OIL

BRENT crude oil fell below $49/barrel on January 22, after the European Central Bank said it would start buying government bonds, a move which could push the dollar to new highs and put downward pressure on commodities. Exceeding market expectations, the ECB president said the bank would buy 60bn euro ($69.34bn) of government bonds a month until the end of September 2016 to support the flagging eurozone economy.

Brent crude futures traded at $48.85/barrel by 1415 GMT, down 18 cents. US crude was down 48 cents at $47.30. Earlier in the session, Brent had reached a high of $50.45, up $1.42.

Expectations for the stimulus programme have pressured the euro and sent the dollar, seen as a safe haven, soaring. A strong dollar, buoyed by an expected US interest rate hike and an American economy that is growing while Europe and Asia slow, dents demand for dollar-priced commodities by making them expensive for holders of other currencies.

Oil slumped almost 50pc last year as the US pumped crude at the fastest rate in more than three decades and the Organisation of Petroleum Exporting Countries (Opec) resisted calls to reduce output. Prices will rebound rather than extend declines to as low as $20/barrel, Opec secretary general said in Davos, Switzerland recently.

Opec’s 12 members, which supply about 40pc of the world’s oil, maintained their collective quota at 30mbpd at a November 27, meeting in Vienna. Output averaged 30.2m in December, data shows. Oil slumped almost 60pc since June as Opec nations continued pumping amid the highest US production in more than three decades. Opec’s crude output rose by 80,000bpd last month to 30.48m as additional oil from Iraqi fields more than offset a collapse in Libyan production, the International Energy Agency said in its monthly market report January 16.

Oil export losses for major Middle East crude producers are likely to total $300bn this year but large cash buffers are allowing the countries to absorb most of the impact of falling oil on their economies, the IMF said. Those cash reserves are why the IMF only marginally cut its economic outlook for Saudi Arabia, Qatar and other Gulf Cooperation Council countries in its latest report on the region. The fund forecast the regional economy to expand by 3.4pc this year, 1.1 percentage point lower than it expected last October.

Crude exporters in the region rely on the oil income to fund a major share of their economies and had assumed much higher oil prices in their government budgets. The more than 50pc fall in oil prices translates into export losses worth more than one-fifth of their domestic GDP. In its latest regional economic outlook, the IMF said healthy financial buffers would help moderate the impact of sharp cuts in government expenditure among Gulf states, but it urged oil exporters to reduce spending and preserve today’s oil savings for future generations.

Oil prices which have fallen 55pc since last September, are expected to average $57/barrel this year, a 43pc decline on the IMF’s last outlook in October. Markets are currently predicting that prices will rise to $72/barrel by 2019, 23pc lower than the IMF’s previous projection.

The IMF says those worst affected will be Kuwait, Qatar, Iraq, Oman, Libya, and Saudi Arabia. All Gulf states, with the exception of Kuwait, are expected to have to fund fiscal deficits this year in response to ‘rising social pressures and infrastructure development goals’ and plunging oil prices.

The GCC’s collective fiscal surplus of 4.6pc of GDP in 2014 is projected to drop to a deficit of 6.3pc of GDP this year. The growth in government spending by Gulf states, except for Qatar, is expected to slow this year and impact also on capital spending.

GOLD

IN the New York/London market, gold turned higher and touched a five-month high above $1,300/ounce on January 22, after the ECB launched a multibillion euro bond-buying programme aimed at reviving a sagging eurozone economy Inflation in eurozone at minus 0.2pc is far below the central bank’s target of just under 2pc. Inflation was expected to increase gradually later in 2015 and in 2016. Gold is usually seen as a hedge against inflationary concerns.

Spot gold, which had fallen as much as 1pc to a session low of $1,279.5 in early trade, turned positive after the announcement, to the highest since August 15 at $1,306.20/ounce. At 2:54pm EST (1954 GMT) it was up 0.8pc at $1,303.50.

US gold futures for delivery in February closed above $1,300 for the first time since mid-August on a continuation chart, settling up 0.5pc at $1,300.70/ounce. The metal has risen around 10pc since the beginning of the month, its strongest month so far in two years, underpinned by higher demand for assets perceived as safer.

Gold gained strongly in euro terms, with euro-denominated gold reaching its highest since April 2013 at 1,145.86, after the ECB’s President’s comments knocked the euro to a more than 11-year low against the dollar.

Bullion is off to its best start to a year since 1980 while West Texas Intermediate is trading near the lowest since April 2009. Gold futures climbed 9.2pc in January to $1,293.40/ounce on the Comex in New York, heading for the biggest monthly gain in three years. The increased appeal of haven assets has boosted silver futures in New York 17pc this month, also is off its best start since 1980.

Bullion has performed well since the beginning of the year as its safe-haven appeal has been burnished by uncertainties in Europe.

Worries over the health of the global economy have added to gold’s demand. Last week the IMF cut its forecast for global growth in 2015 and called on governments and central banks to pursue accommodative monetary policies and reforms. Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, jumped 1.55pc to 742.24 tonnes.

Gold futures rebounded after the ECB expanded stimulus measures, boosting demand for the metal as a store of value.

Published in Dawn, Economic & Business, January 26th , 2015

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