The Hindu Business Line : Liquid gold and the weak-kneed dollar

OIL touched its highest level in almost a year last Tuesday; with US light crude peaking at $36.98 a barrel, before easing 11 cents to close at $36.75; While London Brent eased seven cents to close at $33.27.

Peak values for American light represented Rs 1,675.20, 29.84 euros, 19.88 British pounds and 4053.47 yen; while a barrel of Brent at its peak was worth Rs 1,510.30, 26.90 euros, 17.93 pounds and 3,654.48 yen. On March 3, 2003, despite the enormous `hike' in the price of oil in the intervening period, a barrel of Brent cost Rs 1,577.77, 30.64 euros, 21.01 pounds and 3,901.51 yen; i.e., there has actually been a drop in the price of Brent, expressed in these currencies - of 4.3 per cent, 12.2 per cent, 14.7 per cent and 6.3 per cent respectively. American light, apparently, was not commonly traded at that time.

Judging from the forward rates being quoted last March, each of these currencies, without exception, was at that time expected to drop steadily against the dollar, after taking interest rate differentials into account.

In short, the reason for the `rise' in the price of oil over the past year is that by convention liquid gold is always quoted in high-liquidity dollars - in conjunction with the substantial, deliberate softening of the greenback over the past year in an effort to stimulate employment growth in the US. Bit like the story of the 73 per cent rise in the `Indian' equity market over 2003. That `the' market gained so much doesn't mean that you did.

Indeed, depending on what `stock' you had in your pocket - and when - you yourself might even have ended the year with a large hole in your pocket.

Besides, a 40 per cent drop, which could, for all we know, be just around the corner, waiting for a quick snap at our heels, would be enough to wipe out the 73 per cent gain. On Tuesday, one, three and six month forward rates for the dollar were being quoted at Rs 45.33/45.39/45.44; 0.8076/0.8088/0.8106 euros; 0.5392/0.5420/0.5465 pounds; and 109.5192/109.2945/108.9688 yen.

The `discrepant' figure for the yen might seem surprising; but as I shall explain tomorrow, it is probably the rest of us who are in for a bit of a shock.

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