lame duck and believes his Iraqi foray has been a disaster). In a move that’s as much psychological as practical, the Saudis also are telling customers they will supply them with all the oil they want.

That will help a little, but for now the Saudis maintain there is only so much they can do to lower prices. They have 2 million bbl. of daily production capacity held in reserve: Saudi policymakers figure this oil has to be kept back from the market in case a drastic emergency (such as a US strike on Iran) threatens world supply.

In addition, analysts such as David Kirsch of Washington (D.C.) oil consultants PFC Energy think that, with so much investment money sloshing around in the commodities markets, the Saudis calculate they have no hope of controlling short-term price fluctuations. They blame the recent price runups on speculation and fear of shortages, factors they say are beyond their control.

In reality, the Saudis add, there is plenty of oil on the market. Iran has put some 30 million barrels of oil that it can’t sell into floating storage. "If we produced more oil, it wouldn’t find buyers," says the Saudi source. "It wouldn’t affect the price at all."

The longer term is a different story. The general hand-wringing over future oil supply may be off-base when it comes to Saudi Arabia. The Saudis have embarked on an ambitious expansion program that should see more than 2 million barrels of new production capacity come onstream by the middle of next year. One new field, called Khurais, may at 1.2 million barrels per day even exceed next year’s global growth in demand.

Nansen G Saleri, a recently retired chief of reservoir management at Saudi Aramco, the national oil company, is confident that the Saudis can reach 12.5 million bbl. per day of capacity—or even 15 million bbl.—vs. their 11.4 million now. "The resource base is there," says Saleri, who now is CEO of Quantum Reservoir Impact, a Houston startup.

Just having that much additional capability should dampen prices, "whether it goes into [reserve] capacity or production," says PFC’s Kirsch. Edward L Morse, energy economist at Lehman Brothers in New York, thinks a sharp correction could begin late this year as demand slows and the market recognizes that the Saudis really are serious about adding capacity. He is forecasting an average price of $83 per barrel for 2009. The Saudis could pay their bills with oil as cheap as $60 per barrel. Whether they have the ability to persuade OPEC to accept much lower prices is the big question.

Easing inflow curbs no cure for ailing rupee

Govt’s move to relax overseas debt curbs for firms and allow foreigners to buy more local debt is not likely to provide the weakening rupee the kind of support it needs as underlying economic conditions worsen. By opening up to more capital inflows, policy makers hope to take some pressure off the rupee, which has fallen more than 7 percent this year, and help control inflation.

Analysts say the move is unlikely to result in a flood of inflows as global market turmoil and the risk of a widening budget deficit dulls the lure of Indian debt, and slowing growth and rising inflation are longer-term weights on the rupee.

"It won’t make a huge difference. The move is largely symbolic and shows the central bank is increasingly worried with the rupee’s continued weakness," said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

India raised foreign investment limits in government and corporate debt to $5 billion and $3 billion, respectively, from $3.2 billion and $1.5 billion, and allowed firms to borrow up to $100 million abroad and repatriate the funds, from $20 million earlier.

That was a turnaround from nine months ago, when authorities clamped down on offshore borrowing by firms to try and rein in the rupee as it rallied to its strongest in nearly a decade. It was also a shift in the central bank’s currency policy, now looking to guard against sharp rupee weakness having bought almost $100 billion in the 15 months since the start of 2007 trying to contain it.

"A FX policy that is weakening the currency is, over time, inconsistent with an overall policy regime that is seeking to curb inflationary pressures," HSBC’s Wandesforde said.

RUPEE WOES

The rupee was trading around 42.6 per dollar on Wednesday, stronger than a 13-month low of 43.21 per dollar hit in May but well below last year’s close of 39.41. Calyon expects the rupee to fall as low as 44 per dollar by September due to growing risk aversion, deteriorating balance of payments and rising political uncertainty.

The rupee last traded at 44 per dollar in March 2007. Annual inflation hit a 3-1/2-year peak of 8.1 percent in mid-May, above the central bank’s comfort-zone of 5.5 percent, and an expected increase in state-set fuel prices, expected to be announced on Wednesday, may push it closer to double digits. According to HSBC research, oil prices in rupee terms have risen 46 percent since April 1

Oil is the country’s biggest import item, and record global prices have upped demand for dollars from refiners and raised worries about a widening trade deficit, a negative for the rupee. On Friday, the central bank said it would provide refiners with foreign exchange against special oil bonds the government issues them as compensation for selling at below-market prices.

