The Hindu Business Line : Crude prices dip to 19-month low

Crude prices have declined to a 19-month low in the global markets and prospects are not looking bright what with the US projected to experience warmer-than-normal winter. So, where are crude prices headed towards? What are the factors that have to be taken into account with regard to crude?

During the weekend, crude prices did gain $1 a barrel to end at $52.99. This, analysts feel, is because the market thought the prices had declined too steeply and quickly. But the market has been expecting the prices to fall since the fourth quarter of 2006, though the fall has been steep after the New Year.

US impact

What has the US got to do with crude prices? The US is the biggest consumer of crude oil, particularly during winter when demand for heating fuel goes up.

Heating fuel

According to the US Department of Energy, the average household heating fuel expenditures are projected to slip to $873 this winter compared with $948 last year. This would be the first winter 2001-02 when home heating fuel expenditures are expected to witness a decline.

US consumption

In the US, petroleum products consumption in 2006 was about 188 thousand billion barrels a day, or 0.9 per cent, lower than in 2005. The decline in total petroleum product demand was driven by residual fuel oil, which fell by 26 per cent.

This winter in the US is likely to be one of the warmest ever. This is due to the El Nino weather pattern that's helped deliver mild conditions. It is expected to persist through March, signalling warmer-than-average weather and could last until spring, the National Oceanic and Atmospheric Administration has projected.

El Nino occurs when surface temperatures in the Pacific Ocean rise to above-normal levels, typically bringing in higher-than-average temperatures to the northern US during winter.

Other reasons

But is the US winter the only reason? There are other reasons too. Last year, when crude prices began to sky-rocket, some of the user nations, particularly in South-East Asia and Europe, began to explore alternative sources of energy. They, in particular, found bio-fuel to meet their energy demands.

Bio-fuels

While the European nations produced bio-fuels from rapeseed and to an extent soyabean oil, the South-East Asian nations began using palm oil. Countries such as India, the US and Brazil began to produce ethanol for fuel needs. Brazil, in particular, diverted 50 per cent of its sugarcane production for ethanol production. The US began utilising corn for ethanol production. India, besides sugarcane, has begun to experiment in bio-fuel from plants such as jatropha.

Biofuel production increased in 2006 to 9,00,000 barrels a day from 6,50,000 in 2005. With hundreds of biofuel plants coming up, the production capacity is set to double in a matter of couple of years.

The measures to go in for alternative fuel, in a way, helped the consumer nations to cut their dependence on fossil fuels and also, at the same time, ensure remunerative prices for agricultural products of their farmers.

Corn and sugarcane prices have witnessed a surge, though their prices are likely to face pressure with the crude cooling.

When fuel prices began to sky-rocket, cost-conscious consumers cut their fuel needs, whilst some of the oil producers produced to optimum capacity to take advantage of the high prices.

All these factors have combined now to result in the fall in the prices. These developments have led to a situation wherein consumers now hold the key. Consumers now have the option to switch over to the cheaper fuel alternative, though the danger of all products prices rising in case of any food emergency or drought effect can not be totally ruled out.

Crude prices are likely to be lower this year compared with last year. Australia's economic research agency Abare, for instance, says crude could average $56 a barrel this year. Analysts are of the view that prices could rule in the $50-55 a barrel range in the near-term.

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