Believe it or not: Oil cheaper than packaged water

At $38/Barrel, Petrol Rs 11/Ltr

Sanjay Dutta | TNN

New Delhi: Black Gold has lost its sheen, and how! Today, the cost of a litre of petrol or diesel for Indian oil majors is less than the price of a bottle of packaged water.
    Back-of-the-envelope calculations show that a litre of petrol costs about Rs 11 and diesel about Rs 14, excluding transportation and sundry other charges. By contrast, a
one-litre bottle of water costs between Rs 12-15.
    Here's how the arithmetic goes. A barrel of crude oil contains about 190 litres. At $38 a barrel, the current price in the international market, each litre of crude works out to Rs 10, taking the exchange rate at Rs 50 to a dollar. On an average, approximately 28-29 litres of petrol and 85 litres of diesel are refined from each barrel of crude. Admittedly, this figure can vary according to the type of crude being processed and the technology deployed in a refinery. So, how much would the price of a litre of motor fuel be after incurring the refining cost, if there were no other charges?
    The calculation is so mindboggling that sometimes even executives of oil marketing companies get confused by the myriad central and state taxes—levied at incremental rates—and the complex charges such as a 'freight equalisation levy' and dealer margins.
Such levies taken together constitute 45-55% of the sale price of petrol or diesel.
    So, if petrol costs a little under Rs 50 a litre at Mumbai pumps, taxes and levies make up about Rs 26 and another Rs 13 constitutes the oil-marketing firm's profit. That leaves a basic cost of about Rs 11 per litre. Similarly, at about Rs 37 a litre—the price of diesel—the actual cost can be taken as Rs 14 as the companies are making a profit of almost Rs 4 a litre. A WIN-WIN MOVE? Government may rejig petro-tax regime
New Delhi: The basic cost of petrol or diesel is much less than what the oil-marketing companies charge as nearly 55% of the price consist of the various Central and state levies.
    These calculations are admittedly simplistic and do not take into account other products such as kerosene, jet fuel, cooking gas, naphtha, etc, that are produced along with petrol and diesel and have a bearing on the final cost of each product. However, there won't be a big difference between these figures and the figures worked out by the industry.
    With crude projected to slide further in the coming days as the global slowdown gets a firmer grip on industry and pushes demand further down, the obvious question is: When will our pump prices go down further?
    TOI has repeatedly said this will happen just before the elections are announced, possibly around February. In the meantime, the government is looking to rejig the petro-tax regime to make way for lower prices without hurting oilmarketing companies that have accumulated huge losses during the extended run of high crude prices.

FALLING COMMODITY PRICES :Inflation may drop below 2% : Experts

New Delhi: Inflation might dip below the 2% level by the end of the current fiscal due to slackening demand and sharp decline in commodity and manufactured goods prices, say economists. "I expect Inflation to drop sharply to below 2% by March due to the sharp decline in manufactured goods prices and commodity prices ," HDFC Bank chief economist Abheek Barua said.
    The inflation dropped significantly for the sixth consecutive week to 6.84% for the week ended December 6, the lowest in nine months, after rising close to 13% in the month of August. Barua expects it to further decline to 6.48% for the week ended December 13 and sees more rate cuts by the RBI before its January policy. "I expect a 100 basis point cut in the repo and reverse repo rates," he added.
    Axis Bank economist Saugata Bhattacharya also believe that due to the falling demand, except that of primary articles, inflation might drop to 2% by the end of fiscal year 2008-09. Echoing a similar view, Crisil principal economist D K Joshi said, "By March, I expect the rate of inflation may come down to 2-3% due to the slackening demand and the base effect."
    He added that the sharp decline of commodity prices is leading to the fall of manufactured good prices. In addition to the fall in commodity prices, the decision of the government to reduce prices of petrol and diesel by Rs 5 per litre and Rs 2 per litre, respectively, and the December 7 stimulus package, that envisages 4% cut in excise duty, will have a cascading effect on prices in the coming months. Crisil's economist Joshi said the central bank can take more monetary easing measures in the coming days and slash interest rates further. "I expect the RBI's policy to remain aggressive. It might go for further rate cuts," Joshi added. RBI has taken a host of measures releasing as much as Rs 3,00,000 crore to fuel growth and with the inflation coming down further, it might take more steps to boost industrial output.
    Indicating that the RBI could take more steps to ease liquidity and trigger further softening of interest rates, the Mid-Year Review of the economy tabled by government in Parliament recently said "there is considerable scope for monetary policy easing over the next six to 12 months." Chief economic advisor Arvind Virmani also said the inflation is under control and will come to an acceptable level of 5% by the end of the fiscal."Inflation has started declining. I see it (inflation) between 4-5% by March, may be even before that...it is desirable to cut repo, reverse repo by 100 basis points," he said. AGENCIES