JP Morgan estimates the Reserve Bank of India may end up giving as much as $12 billion to refiners, only a small part of its $316 billion of foreign exchange reserves but an indication of policy makers’ increasing discomfort with a falling rupee.

BOND WOES

At the same time, the cost to the government of subsidising retail fuel prices is likely to increase supplies of, and dampen the appetite for, debt. The quasi-sovereign bonds do not appear in the government’s budget deficit calculations, although the government is responsible for the coupon and principal payments.

Morgan Stanley estimates that the total fiscal deficit including off-budget subsidies and national and state deficits at 9.4 percent of gross domestic product in the 2008/09 fiscal year (April-March), up from 7.7 percent in 2007/08. Along with inflation, risk aversion and a weak rupee, that was likely to push 10-year bonds yields to 8.75-9.0 percent in six months, Morgan Stanley said.

The yield was at 8.1 percent on Tuesday. "We are not bullish on Indian paper at the moment because Asian central banks including the RBI remain behind the curve in inflation fighting, and the fuel price issue is not going away," said Edwin Gutierrez, a debt fund manager at Aberdeen Asset Management who manages $5.5 billion in emerging market debt.

Allowing companies to borrow more from the overseas markets could reduce their borrowing costs by 200-400 basis points, but analysts say inflows via this route are unlikely to pick up sharply as global market conditions make borrowing harder.

Central bank data showed net offshore borrowings by firms was $16.3 billion in April-December 2007, about one-fifth of net inflows in the period. Lehman Brothers expects net capital inflows to fall to $56.7 billion in 2008/09 from an estimated $99 billion in 2007/08, with the balance of payment surplus shrinking to $18 billion from $85 billion. "(As long as) oil prices remain elevated, inflation remains high and there are concerns on growth, the rupee will continue to remain on a weak wicket," said Shuchita Mehta, economist at Standard Chartered Bank.

Govt hikes prices of petrol by Rs 5/L and diesel Rs 3/L

Amid growing consumer concern, the Cabinet on Wednesday raised prices of petrol by Rs 5 and diesel by Rs 3 to bail out state-run oil firms that have been reeling under unprecedented high crude prices. Prices of domestic cooking gas was hiked by Rs 50 a cylinder effective midnight tonight.

The excise duty on petrol was cut by Rs 1 a litre and diesel and customs duty on crude was abolished. Poor man’s fuel kerosene was exempted from the hike.

Petroleum Minister Murli Deora told reporters. With the hikes, India joins other Asian nations like Indonesia and Malaysia that are raising regulated domestic fuel prices as they find they can no longer afford to shield their consumers from the full effect of record global prices.

The Cabinet Committee on Political Affairs today met to deliberate on the need of raising fuel prices in view of spurt in global oil prices.

Prime Minster Manmohan Singh was expected to address the nation later in the evening to tell the people why the government increased prices of fuel at this point when inflation is also high.

The meeting was chaired by Prime Minister Manmohan Singh and attended by External Affairs Minister Pranab Mukherjee, Defence Minister A K Antony, Finance Minister P Chidambaram, Petroleum Minister Murli Deora, Railway Minister Lalu Prasad and Road Transport Minister T R Baalu.

Petrol and diesel prices were last raised in February when the Indian basket of crude oil was at 67 dollars per barrel. Today it is at 124 dollars per barrel.

State-run Indian Oil, Bharat Petroleum and Hindustan Petroleum were together projected to lose Rs 2,46,600 crore on sale of petrol, diesel, domestic LPG and PDS kerosene in 2008-09 in absence of any price hike or duty cut

Scientists find new weapon in fight against malaria

Scientists have blocked the sexual development of the malaria parasite in the laboratory, opening the possibility of a drug that could sharply reduce the disease’s spread, according to a new study.

When a mosquito bites an infected human, it sucks up the gametes, or sex cells, of the malaria parasite at the same time that it feasts on the blood.

