Oil Supply; Agricultural Commodities; Inflation in Asia; Brazil COPOM Hike; Emerging Europe Inflation
Co-written with other RGE Lead Analysts.
Oil Supply Shortfalls
WTI Crude oil futures surged to yet another all-time high this week – over $115 a barrel. Supply shortfalls –Russian oil output declines, trimming of OPEC output, rising costs to maintain output and a decrease in U.S. crude oil stocks – likely contributed to the surge. Refiners have reduced throughput, perhaps being unwilling to hold inventories while crude is so expensive. Yet, the effect of high oil prices on consumers is a wildcard; will demand slow enough to cool prices? So far demand from China and other fast growing emerging markets has offset OECD demand drops, to the extent that Chinese crude oil imports reached an all-time in Q1. Take a look at: “Every Barrel Now Counts: What is the State of Global Crude Oil Supplies?” and “The Energy Tigers: Asian Demand to Continue to Boost Commodities?”
Agricultural Commodities and Food Crisis
The commodities boom has spread to agriculturals, particularly key grains such as corn, wheat, soybeans and rice. Seeking higher returns, inflation hedges and shelter from turmoil in other asset classes, speculators jumped on this latest bandwagon put in motion by fundamentals: demand growth from biofuel production and emerging markets – where incomes and protein demand are rising – and supply tightness due to poor weather and public planning. Wheat has trebled in price since February last year, while other softs like soybeans and cocoa went parabolic to hit all-time high nominal prices this year. As land is diverted to more profitable cash crops like wheat and soybeans, the ‘turf war’ – the battle for acreage among competing agricultural commodities – exacerbates the supply tightness of losers, e.g. rice, corn and potatoes in the U.S. The agricultural price boom takes its human toll on those who can least afford it – food shortages have cropped up in developing countries – but also impacts the wealthiest populations in the world: Eurozone core inflation has risen on processed foods, of which grains are a major component. Read: “Agriculturals: Best in Commodities Class. Bubble or Supercycle?” and “World’s New Crisis: Soaring Food Prices”
Asia: Inflation Creeping Up
Surging rice and commodity prices across Asia is posing the risk of social unrest and higher production costs. Countries have resorted to trade restrictions and subsidies as interest rate hikes or currency appreciation may exacerbate the export and growth slowdown. Given the distortions and fiscal costs that administrative measures entail, the global food crisis highlights the need for developing countries to invest in agriculture research and technology to feed the growing urban population.
In India inflation has hit a three-year high but slowing consumption, industrial production, high interest rate differential with U.S. and expected impact of global slowdown is constraining rate hike. Pressure to tighten monetary policy (the next monetary policy rate decision is due next week) may rise to prevent socio-political consequences.
Brazil: COPOM Hike
Monetary authorities in Brazil surprised the markets with a 50bps increase in interest rates. The market was expecting 25bps. The hike brought to an end more than two years of rate cuts amid mounting concerns that CPI will overshoot the 4.5% target for inflation in 2008. Check out: “LatAm Monetary Policy Monitor” and “The First Hike After 35 Months: Monetary Policy Decisions in Brazil”
Emerging Europe: Inflation Creeping Up
Inflation is spiking across emerging Europe. Price rises are expected to exceed 10% in Latvia, Estonia and Bulgaria this year. Besides soaring commodity prices, local factors are also at work. The CEE area’s tight labor markets mean there is a greater risk of spillover into second-round effects like wage hikes, which could lead to an inflation spiral. So far, the pick-up in prices has been less marked in Central European countries, like the Czech Republic and Poland, where some of the pressure has been absorbed by strong currency appreciation. Check out “Inflation on the Rise Across Emerging Europe”
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