The Hindu Business Line : Investors look at non-oil commodity markets

SOME call it a "Bad case of oil jitters" and despite slight fall in the oil prices on Tuesday night, there is still edgy nervousness in markets as investors pulled out of key blue chip stocks and look at investment prospects in fast rising non-oil commodity markets.

The commodity stocks have risen slightly as oil prices eases in the European markets. The Brent crude is selling at $42.99 in New York against $44.01 record high it hit on Monday. J.P. Morgan's equity strategist is today quoted saying: "High oil prices do not look sustainable in the long term" and believes that stock values on both sides of the Atlantic are "well supported".

There are several factors contributing to latest turnaround in global oil prices. To start with, the Russian authorities "easing of pressure" on Yukos, - which ranks amongst big five Russian oil companies. Yukos exports 1.6 million barrels a day and Russia is the world's second largest reservoir of oil after Saudi Arabia.

Recent events in Russia have prompted analysts to feel that the country is becoming more "market oriented" and may play a "positive role" to curb high oil prices.

Secondly, Libya and Iraq are closer to opening their oil industry. Libyan authorities have invited large global oil companies for a dialogue to structure future trading, exploration and marketing strategies with Libya. With 35 billion barrels proven reserves of high quality crude oil and "market oriented" policies the Libyan Government proposes to follow, after self-imposed isolation of over two decades, Libya could soon emerge as a prominent supplier of oil. According to analysts, Iraq will play prominent role in global oil markets within two or three years.

In Africa, Nigeria is planning to boost oil production by 25 per cent with a budget windfall of recent high oil prices. Venezuela, the world's fifth largest oil exporter, appears to have survived recent political crises.

With Russia, Iraq, Venezuela, Libya and Nigeria coming on global market with "market oriented' agenda, Western countries dependency on the Arab Gulf region "in shadow of Islamic fundamentalist terrorist movement" could be substantially reduced.

Hence, the US and the European Union countries may breath a sigh of relief. But despite such guarded optimism, this scenario could suddenly change with unpredicted terrorist strikes and it would be foolish to ignore any piece of adverse news for oil supplies. Although, OPEC and non-OPEC production levels are rising, there is talk of creating a "strategic oil stock pile" of 1.4 billion barrels should some disaster strike.

The markets have so far survived "short term" effects of high oil prices but investors and money managers are keenly looking at other non-oil commodity options for a "cushioning effect" in the background of a major reverse on the global oil front.

This is an uncertainty, which may not be viable, but markets are in no mood to take chances.

So far, markets have coped with record high oil prices "amicably but with much jitters" and current debate is if this could be sustained indefinitely.

The surging demand for oil in China has partly contributed to the recent rise in oil prices. OPEC has almost 6 million barrels a day spare capacity it could call but now it has no significant reserves and is pumping flat out.

OPEC is still reluctant to develop its vast oil reserves and in 25 years its capacity has fallen from 34 million barrels per day in 1979 to current 30 million.

But, growing perception all round is that current oil prices above $45-level will not last.

This is highlighted by current oil for delivery 12 months forward, are trading under $40-mark.

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