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NEWS UPDATES Asean Affairs    28 August  2012

Oil prices hit three month high


Crude oil prices have been climbing steadily since late June, hitting a three-month high as producers cut back on output and sanctions on Iran by the European Union and United States took effect.

A key benchmark of the price of black gold crossed US$115 a barrel in recent days due to an expected fall in supply next month.

The rally ended an earlier slump which, just two months ago, saw oil prices sink below US$80 a barrel for the first time since last October.

The experts have mixed views over outlook for the coming months. Some tip higher prices due to supply disruptions in Europe's North Sea, while others say a correction could come as tensions ease in the Middle East.

Since sinking to US$77 in late June, the price of West Texas Intermediate - a key type of American crude used as a benchmark for oil prices globally - surged to US$96.15 as of last Friday's close.

The price of Brent - another major global barometer from the North Sea - crossed US$115 a barrel last week before closing at US$113.59 last Friday. Just two months ago, it was languishing at around US$90 a barrel - its lowest level in more than a year.

HSBC co-head of Asian economic research Frederic Neumann said: "The rise in oil comes at a particularly awkward time...what worries us is the joint effect of climbing food and oil prices."

He added that this poses an evident inflation risk in some parts of the world, as rising oil prices have a particularly pernicious effect on inflation when food prices are on the up as well.

The higher oil prices should prevent inflation here from falling further after hitting a 20-month low of 4 per cent last month, said CIMB regional economist Song Seng Wun.

He added: "We'll still find headline inflation staying around or below 4 per cent for the rest of 2012 due to a high base in 2011. Other factors such as COE (certificate of entitlement) prices will also weigh in."

The key driver for current high oil prices is the expected supply outages in the North Sea oil fields, which are set to be shut from next month till mid-October, said OCBC commodities analyst Barnabas Gan. "We expect crude oil prices to stay high for the month ahead, and do not see significant downside risks to oil prices in the near term."

But not all shared his view.

UBS Wealth Management head of commodity research Dominic Schnider tips Brent to fall back to US$90 in the short run.

He said: "We expect prices to weaken again over the next one to two months. The price strength is over-extended... the demand might not be as strong as what many investors think."

Another key factor affecting further oil price rises is the prospect of a third round of US stimulus measures known as quantitative easing, or QE3.

Oil has been rising partly due to a weakening US dollar due to increased bets on QE3 next month. Thus, the possible absence of QE3 next month could lead to a stronger US dollar and limit oil price hikes.

There have been supply worries due to the turmoil in Syria and Iran, and talk of a possible Iran-Israel military conflict.

Increased tensions in the Middle East could push prices up, noted ABN Amro in a report dated August 22. However, it added: "We expect that an escalation will be avoided. The rally in oil prices came to a standstill last week."

A rise in crude oil prices usually filters through to petrol prices here in two to three weeks.

Electricity tariffs, however, are reviewed quarterly, so the price rise may be felt only in the fourth quarter, said Song.

Drivers here have already been feeling the pinch since early last month, as pump prices have been on an upward trend in recent weeks and have gone above $2 a litre.

OCBC economist Selena Ling said: "Singapore businesses and consumers are expected to pay higher utility and pump prices. We do not expect the easing of pump prices to continue for the month ahead."

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