Centre weighs reimposition of 10% CVD on import of long steel items

CVD HAS BEEN FAVOURED AS DOMESTIC PRICES OF LONG PRODUCTS HAVE FALLEN 35% SINCE APRIL

THE government is considering reimposition of 10% countervailing duty (CVD) on bars and structurals to safeguard the interests of domestic steel companies in the wake of rising imports. Bars and structurals are long steel products mainly used in construction work.
    The move would come as a breather for steel makers such as Tata Steel, RINL, SAIL and Jindal Steel and Power (JSPL), who have been feeling the pinch of increased imports of long products over the last couple of months. "The proposal to reimpose CVD is being considered by the finance ministry. It may be included as part of a new fiscal package being considered for the sector," a government official said.
    Last week, steel minister Ram Vilas Paswan also wrote to Prime Minister Manmohan Singh asking for CVD on bars and structurals considering the current import scenario. The CVD on bars and structurals was withdrawn earlier this year when steel prices were rising. The duty waiver was aimed at protecting needs of the domestic construction sector and controlling inflation.
    The CVD has now been favoured as prices of long products have fallen 35% to Rs 32,000-34,000 per tonne level this month as against Rs 48,000-50,000 per tonne in April this year. The absence of the duty puts domestic manufacturers at a disadvantage. In a market where prices are falling, imports become attractive as they are not charged 10% excise duty which domestic companies have to pay. Moreover, with international prices being lower than the domestic prices, there is a fear that even long products may be dumped in the country.
    Says JSPL director Sushil Maroo, "We have been urging the government for CVD on long products for sometime now, considering the price situation. The move will not only protect the local industry against cheap imports but also generate decent revenues for the government. Giving a boost to the domestic industry would mean creation of more job opportunities."
    "Earlier, the US was a major export market for China. With slowdown in demand from the US, Chinese steel producers shifted their focus to India. The CVD would primarily benefit small players as imports would become expensive," says independent steel and natural resources consultant AS Firoz.
    India's annual steel production stands at 56 million tonnes with long products constituting close to 50% and flat products 50%. However, the share of long products in the country's total imports stands at a mere 25%. For the April-November period, total steel imports stood at 6.65 mt.
    Globally, steel prices have more than halved to $600-700 per tonne level after touching a level of $1,400 per tonne earlier this year. Even domestic steel prices have fallen by over 30% in last three months due to slowing demand.
    subhash.narayan@timesgroup.com 

Oil crashes to four-year low of $33

 Oil prices stabilised Friday as the White House's $17.4 billion auto industry rescue package gave Wall Street a boost and the dollar strengthened against the euro. Light, sweet crude for February delivery rose 92 cents to $42.59 a barrel on the New York Mercantile Exchange. The contract overnight fell $2.94 to settle at $41.67. The January contract, which expires Friday, fell 82 cents to $35.40, but fell as low as $33.44, a price last seen more than four years ago.
    Analysts are largely discounting the January price, with the volume of the next month contract trading at 13 times the volume. Yet analyst Jim Ritterbusch said pre-expiration lows do provide a downside target to the next contract.
    Ritterbusch, president of energy consultancy Ritterbusch and Associates, said the market is sending strong signals that an oversupplied market will remain in place for some time. "I think it's going to work its way down to today's lows in the January futures," he said.
    In London, February Brent crude rose 18 cents to $43.54 barrel on the ICE.
    The extreme volatility in energy markets this year, which have seen crude pushed from $100 to $150 between January and July, and back down to $33 this month, has become an urgent global issue. At an energy summit Friday on London, British Prime Minister Gordon Brown warned that a failure to stabilise oil prices could cost the global economy trillions. AP

