China demand may fuel crude

THE YUAN IMPACT

Crude oil prices may rise in the next 2-3 weeks on likely increase in Chinese demand, analysts and industry experts said today.

An Indian Oil Corporation executive said, "Yuan revaluation may artificially push up crude oil prices over the next 2-3 weeks on hopes of rise in Chinese demand." China is the world's second largest buyer of the commodity.

However, prices are then seen returning to current levels and will remain firm, analysts said.

The Chinese currency was revalued 2.1 per cent to 8.11 per cent against the US dollar last Thursday.

Yuan is now on float against a basket of currencies. While the Chinese government has not clarified which all currencies are included in the basket, analysts say the Euro and the Japanese yen are most obvious contenders.

An analyst with Refco Commodities said, "Chinese demand growth for crude is expected to decline in the fourth quarter of calendar 2005. The currency revaluation is also not expected to change this view significantly."

Displaying a similar sentiment, the New York Mercantile Exchange crude oil futures saw minimal impact of currency revaluation, "providing a mixed message to the extent that the expectation of diminishing demand was offset of a declining US dollar", the analyst added.

In the long-term even though crude becomes cheaper for China, as V Sivaramakrishnan of Hyderabad-based Karvy Commodities said, the dragon will lose "some of its advantages of being a world's 'production power house' which may bring down the demand from China. Therefore, the impact (of yuan revaluation) could be negligible or slightly negative."

As the yuan revaluation is marginal, mere 2.1 per cent, the crude-dollar equation stands rather unaffected. An independent analyst T Gnansekar considers the whole idea of yuan affecting the commodity as an exaggerated one.

Further, analysts see a US interest rate hike keeping the dollar firm. Another reason for a firm dollar in the medium term is the weak eurozone which may keep the Chinese away from investing too much in euro vis-a-vis the dollar.

A Refco Commodities daily note states, "Dollar seems to be trading higher against the euro, as euro is pressured by renewed selling and speculation that yuan revaluation will not change positive dollar fundamentals."

These are likely to keep crude oil prices firm, in the long term, with it being a dollar-denominated commodity.

Another factors which will keep crude oil prices firm is the US inventory data to be released later in the evening today.

Market expects US crude oil stocks to be fall by 1.8 million barrels following storm disruption to oil and gas production.

According to a Barclays Capital report, hurricanes and tropical storms are likely to continue to be a threat to oil production in what is a tightly balanced market.

Indeed estimates of the amount of crude oil production lost in the US gulf hurricane this season already totalled 15-20 million barrels. Moreover, China's relatively weak oil trade data was partially mitigated by a rebound in net product imports which had been declining consistently since November 2004."