Monday, September 28, 2009

>Inflation, tight supply to boost crude oil

Singapore - Crude oil is the top commodity pick of Bank of America-Merrill Lynch (BAC) in the medium to long run as tight supply and inflation are likely to push up prices, an executive said.

"Inflationary pressures resulting from printing money will manifest most across those sectors that have the tightest capacity utilization, such as commodities and energy in particular," Diego Parrilla, who heads the Asia-Pacific commodities team at the U.S. investment bank, said in an interview with Dow Jones Newswires.

"Metals has a bright picture, but the tightness in supply side is most acute in energy."

Mainly used for production of transportation fuels, crude oil is hard to replace and it has become more difficult to find the next barrel of oil. These supply-side factors will likely drive up prices, said Parrilla.

While limited refining capacity, not speculation, drove crude oil futures on the New York Mercantile Exchange above $140 a barrel July last year, "the next wave up will be driven by strength and tightness in crude oil", he said.

"In the short run, the possibility of a big spike in commodity prices is somewhat limited," Parrilla said. This is because there is still spare production capacity and more refining units are coming on stream.

Oil inventories are relatively high and "it is still questionable whether the health of the recovery is strong enough to sustain much higher prices," he said.

Asia Expansion

BoA-ML is one of several banks including Barclays PLC (BCS), J.P. Morgan Chase & Co. (JPM) and Standard Chartered PLC (STAN.LN) that have expanded their Asian commodities trading teams following a rebound in oil prices.

The bank doubled its commodities team in Asia to 30 in the past year, in stark contrast to the retrenchment that followed last year's downturn, which saw the departure of Mark Long as Merrill Lynch's head of commodities trading in Asia, and several other staff in the region.

Parrilla, a Spanish national who was formerly an executive director of commodities sales at Goldman Sachs, joined the bank in April. BoA-ML also recently hired five senior staff to expand its commodities business in the key emerging markets of China and India, as well as in the energy and metals sector.

Concerns are also growing that proposed trading limits by the U.S. Commodity Futures Trading Commission, or CFTC, in energy markets may drive trade to other exchanges or to over-the-counter venues.

"As part of the rebalancing trend in global commodity demand and supply, it's only natural that we develop more - and more meaningful pricing benchmarks for these markets (in Asia)," Parrilla said.

"Whether the CFTC triggers this or not, I think it's still too early to say."