Oil price close to US$120

By Jessica Cheam, ST

Crude oil hit a new record of nearly US$120 a barrel yesterday as a workers’ strike closed a major British oil pipeline and fresh violence in Nigeria reignited supply fears.

Rationing is already being enforced at some British outlets amid panic buying.

Soaring oil prices are hurting Singapore car drivers at the petrol pump, just as they are adding to corporate costs around the globe – fuelling growing inflation fears.

The question on everyone’s lips now: Just how high will oil prices go?

Experts and other oil industry figures are split. Some say it could hit US$200 a barrel, but others expect the price to ease to an average of US$95 a barrel this year and the next.

Still, the latest developments are adding to the jitters.

Oil for June delivery rose as much as US$1.41, or 1.2 per cent, to US$119.93 a barrel in after-hours electronic trading on the New York Mercantile Exchange yesterday – the highest since futures began trading in 1983, reported Bloomberg.

The contract eased back to US$119.04 a barrel by noon in Europe, up 52 US cents from last Friday’s close of US$118.52.

The shutdown of one of Britain’s biggest oil refineries over a pension-row strike was expected to prompt more panic buying of petrol yesterday as motorists, particularly in Scotland and northern England, rushed to pumps to stock up.

Also in Nigeria last Friday, the key armed group in the southern oil-producing region sabotaged a supply pipeline owned by Shell.

In a report last Friday, Mr Adam Sieminski, Deutsche Bank’s chief energy economist, said there was a huge risk that oil price ‘will escalate until it gets to some level when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now’.

Organisation of Petroleum Exporting Countries (Opec) president Chakib Khelil reportedly does not rule out oil hitting US$200 a barrel even with adequate supply.

At a seminar at the National University of Singapore yesterday, Professor Sam Ouliaris of the economics department had a more conservative estimate. He sees average oil prices at about US$95 a barrel for this year and the next, and cited several key reasons for the recent hikes: tight supply, disruption of oil facilities, Opec’s limited excess capacity, and the declining US dollar, in which oil contracts are priced.

Speculative activity by hedge funds – lured to commodities trading because of the volatility of equity markets and low interest rates – has also contributed to the price hikes, he added.

Prof Ouliaris, a former senior International Monetary Fund researcher, added that consumption in growing major markets such as China and the Middle East is driving up prices. But he said the recent oil price shocks are ’small, relative to those in the 1970s’.

For hikes to have the same impact as they did in the 1970s, when oil rose from around US$3.50 a barrel to US$35, current prices would have to hit US$250 a barrel in 2010 to 2013, said Mr Sieminski in his report.

Standard Chartered Bank economist Alvin Liew, however, puts oil prices slightly higher at about US$104 a barrel for this year.

‘I think we can see an easing of demand in the second half of the year. If the US is indeed in a recession, demand will fall accordingly,’ he said.

Prof Ouliaris added that a long-term solution is to minimise the growth in consumption, particularly in the transport sector, as oil supplies are likely to remain tight.

‘In the meantime, get used to high oil prices,’ he said.

Rice price hits new high on global markets

The prices of rice in Thailand, the world’s top exporter, surged to a record high above US$1,000 (S$1,360) a tonne yesterday as fears of a global shortage spread as far as the United States.

Thai 100 per cent B grade white rice, the world’s benchmark for global trade, was quoted in a range of US$1,000 to US$1,080 per tonne.

This week’s 5 per cent jump takes prices to nearly three times their level at the start of the year.

Rice futures in Chicago also rose above US$25 per 45kg on Wednesday, but eased slightly in early trading yesterday.

The price surge, which started when India imposed export curbs last year and has since led to shortages and riots from Egypt to Haiti, has made its way to US shores.

Americans have been cleaning out the shelves at major retailers including Wal-Mart’s Sam’s Club and Costco Wholesale Corp.

On Wednesday, Sam’s Club said customers could buy only four 9kg bags of jasmine, basmati and long-grain white rice per visit. Its rival Costco has already limited customers to two bags of rice a day at some of its stores.

‘It is like a run on the bank. We don’t think there is a shortage; it is just increased shopping by customers who think there is,’ said Costco’s chief financial officer, Mr Richard Galanti.

But the upward surge of rice prices shows no sign of abating. In Bangkok, some traders said Thai 100 per cent B grade white rice could hit US$1,300 a tonne due to unsated demand from the No. 1 importer, the Philippines.

Pressure on supplies and prices increased on Wednesday, when Brazil became the latest country to suspend rice exports, following in the footsteps of India and Vietnam.

But Thailand, which accounts for nearly a third of all rice traded globally, has said it will not impose any curbs. Yesterday, a Thai government spokesman reiterated that the country will meet all export commitments.

