Saturday, March 24, 2012

>Impact of higher Brent prices- Why Brent crude prices soaring??


The ICE Brent Crude futures contract is a deliverable contract based on Exchange of Futures for Physical (EFP) delivery with an option to cash settle. Introduced in 1988, the ICE Brent Crude futures contract is the leading benchmark for light sweet crude oil, including grades in Africa, the Middle East and Asia. Brent crude is actually a combination of crude oil from fifteen different oil fields located in the North Sea. It contains about 0.37 percent of sulfur making it slightly less "sweet" than WTI. It is primarily used in the Northwestern European market and its price is leading global price benchmark in Asia and Europe and two thirds of the worlds internationally traded crude oil supplies. The Brent crude had touched $128.40 on March 1, 2012, its highest level since July 2008.

Why Brent crude prices soaring??
■ Escalating tensionwith Iran,which have resulted in sanctions by the US and a deferred oil embargo until July 1 imposed by the European Union and shutdown of three Petroplus refineries in Belgium, France and Switzerland, leading to a loss in European capacity of around 300,000 bpd has resulted in higher Brent premium.

■ Iran has threatened to block shipments through the Strait of Hormuz in the Persian Gulf, transit route for about 20 percent of the world's globally traded oil.

■ Iran's decision to stop selling oil to Britain and France sent Brent crude prices soaring. Europe uses about 500,000 barrels a day of Iranian oil.

■ Recently the news of approval of bailout package to Greece supported Brent prices.

■ Due to increasing tension between the West and Iran the major Asian oil consumers are looking anxiously at their meagre strategic oil stocks. The world's second-largest oil importer China has a lot less emergency oil is increasing its strategic oil stockpile capacity.

■ The production of Brent crude in North Sea is declining. North Sea oil and gas output passed its peak at the start of the last decade as the larger and easier-to-tap deposits were pumped out.

Impact of higher Brent prices
•Recently high Brent prices are fast threatening the biggest danger to growth in Asia as taking a knife to exports and reigniting inflation.

•Increasing Brent prices is also a headache for central banks as it makes it harder to use easy monetary policy to cushion growth.

•And any threat to Asia is a danger to all, as world market considers that the region's growth can offset the recession in Europe and a fitful recovery in the United States.

•Asia is the largest consumer of the commodity with an account ofmore than 31% of world demand.Asia is a home to four of the world's 10 largest oil-consuming countries in China, Japan, India and South Korea. So increasing Brent prices can hamper the growth of region
and demand for commodity as well as.

•Any increase in Brent would add up more burdens on region's; higher import bill indeed. Excluding Japan, Asia spent a net USD 447 billion on imports of oil and petroleum last year, up from USD 329 billion in 2010.

•China has cut its growth target to 7.5 per cent in 2012, a third straight reduction as the world's number two economy is buffeted by ongoing troubles in the West and high oil prices. India's growth is also tottering.

•Higher oil prices are also threatening the inflation and thus process of monetary easing in developing countries. If prices stabilize at current level, the inflation would be relatively modest and should not trouble monetary policy too much. But if prices spike to USD 150 a barrel then inflation could become much more of a restraint to monetary easing in China, India, South Korea and Taiwan.