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Strong global rally helps gold scale 13k

 GOLD prices hardened further in the domestic market on Wednesday on the back of a strong global rally. In Mumbai, prices of standard and pure gold scaled Rs 13,000 per 10 gm to touch Rs 13,090 and Rs 13,150 per 10 gm, respectively. The metal was last seen above Rs 13,000-mark on December 1 when prices stettled at Rs 13,010 per 10 gm in Mumbai bullion market.
    However, higher prices kept retail buyers away from the shop despite ongoing marriage season, a bullion merchant said in Mumbai. But it is not the domestic demand that is driving prices now. Bullion dealers said the firm international prices, which is a combined result of the US economic recession and a slide in dollar value against the euro,
are the main reason for the rally in gold market.
    In international markets, yellow metal gained more than 1% on Wednesday on dollar weakness in the wake of the US Federal Reserve's decision to slash interest rates to between zero and 0.25%.
    In Kolkata, the yellow metal rose by Rs 145 to Rs 13,270 per 10 gm. While in Delhi it rose by Rs 20 to touch Rs 13,110 per 10 gm, it scaled Rs 13,000 per 10 gm in Chennai. In London, spot gold rose to $871.30/873.30 an ounce, a two-month high, up from $857.35 on Tuesday in New York. Meanwhile, US gold futures for February delivery too became dearer by
$32.50 at $875.20 an ounce.
Meanwhile, demand for silver improved substantially as jewellers and gift items manufacturers turned active buyers to meet demand for Christmas and New Year celebrations. Ready silver gained the most in Chennai, where the metal closed Rs 595 higher at Rs 18,465 per kg. While in Kolkata the white metal surged by Rs 460 to Rs 17,850, it traded Rs 445 higher at Rs 17,815 per kg. Delhi markets saw a gain of Rs 350 as the metal settled at Rs 17,600 per kg. In international markets, London silver rose to $11.44/11.52 an ounce from $11.21.

OPEC MAKES DEEPEST CUT EVER

Slashes 2.2M Bpd In A Bid To Build A Floor Price, But Prices Slip Further To $40

William Maclean & Barbara Lewis ORAN (ALGERIA)

    OPEC members agreed their deepest oil cut ever on Wednesday, slashing 2.2 million barrels per day from oil markets in a race to balance supply with rapidly crumbling demand for fuel. The 12 members of the Organisation of the Petroleum Exporting Countries were also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel.
    The cut, effective from January 1, comes on top of existing reductions of 2 million bpd agreed by Opec at its last two meetings. It lowers the group's supply target to 24.8 million bpd. "I hope we surprised you —if not, we have to do something about it, said Opec president Chakib Khelil, host of the conference.
    Oil fell more than $3 towards $40 following the deal, after weekly US data showed inventories in the world's biggest consumer continued to swell. US light crude fell $3.40 to $40.20 a barrel, the lowest since July 2004, while London Brent crude fell 80 cents to $45.85 a barrel.
    A deepening recession has battered world demand and fuel inventories are bulging world-wide. "The world economy is driving the price more than anything Opec can do at this stage," said Gary Ross, CEO of consultancy PIRA Energy.
    Opec president said the group would do its utmost to ensure new restraints were strictly enforced. "I can tell you it's going to be implemented and it's going to be implemented very well because we do not have a choice," said Khelil, who is also Algeria's energy minister, adding "If not, the situation is going to get worse."
    Saudi Arabia, the world's biggest oil exporter, has led by example —reducing supplies to customers even before a cut has been agreed to help push prices back towards the $75 level Saudi King Abdullah has identified as 'fair'.
    "The purpose of the cut is to bring the market into balance and avoid the gyrations of the price," said Saudi oil minister Ali al-Naimi. The cut, the third this year, brings a total reduction in Opec supply to 4.2 million bpd, nearly a 5% cut in world oil supplies. The group is due to meet again on March 15.
    Oil below $50 is uncomfortable for all producing nations, but especially for Opec members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programmes. It is hoped that a sharp supply cut will set oil on the path towards $75.
    Analysts said a limited recovery in prices would put a bit more strain on a recessionary global economy, but it may help pull the world back from the brink of deflation — a growing source of concern. The influential Saudi oil minister clearly outlined the kingdom's route to lower production. It is pumping 8.2 million bpd against 9.7 million bpd in August. Saudi Arabia's implied output target is about 8.4 million bpd under existing Opec curbs.
    According to independent observers cited in Opec's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50%. Opechasencouraged other producers to cut back too. Russia and Azerbaijan are attending the Oran meeting as observers and have said they could rein in exports in future, but stopped short of am immediate pledge. Leading a high level delegation, Russia's deputy PM Igor Sechin said in a speech to Opec that Moscow did not plan to join in co-ordinated output cuts and did not want to join the group. — Reuters