The sexual cycle of the Plasmodium falciparum parasite continues inside the mosquito, producing cells that are transmitted in its saliva the next time the insect draws human blood with its needle-like proboscis.

The gametes do not provoke malaria’s terrible symptoms, but settle in the liver where they eventually give rise to the parasite that does.

A team of researchers at the London school of Hygiene and Tropical Medicine led by David Baker discovered an enzyme critical to the parasite’s sex cycle, and developed a means for arresting it.

"It acts as an inhibitor that stops the parasite from developing sexually," Baker told AFP.

"If we could develop a drug for patients, it would enable us to block malaria transmission from individual to individual" via the species of mosquitoes that carry the disease," he said.

Malaria severely sickens half-a-billion people in the world each year, and kills more than a million. Ninety percent of victims live in sub-Saharan Africa, and the vast majority of those are infants and children.

Baker said that the drug might also have a curative effect, though the study, published in the open-access online science journal PLoS Biology, only focuses on the spread of the disease.

Each day, some 3,000 young lives -- one every 30 seconds -- are snuffed out by malaria. The disease also saps more than a full percentage point from the annual economic growth of the most affected nations.

Will RBI tighten money supply further to tame inflation?

With inflation crossing 8 per cent, economists and bankers seem divided over whether RBI would once again ask banks to keep more cash with the central bank to squeeze liquidity from the banking system.

"The dilemma between rising inflation and slowing growth will continue and we expect the central bank to tighten monetary policy using CRR hikes rather than repo rate hikes" said Lehman Brothers India Economist Sonal Verma.

"We expect another 100 basis points worth of CRR hikes during the course of the year with unchanged repo and reverse repo rates," she said.

However, bankers have divergent view on the issue of CRR hike. Most bankers are of view that raising the ratio was not the viable option to ease inflationary pressure as it was not driven by money supply.

According to Oriental Bank of Commerce Executive Director Allen C A Periera, high inflation is on account of rising crude oil prices and food prices. So, further tightening of money supply would not have much impact in bringing down inflation.

With the expected good monsoon and fiscal measures taken the by the government, inflation is likely to ease in the coming months, he said.

Finance Minister’s adviser Subhashish Gangopadhyay had said, "inflation rate is higher than what we want it to be and raising interest rate is not the best way to curb inflation."

However, according to a study by financial services major Barclays Capital, RBI is likely to surprise the market by tightening money supply to combat inflation, which would push interest rates up.

Investing in gold can make a lot of sense

The stock market is expected to remain rangebound as last-quarter results are getting discounted in individual stock prices. The market seems to be reasonably valued, with the BSE Sensex between the levels of 16,000 and 17,000. A further upside over the next few months seems limited, in view of the palpable slowdown in economic activities as reflected in the growth rate of companies. This slowdown is compounded by the high rate of inflation. The government is taking all conceivable steps to counter it, and the Reserve Bank of India is taking the necessary monetary measures to control liquidity and bring down prices.

Still, it may be a while before the inflation rate comes down, given external factors. Crude oil is trading at a historic high of around $135 per barrel, and that is bad news for all oil importing economies, especially India. The domestic prices of petroleum products like petrol, diesel and cooking gas are nowhere near international prices, thanks to government subsidies, and any move to increase these prices even marginally will fuel inflation and greatly hamper the already slowing growth rate. With crude oil showing no signs of slowing down, it is indeed possible that our economic growth rate may slow down.

One may be tempted to reduce equity exposure and increase exposure to debt and fixed income options. Commitments to longterm debt instruments may not be a good idea, because interest rates may rise, given high inflation. Short-term debt and floating rate instruments could be considered under the fixed income portfolio allocation. There’s no need to increase the debt portion in percentage terms, as yet.

Have you considered gold?

It is also important to look at other asset classes at a time like this, to diversify your portfolio. Commodities have been faring better than stocks over the past few months, and the precious metal, gold, is one commodity that’s likely to move in tandem with international crude oil prices. Review your investment portfolio in view of the high inflation rate and the possibility of a slowdown in economic activity, and rework your asset allocation. It may be a good idea to reduce equity exposure in percentage terms by about 5-10 % of your total portfolio, and allocate that money to gold.

