OIL

Oil prices have tumbled in the run up to the release of data expected to show US inventories at record highs. Rising production from the world’s biggest exporter, Saudi Arabia, also fuelled worries about global oversupply.

Oil prices fell for a second day on February 19, after the US government reported another record high in crude inventories, but prices bounced sharply off session lows on relief the builds were less than an industry group had estimated. Prices also retraced losses as investors covered more short positions in US crude futures a day ahead of the expiry of the front-month contract.

US commercial crude oil inventories rose 7.7m barrels last week to a record 425.6m barrels, the US Energy Information Administration (EIA) said. It was the sixth straight week levels were at a seasonal record peak. The build was more than double the 3.2m barrels expected by analysts. Benchmark Brent and US crude futures, which fell about 5pc on February18 after the API report, came off session lows on the EIA data.

Brent LCOc1 settled down 32 cents at $60.21/barrel, off the day’s low of $57.80. On February 17, it hit a two-month high of $63. US crude CLc1 finished down 98 cents at $51.16. Early in the session it was down more than $2.

With the price of crude oil about half what it was six months ago, companies large and small are being pressured to cut costs. On the front lines are oil services companies that do everything from drilling to providing electrical power at well sites. Hundreds of thousands of jobs are threatened as companies try to adjust.

Earlier this month, Halliburton, a giant in the oil services businesses, said it is laying off up to 6,400 workers. Before that, Baker Hughes, which is merging with Halliburton, announced it is slashing about 7,000 jobs. And another giant, Schlumberger, is slashing 9,000 jobs.

More than 100,000 industry layoffs have been announced worldwide so far. The Saudi-backed decision has hurt big, public listed companies, such as Royal Dutch Shell PLC and Chevron Corp, but is now ricocheting and hitting national oil companies.

Saudi Arabia’s refusal late last year to rein in oil production helped trigger the price crash that has hurt oil-producing countries and public listed energy companies alike. And now even the kingdom’s own oil company is feeling the pain.

As a result, state-owned Saudi Aramco is looking for ways to cut costs everywhere. “Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” Aramco CEO Khalid Al Falih said in public remarks during the World Economic Forum in Davos in January. “We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.”

Recent oil price declines, of course, have given consumers considerably more purchasing power. Global consumer outlays are up markedly in the current quarter, but this will be partially offset by slowed capital investment in oil-producing countries this year and next. On balance, the impact of the oil price decline on global gross domestic product appears marginally positive.

GOLD

In the New York market gold prices advanced on February 19 as traders’ hopes that the Federal Reserve would delay raising interest rates outweighed pressure from a potential debt deal for Greece. The most actively traded contract, for April delivery, rose $7.40, or 0.6pc, to settle at $1,207.60/troy ounce on the Comex division of the New York Mercantile Exchange.

Gold prices rose higher after Federal Open Market Committee meeting minutes released earlier showed that many officials were inclined to put off raising interest rates for longer than expected. The central bank is widely expected to raise interest rates in the second half of the year, though the dovish minutes soothed fears a move would come as early as June. The Fed has kept rates near zero since 2008 to stimulate the US economy, benefiting non-interest-bearing assets such as gold. Any rate increase would lift the dollar, hurting demand for bullion.

Rising interest rates are likely to dull gold’s allure and will struggle to attract investors away from assets that offer an income stream such as Treasury bonds.

Gold is up 4pc this year as investors question whether the world’s central banks can contain deflation as global growth slows. Fears about the fate of Greece and the euro have added to gold’s appeal as a non-yielding asset that is traditionally viewed as an insurance investment.

Yet despite the rally, physical demand for gold has yet to pick up in China and India, the world’s largest consumers of the metal.

Global gold demand fell 4pc last year, according to the World Gold Council, an industry body. Gold futures fell early last week to a six-week low approaching $1,200/ounce on speculation that Chinese demand will fall during the Lunar New Year holiday. Silver tumbled, and platinum dropped to the cheapest in more than five years.

Gold futures for April delivery fell 1.5pc to settle at $1,208.60 on the Comex in New York. Earlier, the price touched $1,203.30, the lowest for a most-active contract since January 6.

Gold imports to top consumer India are set to jump in coming months after the Reserve Bank of India (RBI) eased gold import curbs, ahead of an expected cut in import duty in next week’s budget.

The RBI said recently banks would again be allowed to import gold on a ‘consignment basis’, under which they act as intermediaries and don’t pay for the stock until a buyer has been found, which is usually quickly. Trading houses will be allowed to bring in gold with no conditions attached.

In general share prices of the larger gold mining companies, such as Barrick Gold Corporation (ABX), Newmont Mining Corporation (NEM), and Goldcorp, Inc (GG) have been trading with a mild uptrend over the past couple of months. As uncertainty surrounding the Euro mounts, investors have shuffled closer to gold as a safe haven investment.

Published in Dawn, Economic & Business, February 23rd, 2015

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