Opec president and Algerian oil minister Chakib Khelil announces the record ever output cut after the Opec meet on Wednesday. - REUTERS

Five Ways to Profit from the New Year Rebound in Commodity Prices

By Martin Hutchinson

Contributing Editor
Money Morning

Between September 2007 and June 2008, oil prices doubled, gold rose 30% and commodities, in general, advanced by a similar percentage.

So why, six months later, when prices have fallen back below last year's levels, does everybody think they won't rise again? The difficulties of extraction haven't gone away, nor have the prospects of increasing consumption in the faster-growing emerging markets such as China. Yes, the prices of commodities are severely affected by marginal moves in supply and demand, but this is ridiculous!

Rest assured, commodities prices will rebound in the New Year. The reasons will soon become quite clear.

The decline in commodities prices since the summer is broad-based. The Reuters Continuous Commodities Index traded recently at 341, down 25% from a year earlier and off about 45% from its June high. At $48 a barrel, oil is trading at less than one-third of its June high. And gold, which appreciated less than other commodities in the spring, is still down 18% from the $1,000-per-ounce level it reached earlier this year.

Conventional wisdom blames the decline in commodity prices squarely on the global recession. Since the rise in demand from emerging markets – particularly the huge consumption bases of China and India – had caused the previous run-up, it seems natural that the absence of that demand growth would cause prices to decline. After all, that happened in 1982, when a deep recession in the United States spread to a number of other countries. Oil prices plunged from $40 a barrel to a mere $10, breaking the back of the Organization of the Petroleum Exporting Countries (OPEC) in the process.

This time around, however, the math doesn't seem to work. For one thing, the world as a whole is by no means locked into recession. We in the rich countries think of our economies as spiraling into a deep decline, but the reality is that we may only be witnessing a secular shift caused by the narrowing of income differentials between rich and poor countries as globalization proceeds.

In countries such as China, India and Brazil – three of the four so-called "BRIC" economies – growth has slowed and many are suffering imbalances in their financial structures, but there is little sign of actual decline in any of them. Indeed, if China's recently announced $590 billion infrastructure investment serves to redirect growth toward domestic consumers, it is possible that the demand for oil and other commodities there may show very little dip at all; it takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China's stated objectives.

On the supply side, OPEC was full of spare capacity in the 1980s. South Africa and the Soviet Union were still expanding gold production, and the explorations of the 1970s had produced surpluses of many other commodities. But in the past two and a half decades, things have changed.

Oil, for example, remains in short supply. Both deep offshore fields – like those discovered by Petroleo Brasileiro SA, or Petrobras (ADR: PBR), in the Tupi Complex – and the tar sands (like the ones in Canada and Venezuela), are economically unfeasible with oil trading at such a low price. And, if prices remain low, the expansion and exploration of new sources of production will be curtailed even further.

More importantly, though, supply and demand is only one of the reasons commodity prices rise and fall. What really spurred the big price rise in commodities that took place earlier this year was the explosion in the money supply throughout the world.

Money supply, unlike demand, is something that hasn't evaporated with the economic downturn. In fact, it has actually ramped up. Even though money markets have become illiquid, central banks throughout the world are forcing down interest rates and pumping out liquidity by every means they can think of [Indeed, the policymaking arm of the U.S. Federal Reserve meets today (Tuesday), and is expected to cut rates yet again. For a related story, click here].

