Business Blog Posts

Oil market investors are pricing in only a small risk that Middle East unrest spreads to top oil producer Saudi Arabia -- an event that would instantly catapult oil to the top of the global economic risk list.

Assuming Saudi Arabia's oil flows unimpeded, the blow to global consumer spending looks relatively modest. Food prices, however, are expected to remain elevated for some time, which puts more pressure on household budgets.

"At the moment, the increase in food prices is much more of a concern," Thomas Helbling, an advisor in the International Monetary Fund's research department, told Reuters Insider.

Treasury Secretary Timothy Geithner echoed that view last week, pointing out that rich nations could tap strategic oil reserves if needed, while food prices will remain high "for a long period of time."

Retail sales figures coming this week from the United States, China and Britain will shed some light on how consumers coped in February, when violence in Libya drove energy prices sharply higher.

Economists polled by Reuters expect yet another month of explosive growth in China, with retail sales up 19.1 percent year-on-year. For the United States, the consensus view shows a month-on-month sales gain of 1 percent, which would be far faster than in January.

To be sure, some of that strong growth reflects more money spent on fuel in February, and if oil prices remain elevated they will tax consumption.

WHICH CRACKS FIRST?

So far, however, U.S. consumer confidence has risen right along with gasoline prices, according to the Thomson Reuters-University of Michigan Surveys of Consumers.

Richard Curtin, the survey's director, said if oil prices continue to climb, it will be confidence that breaks first.

"That aberrant trend is unlikely to continue," Curtin said. "Either gas prices will begin to decline or, more likely, expectations will fall."

If investors are right, however, oil prices will top out around $106 a barrel and then drift lower next year.

Deutsche Bank economist Peter Hooper said a "mild" oil shock that pushes prices no higher than $110 a barrel would trim 0.4 percent off global economic growth. That would be a relatively modest hit, considering that economists in a Reuters poll expect 2011 global growth of 4.2 percent.

If oil hits $150 a barrel -- Hooper puts just a 10 to 15 percent probability on that -- it would wipe 2 percentage points off global growth.

Asian markets have see-sawed following volatile oil prices in recent weeks, but the MSCI ex-Japan index .MIAP00000PUS is barely a percent away from a 2-1/2 year peak tested in January, indicating markets have been largely resilient to the Libyan crisis.

Still, investors are worried that a prolonged period of high oil prices could stifle economic growth and erode corporate profits, while adding to inflationary pressures in emerging economies.

On Monday, the MSCI ex-Japan index was down more than half a percent.

U.S. crude oil futures jumped 1.6 percent, topping $106, to the highest price in 2-1/2 years on Monday as a counter-offensive by Libya's Muammar Gaddafi against rebels deepened concerns that a civil war is brewing in Africa's largest holder of oil reserves.

ICE Brent crude for April was trading at $117.28 a barrel, up 1.1 percent.

"The concern is that with what we are seeing in Libya, it's purely fear driving the market," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.

"Each time the price moves up a little, people are forced into the market. Once it's feeding itself, it will continue to rise," Barratt said, adding $120 may be the peak without further supply disruptions.

A reasonably strong batch of U.S. data on Friday that showed the jobless rate falling to a near two-year low failed to boost sentiment, as investors remained firmly focused on the developments in the Middle East and the resulting longer-term impact on oil.

U.S. crude is up by more than a fifth in the last two weeks.

The spike in oil combined with soaring food prices present fresh problems for central banks in Thailand, Malaysia, South Korea and New Zealand who head for policy meetings this week.

The region is a big importer of oil and market players are worried that sharp increases in prices would stifle growth and fuel inflationary pressures.

FAIRLY VALUED?

The MSCI APXJ index is trading at 12.7 times forward 12-month earnings, at par with its long-term average, I/B/E/S data showed -- indicating that markets are now fairly valued.

"Higher oil prices are a key factor weighing on investor sentiment. Heavier energy costs have numerous negative implications for a manufacturing-focused energy importer like South Korea," said Y.S. Rhoo, a market analyst at Hyundai Securities.

While longstanding U.S. policy is to release reserves only in the event of a significant and immediate supply shortage, some analysts say the Obama administration may feel compelled to try to tamp down prices that are being fueled both by outages in Libya as well as concerns over Middle East unrest.

Echoing comments made by a number of Obama officials over the past week, White House Chief of Staff William Daley told NBC television's "Meet the Press" on Sunday: "We are looking at the options. The issue of the reserves is one we are considering."

