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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Oil Price Rally Hits Asia Where It Hurts

Rising oil prices are pushing up prices for fuels in Asia, and this is coming at a bad time; many Asian currencies are depreciating as economic growth falters. This is one of the major outtakes from this week’s S&P Global Platts Asia Pacific Petroleum Conference, and it should serve to rein in oil bulls’ enthusiasm in the near future.

For now, all is great for those betting on still higher oil prices, experts attending the event told S&P Global Platts. “Good news for refiners is that India for one, oil demand won't subside [for the next few decades]," one of them, the president of refining operations at Reliance Industries, Harish Mehta, said.

Economic growth in the region will continue strong, at rates of over 4 percent, Mehta also said, with India and China leading the way as they lead the way in oil demand growth. This growth will encourage spending, but if prices continue to rise, so will fuel prices, and this will affect all consumer spending with the usual reverberations on that same strong economic growth, ultimately weighing on oil demand and completing the circle of interdependency.

A key ingredient in this stew is Asian currencies. Despite the healthy rate of economic growth, China and India have witnessed a slide in their national currencies. The Indian rupee fell sharply earlier this year, followed the latest trade deficit reading, which revealed India’s imports exceeded its exports by US$18 billion. This is the highest trade deficit since 2013. As a result, the country’s oil import bill could increase by as much as US$26 billion in FY 2018/19 with oil trading consistently higher than the US$65 level India’s government had budgeted for the year.

China’s yuan has been affected by the trade war with the United States, and analysts believe that Beijing is willing to let it depreciate further in order to boost exports, countering the effect of the U.S. tariffs. Weaker than expected economic growth also helped. However, analysts argue that the government will not let the yuan slide below a certain point—7 yuan per U.S. dollar—lest Washington decides to accuse Beijing of currency manipulation.

So, as things stand right now, we have rising oil prices, a falling rupee and yuan—and other currencies in the region, too—rising fuel prices, and we have Iran cornered and offering its crude at huge discounts to lure in buyers. It’s probably a safe to bet that both China and India will do their best to secure cheaper oil supplies to satisfy rising demand without compromising consumer spending. At least, that’s what they should do. Of course, Washington will continue to apply pressure with the sanctions against Iran, but both China and India have already announced ways around the sanctions and these ways involve their national currencies, these same currencies that have been depreciating lately. Related: Traders Turn Bullish Ahead Of Iran Sanctions

So, here’s a twist. A recent analysis by South China Morning Post’s Karen Yeung argued that the yuan depreciation is good for China: it is helping to advance the internationalization of the currency. India would be happy to pay with rupees for whatever Iranian oil it continues to import after the sanctions kick in.

The problem is that Iran’s crude would hardly be enough to satisfy all that demand everyone is forecasting in Asia. And this means that what IEA’s Director of Energy markets and Security Keisuke Sadamori said at the APPC is about to take place: "We are not only witnessing international oil prices rising but also emerging market Asian currencies weakening fast...leading to a rapid rise in consumer prices at the pumps."

Clarifying things further, Citi’s Edward Morse noted that equity funds were flowing out of Asia, further weighing on local currencies. "This will impact oil demand growth in the emerging market Asian economies," Morse said.

By Irina Slav for Oilprice.com

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