• Home ::
• Fundamental ::
• Analysis Reports ::
• Friday Notes

• Send
• Print
• Add To
• Rss

Friday Notes

8766f072-c5e6-4333-bfac-6a17f0443e88

0

0

The oil price just keeps on rising

Fri, May 4 2007, 11:45 GMT
by HVB Group Global Markets Research

HVB Group

• Revision. We are raising our oil price forecasts by close to USD 10. On average for 2007, Brent will cost USD 68 per barrel followed by USD 75 in the coming year. The respective seasonal highs in the third quarter will be USD 5-10 higher.
• Upward. The primary trend, i.e. the development beyond short-term or seasonal fluctuations, continues to point north. While crude oil demand will rise strongly, the supply bottlenecks are becoming increasingly visible. Peak oil, i.e. the global zenith of crude oil production, is getting closer.
• Impact. Rising oil prices will crimp the underlying growth trend, but not inflict any sustained damage, because the energy intensity of production is declining steadily (cf. chart). Moreover, consumers appear to be coming to terms with the higher energy price level.
• ECB. The renewed rise in the price of oil will slow the pullback in inflation and increase the risks of second-round effects. Alongside the bright growth prospects, the bullish sentiment and the booming demand for credit, this underpins why we expect a "more aggressive" ECB in 2007 than the consensus.

Further topics:

• Weekly Comment: Three easy pieces.
• Drought in Germany harbors only minor price risks.
• Germany: Rising tax revenues awaken expenditure desires.
• US commercial construction enjoying just a gentle breeze.
• Data outlook: ECB to wait until early June, Bank of England to hike, and the Fed will retain its tightening bias.
• Market outlook: EUR to test all-time high again, Bunds stable.

THREE EASY PIECES

There are three distinct issues which I think are worth noting this week.

First: We have reiterated that our baseline global macro view is a “goldilocks” scenario, with growth in the US moderating but holding up at a decent level, and the US slowdown cushioned by a surprisingly strong Europe and a still buoyant Asia. Inflation is a concern, but remains just that, a concern, recurring more often in the rhetoric of central banks than in the actual data. Against this background, a key priority for investors is of course that of identifying key risks. As we try to enhance the yields on our investment, out of the corner of our eye we try to spot the accident about to happen, the truck that might suddenly come around the bend and run over goldilocks. Well, key central banks are doing the same, and it strikes me that two very recent speeches by key Fed officials have been focused on the risk of protectionism. On May 1, speaking at an economic summit in Montana, Fed Chairman Bernanke highlighted the benefits of trade for both developing and developed countries. He quoted studies estimating that “removing all remaining barriers to trade would raise US incomes anywhere from $4,000 to $12,000 per household”. He cited a World Bank study documenting how developing countries which have opened themselves up to globalization have benefited from much higher growth rates than those which have kept up barriers. Bernanke then highlighted that there is no evidence that trade has had any impact on US employment, at the same time quoting figures that give a dramatic sense of the dynamism of the US economy: over the past decade, about 16 million jobs have been destroyed every year, and 17 million jobs created! He stressed that even outsourcing has, in the end, a positive impact, and that the key priority should be to invest in education, training, and fostering flexibility in the labor market together with active labor market measures aimed at cushioning the temporary displacement of workers. Protectionism, by contrast, is the one mistake to be avoided, as its costs always far outweigh any benefits. A few days earlier, on April 26, Governor Mishkin spoke in Washington on the beneficial impact that globalization and trade have on financial development in developing countries, as well as on productivity and economic growth. He concluded by urging industrialized countries to open up their own markets as a way to help the opening up of developing countries. The benefits of tree trade are well established in academic literature. If Bernanke and Mishkin feel the need to emphasize them, it is because they see the danger of protectionism mounting in the US Congress—just as protectionist pressures have been gathering strength in the EU. An increase in international trade has played a fundamental role in fostering growth, and the global economy has become much more interconnected than it used to be. A surge in protectionism could do a lot of damage to our goldilocks scenario.

Second, Turkey: I wrote last week that Prime Minister Erdogan had taken a statesman-like step by not being a candidate for the Presidency (instead favoring the candidacy of the more moderate Foreign Minister Gul). The Turkish Army did not see it quite the same way, and the same day published on its web-site a strongly worded statement to the effect that it stood ready to do whatever necessary to defend secularism. Some commentators dubbed it a “virtual coup”, being an intervention in the country’s political life done purely through the internet. Markets plummeted last Monday, and recovered convincingly only on Wednesday, as the Constitutional Court annulled the first round of voting in the presidential election. This should open a way out of the crisis, most likely through early parliamentary elections and possibly a constitutional change to allow for the direct popular election of the President. PM Erdogan however called the ruling “a bullet aimed at democracy”, highlighting the fact that tensions are far from eliminated. Turkey’s transition to a fully stable democracy and market economy clearly still has some way to go. The Army’s cybernetic intervention took most people by surprise, but it was also in part due to the cooling of relations with Europe: EU accession is nowhere near as popular as it used to be a few years ago, and this made it much less costly for the Army to speak up so forcefully. Europe can still play a crucial role in facilitating Turkey’s consolidation into an economically stronger, fully secular democracy, and I still believe this would be as much in the EU’s interest as in Turkey’s. Meanwhile, tensions have flared up between Russia and Estonia, after the Estonian government decided to remove a Soviet-era war memorial from the center of the capital. There were street riots, the Estonian government’s computers were paralyzed by a cyber-attack that the Estonians claimed they had traced to Moscow, and the Russian railway company promptly announced urgent work on the railway lines bringing oil and coal to Estonia. As I pointed out last week, the EU needs to look more and more outside its borders, and some tough choices may at some point become unavoidable.

Third, the Bank of England acknowledged that its communication policy leaves a lot to be desired, as demonstrated by the high volatility in UK futures markets. BoE Governor Mervyn King told the Financial Times that the central bank was clearly failing to explain to markets how it was likely to respond to economic data, and indicated that some improvements were needed. This comes as a relief even to those among market analysts who had come to the conclusion that the BoE was purposefully trying to systematically surprise the markets. Most importantly for us, I think this is going to be seen as a further vindication of the current high transparency practiced by the ECB, which I believe is therefore even more likely to continue to signal clearly the moves ahead. This implies that next week we should see clear confirmation that a hike to 4% will take place in June, and at that point we will then get a clear indication that rates still have some way to go (an extra 0.50%, in our view).

• Download Full Friday Notes

Published on  Fri, May 4 2007, 11:53 GMT