"It is something that only is done -- has been done -- in very rare occasions. There's a bunch of factors that have to be looked at and it is just not the price," he added. "All matters have to be on the table when you go through -- when you see the difficulty coming out of this economic crisis we're in and the fragility of it."

He spoke just before a survey showed the second-largest two-week rise in gasoline pump prices ever. The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the influential Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the February 18.

Congress has pressured the Obama administration to look to the emergency oil supplies as an option to ease consumers' fears over rising U.S. gasoline prices, which are nearing the all-time high of $4.1124 per gallon hit on July 11, 2008, according to the Lundberg Survey.

Higher oil prices could undermine the fragile U.S. economic recovery and damage President Barack Obama politically as he moves toward a 2012 re-election bid.

2011 NOT 2008

The United States has tapped the Strategic Petroleum Reserve, which now holds 727 million barrels, only a handful of times since it was created in the mid-1970s after the Arab oil embargo. It was last used in 2005 following Hurricane Katrina.

Thus far the International Energy Agency (IEA) -- which coordinates reserves policy among the world's major energy consuming countries -- has made clear it will rely first on OPEC to fill the void left by the violence in Libya, which has cut off an estimated 1 million barrels per day (bpd) of output.

Saudi Arabia has stepped up production significantly, but oil prices remain high, partly due to intensifying fears that the wave of North African and Middle East protests could yet seep into major Gulf oil producers, cutting off supplies that would be impossible to make up from other producers.

Despite longstanding U.S. policy on the SPR, there are reasons to believe the reserves could be used more liberally now.

Unlike in 2008, when oil prices shot to nearly $150 a barrel in a demand-led rally, the current spike is driven by the real loss of supply -- a distinction which could give President Barack Obama more latitude to tap into the SPR, even though Libya ships only a fraction of its oil to U.S. shores.

In addition, the global economy is in a more precarious state than was generally believed at the start of 2008, prior to the financial crisis.

"Sovereign debt issues need time and growth to resolve. High oil prices threaten that outcome. No leader will want to preside over a recession that they had the tools to avert," said Lawrence Eagles, head of oil research at JP Morgan.

While longstanding U.S. policy is to release reserves only in the event of a significant and immediate supply shortage, some analysts say the Obama administration may feel compelled to try to tamp down prices that are being fueled both by outages in Libya as well as concerns over Middle East unrest.

Echoing comments made by a number of Obama officials over the past week, White House Chief of Staff William Daley told NBC television's "Meet the Press" on Sunday: "We are looking at the options. The issue of the reserves is one we are considering."

"It is something that only is done -- has been done -- in very rare occasions. There's a bunch of factors that have to be looked at and it is just not the price," he added. "All matters have to be on the table when you go through -- when you see the difficulty coming out of this economic crisis we're in and the fragility of it."

He spoke just before a survey showed the second-largest two-week rise in gasoline pump prices ever. The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the influential Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the February 18.

Congress has pressured the Obama administration to look to the emergency oil supplies as an option to ease consumers' fears over rising U.S. gasoline prices, which are nearing the all-time high of $4.1124 per gallon hit on July 11, 2008, according to the Lundberg Survey.

Higher oil prices could undermine the fragile U.S. economic recovery and damage President Barack Obama politically as he moves toward a 2012 re-election bid.

2011 NOT 2008

The United States has tapped the Strategic Petroleum Reserve, which now holds 727 million barrels, only a handful of times since it was created in the mid-1970s after the Arab oil embargo. It was last used in 2005 following Hurricane Katrina.

Thus far the International Energy Agency (IEA) -- which coordinates reserves policy among the world's major energy consuming countries -- has made clear it will rely first on OPEC to fill the void left by the violence in Libya, which has cut off an estimated 1 million barrels per day (bpd) of output.

Saudi Arabia has stepped up production significantly, but oil prices remain high, partly due to intensifying fears that the wave of North African and Middle East protests could yet seep into major Gulf oil producers, cutting off supplies that would be impossible to make up from other producers.

Despite longstanding U.S. policy on the SPR, there are reasons to believe the reserves could be used more liberally now.

Unlike in 2008, when oil prices shot to nearly $150 a barrel in a demand-led rally, the current spike is driven by the real loss of supply -- a distinction which could give President Barack Obama more latitude to tap into the SPR, even though Libya ships only a fraction of its oil to U.S. shores.

In addition, the global economy is in a more precarious state than was generally believed at the start of 2008, prior to the financial crisis.

"Sovereign debt issues need time and growth to resolve. High oil prices threaten that outcome. No leader will want to preside over a recession that they had the tools to avert," said Lawrence Eagles, head of oil research at JP Morgan.