Meanwhile, governments everywhere (except Germany) are implementing massive "stimulus packages" that will destabilize budgets and insert huge additional demand into the global economy. Since the governments will have to borrow the money to finance those stimulus packages – and the budget deficits that are inevitable in an economic downturn – central banks will be compelled to pump out even more money to accommodate all the increased debt; otherwise, interest rates would go through the roof and finance for the private sector would become unobtainable, hardly the object of this whole costly exercise.

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The future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and the United States may suffer deep recessions this time around.

To take advantage of this likely trend, I would recommend a broad portfolio of shares whose prices are closely linked to the prices of major commodities. Among those you might consider:

• Vale (ADR: RIO): As a gigantic Brazilian iron ore producer, Vale will benefit enormously from China's new infrastructure program (Think of all those steel rails!). The stock is currently trading at just over $12 a share with a Price/Earnings ratio (P/E) of about 7.0 and a yield of slightly more than 1.0%.

• Rio Tinto PLC (ADR: RTP): Another huge mining conglomerate, the long-and-bloody attempted takeover of Rio Tinto by BHP-Billiton Ltd. (ADR: BHP) recently fell apart. At $93, Rio Tinto shares have a yield of 5.8% and a prospective P/E of about 3.0. The company is overleveraged, so somewhat dangerous, but you'd be getting paid for the risk.

• Suncor Energy Inc. (SU): The largest pure player in the Canada's Athabasca tar sands, Suncor's marginal cost of production from operating facilities is about $30 per barrel and the cost of opening new facilities is about $60 per barrel. It's currently trading with a P/E of 8.0 but has a yield of less than 1.0%, as it needs all its cash.

• SPDR Gold Trust (GLD)exchange-traded fund (ETF): The largest ETF that invests in gold, GLD has more than 750 tons of the "yellow metal" held in trust.

• Yanzhou Coal Mining Co. (ADR: YZC): China's largest coal miner, Yanzhou has a P/E of 4.0, yields 3.5% and enjoys low costs – not to mention a super-close proximity to the gigantic market that is China.

The carbon trap

Hamsa Sripathy throws light on the concept of carbon credit and explains its significance

 One often hears the term 'carbon credit' being bandied about in industrial circles, but few know the actual meaning of the term, and what role it plays in saving our planet from toxic annihilation. As levels of carbon-di-oxide began rising alarmingly, it became imperative to seek ways of reducing emissions at the earliest. The concept of carbon credits arose in the late 1980s as a consequence of seeking a feasible and practicable solution to the pressing problem. It was introduced in the Kyoto Protocol and carried further in the Marrakesh Accords.
    A carbon credit works like this: if a country or organisation has reduced its greenhouse emissions to a level approved by a regulatory authority such as Clean Development Mechanism (CDM), a credit is awarded to it. One carbon credit allows the holder to emit one ton of carbon dioxide. Credits so acquired can be traded in the international market at the prevailing price.
    Carbon credits play an important role in reducing greenhouse gas emissions by putting a cap on the total annual emissions. Organisations exceeding the pre-defined limit of emission are required to purchase credits from those who have earned them by keeping their emissions low.
    Worth mentioning here is the term 'carbon footprint', which is a numerical measure of the amount of carbon-di-oxide released by an individual or organisation in the course of its everyday activities. The ethos behind the system of carbon credit is to reduce carbon footprints on a worldwide scale.
    Credits are sold by many to commercial and individual customers who are interested in lowering their carbon footprint, who are known as carbon offsetters. Thus, credits not only help reduce carbon-di-oxide output but also provide monetary aid to those who need it most.
    However, the concept has been criticised on the grounds that it is too simplistic a measure to tackle a burning issue, and it does not help solve the systemic and endemic malaises in the world, which were originally responsible for the status quo. Others argue that the offenders are being let off lightly, while they should be penalised more heavily. Still others propose auctioning the credits, as opposed to selling them.
    For all its rights and wrongs, carbon credit cannot take the blame for our failure to save the planet from near-certain destruction. May it serve as a reminder to all of us towards our collective responsibility to nurture the only home we have, mother Earth.