Business Blog Posts

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.

Sentiment is driving large daily swings as traders vacillate between the fear oil prices will hit consumers and derail the recovery and the euphoria that the U.S. labor market is turning a corner.

Reports of escalated fighting in Libya and protests in Bahrain, Yemen and top oil-exporter Saudi Arabia rattled investors on Friday: oil rose, equities fell.

"We are in such a sentiment-driven market right now and everyone is watching the equity market with one eye and oil and commodity markets with the other," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

SHIFT TO OIL STOCKS

Some hedge funds are trading the inverse correlations between oil and equities that have grown in recent weeks, while other investors are shifting their exposure to oil stocks and paring back in overvalued areas of the market.

Through it all the S&P 500 is down less than 2 percent from a near 3-year high hit in late February, which even bears concede is a remarkably robust performance. For the week stocks ended flat.

So far the trade seems to be a reallocation of risk within equities rather than a move out of stocks altogether.

Zahid Siddique, a portfolio manager at the Gabelli Equity Trust, has used the turmoil as a chance to raise his exposure to energy stocks, which have surged with oil prices.

The S&P energy sector .GSPE has risen 10 percent since the middle of January when troubles in the Arab world broke out. Since then the wider market has crept up by just a fraction of that. Over the same period Brent crude oil rose nearly 18 percent to over $116 per barrel.

"These type of crises make you refresh your portfolio and just take another look," said Siddique. "Near term we may have some volatility in the market ... although the markets could still trend higher within that."

In the energy sector Siddique has added to positions in Suncor Energy (SU.TO) (SU.N), Marathon Oil (MRO.N), and Exxon Mobil (XOM.N).

At the same time he has taken the opportunity to pare back positions that he believes are starting to look over priced. Those include Deere & Co (DE.N) and Caterpillar Inc (CAT.N).

If oil prices spike higher, other areas of the market could start to look more vulnerable.

STRONG ECONOMIC MOMENTUM