Mr Wichianchot Sukchotrat was speaking in Kuala Lumpur, where Thai Prime Minister Samak Sundaravej met Malaysian leaders, during which food security was a key topic of discussion.

‘We don’t need to restrict Thai exports because in the next few months, a new crop will come out,’ the spokesman said.

In Singapore, where most rice imports come from Thailand, importers say it is getting more difficult to hold back on price increases given the more frequent, and steeper, price jumps in global markets.

Singapore’s biggest supermarket chain, NTUC FairPrice, said it will moderate price increases and stagger them to soften the impact on consumers.

Said its spokesman: ‘Our current rice stockpile was secured at a lower price a few months ago. Going forward, we have to import rice at prevailing market rates which have increased by more than 100 per cent since March last year.’

The Government has highlighted three measures to help the needy: bigger and earlier payouts for those on the Public Assistance Scheme; two instalments of Growth Dividends; and targeted help from the citizens consultative committees (CCCs).

Most of the CCCs that spoke to The Straits Times said there was an increase in the number of people approaching them for help.

Oil rises above US$115 on tight supply, weak dollar

Oil set a record above US$115 a barrel yesterday, as a drop in the United States’ petrol inventories raised concern of tighter supply and a weak dollar boosted investor demand for commodities.

A US government report on Wednesday showed a surprise drop in crude inventories and a larger-than-expected decline in stocks of petrol. Demand for motor fuel usually peaks in the summer.

‘Summer driving season is approaching. Even in a recessionary economy, seasonal petrol demand will pick up, which adds to stress on the global oil supply chain,’ said Mr Jan Stuart at UBS.

‘But before we get there, the stress already put onto the supply chain globally by middle distillate demand and supply dynamics is not still abating,’ he said in a research note.

US crude set a record of US$115.54 a barrel and by 0958 GMT (5.58pm Singapore time) yesterday was trading at US$115.24, up 31 US cents.

Oil has hit new peaks for three consecutive days. London Brent advanced as much as 72 US cents to a record US$113.38 a barrel on London’s ICE Futures Europe exchange.

London’s gas oil, – the benchmark for heating oil and diesel in Europe – set the pace for crude oil and refined product futures, gaining 1.1 per cent to US$1,056.25 a tonne.

In the latest indication of strong demand for middle distillates, China’s top refiners were set to extend unusually high imports into a sixth straight month.

PetroChina, China’s second-largest refiner, has bought 300,000 tonnes of gas oil for next month, traders said.

The weakness of the dollar continued to attract investors into commodities to hedge against inflation and bet oil’s rally would help compensate for the shrinking value of dollar assets in their portfolios.

The dollar has declined 13 per cent on a trade-weighted basis in the past 12 months, as the collapse of the US sub-prime mortgage market prompted the Federal Reserve to cut rates to prevent bank losses from pushing the US economy into a recession.

Temasek bought additional $819m Merrill shares in Feb

By Grace Ng, ST

Temasek Holdings has exercised its option to buy an additional US$600 million (S$819 million) worth of shares in troubled American bank Merrill Lynch.

A filing by Merrill with the United States Securities and Exchange Commission (SEC) on Feb 25 stated that Temasek had bought an additional 12.5 million shares at US$48 apiece. This raised its stake in the bank to US$5 billion.

The Singapore investment company had bought US$4.4 billion worth of Merrill stock at US$48 a share late last year, when the bank sought to raise capital from Temasek and US money manager Davis Selected Advisers.

The agreement signed in December last year also gave Temasek an option to buy a further US$600 million worth of shares by March 28, as long as its holdings would not exceed 10 per cent of Merrill’s total outstanding common shares.

Temasek said at that time that its investment reflected its belief in the ’strong growth potential’ of Merrill.

The US$48 share price then was a 13.6 per cent discount to Merrill’s trading price of US$55.54 on Dec 21.

On Feb 24, a day before Merrill’s SEC filing about the new Temasek purchase, the shares closed at US$53.05.

But the shares have since slumped, closing at US$42.88 on Monday.

This is 10.7 per cent below Temasek’s US$48 purchase price and represents a paper loss of about US$534 million for its entire investment to date in Merrill.

Analysts said Temasek’s move to raise its stake in Merrill reflected its stance as a long-term investor and its confidence that the credit crunch, which has brought major banks to their knees, will eventually blow over.

In January, Merrill raised more capital from Middle East and Japanese investors. But it does not plan to raise any more, according to chief executive John Thain.

Merrill has written down US$24 billion worth of securities related to the risky US sub-prime mortgage market.

The write-downs dragged Merrill into the red to the tune of over US$8 billion last year.

Analysts expect Merrill to suffer further write-downs of US$3 billion to US$5 billion when it reports its first-quarter earnings tomorrow.