How to invest in gold

Buying gold in physical form-bars and coins-is an outdated option, fraught with issues including purity, liquidity, secure storage, and so on. The best option is to buy a listed exchange-traded gold fund (ETF) from the stock market. All you need is a demat account and a share trading account with a broker or sub-broker who deals in stocks. Currently, four ETFs are available: Gold BeES (Benchmark Mutual Fund), Master Gold (UTI Mutual Fund), Kotak Gold (Kotak Mutual Fund), and Reliance Gold (Reliance Mutual fund).

These are traded in units of one. That means you can buy one or more units at a time. Each unit represents approximately the market value of one gramme of gold. There is not much to choose between the four funds, because no management skills are involved. You can buy whichever is quoting a little cheaper than the others. However, the volume of units traded on any given day could help you decide, because a higher volume of trading means better liquidity: easy to buy, easy to sell, and the spread between the bid and offer (that is the selling and buying prices on the market) will be low.

Gold ETFs are traded close to real-time gold prices in the market, that is, ETF prices move up and down with the market price of gold in the conventional marketplace. Your expenses in an ETF would be very low: you would pay securities transaction tax (STT), brokerage /service tax, and the like, which are unlikely to exceed 1% of market price. You’d hold gold in demat form in your demat account, just as you hold shares. If you decide to sell your ETF units, you’d do so through your stock broker or sub-broker and the charges would be the same as what you paid while buying the ETF. Thus an ETF is very convenient, and you need not worry about the purity of the gold, secure storage, insurance against theft, and so on.

What about physical gold?

Perhaps you’re one of those parents who keep buying gold over the years, for possible use to make jewellery when your son or daughter gets married. You may be wondering how a gold ETF would help you do that. Well, it’s still the best option for you because of the factors discussed above. You can buy gold ETF units now at the current price of gold, hold them in your demat account, and sell them in the future, whenever you want, and use the money to buy jewellery then. In this way, you will be protecting yourself from rising gold prices, while also sparing yourself anxiety about the purity and safety of your gold. You can keep accumulating gold at a slow rate, perhaps even one gramme at a time.

Returns and taxation

Gold has appreciated substantially over the past couple of years. The growth rate of late has been much higher than the conventional rate of appreciation. But, with global uncertainties rising, gold may be a very good hedge, and can be expected to deliver returns of 10% to 15% a year, over the next few years. If you sell gold ETF units within one year, the resulting gains will be short-term capital gains, and you will be taxed at the same rate that applies to your overall income. If you sell after having held the gold ETF units for more than one year, you would make a long-term capital gain. The taxation is similar to a non-equity oriented mutual fund on which STT is charged-you can pay tax at the rate of 10% on taxable long-term capital gains, or 20% of the long-term capital gains after applying cost inflation index to your cost of purchase. You can choose the option that allows you to pay the lower tax. Surcharge, education and secondary education cess will also be applicable on the amount of tax. Putting money in a gold ETF is considered investment in a mutual fund, and not in gold, so it’s free of wealth tax also.

Cabinet approves fuel price hike in India

India finally succumbed to international pressure as all transport fuel prices in the country are set to be hiked after Cabinet approved it on Wednesday.

The Cabinet Committee on Political Affairs is understood to have approved a hike of Rs 3 per litre in petrol prices, while the diesel prices are likely to head north by Rs 2 per litre.

However, a formal announcement in this regard will be made sometime around noon.

Announcing this a senior official in the Petroleum Ministry said, “Cabinet Committee on Political Affairs, presided over by Prime Minister Manmohan Singh approved the price hike. The quantum of the hike will be communicated to you shortly,"

"The prime minister is also expected to explain to the nation why the price hike was inevitable. Oil marketing companies have been bleeding since the cost of oil has gone up but the retail prices of petrol and diesel had remained the same," he added.

The CCPA meet came in the wake of the relentless rise in international crude oil prices, which have touched levels as high as USD 135 per barrel.

The meeting, chaired by Prime Minister Manmohan Singh, was also attended by External Affairs Minister Pranab Mukherjee, Defence Minister A K Antony, Finance Minister P Chidambaram, Petroleum Minister Murli Deora, Railway Minister Lalu Prasad and Road Transport Minister T R Baalu.

A limit is also expected to be set on the number of cooking gas cylinders that would be available to each household at subsidised rates, sources said.