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Saturday, July 11, 2009

Recovery could stall if crude price surges

Rising cost of gasoline may hurt firms, households


Staff writer

Crude oil prices have nearly doubled since December amid the ultralax monetary policies of central banks and moves by speculators toward riskier assets, and gasoline prices have already started to rise.

Predicting price volatility, some experts are concerned that if the price of crude oil goes any higher, it may affect households and companies and hamper what some see as a fragile economic recovery.

Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Securities Co., suggested higher oil prices will negatively affect personal consumption and corporate profits. Airlines may also reimpose fuel surcharges, Fujito warned.

After reaching a high of $72.68 per barrel on June 11, West Texas Intermediate Cushing crude oil spot price dropped to $60.41 on Thursday.

Japan's wholesale prices also fell a record 6.6 percent in June from a year earlier on lower energy prices and weakening domestic demand, the Bank of Japan said Friday. Prices of petroleum and coal products, including gasoline and kerosene, plunged 41.7 percent, while prices of nonferrous metal dropped 29.1 percent and those of iron and steel fell 9.3 percent.

But the current oil price is still 1.9 times higher than a low of $31.41 logged in December.

Gasoline prices rose for a 14th consecutive week to ¥124.10 per litter as of Monday, according to a nationwide average retail price survey of regular gasoline conducted by The Oil Information Center. The previous low of ¥106 was recorded in January.

Noting the recent losing streak, Akio Shibata, director at Marubeni Research Institute, still forecast oil will rise again to a range of $70-$100 toward year's end on the back of strong demand from China and the global economic outlook.

Mitsubishi's Fujito also said prices will not likely plunge again to their lowest levels, since oil producing countries would threaten to cut production if that were to happen.

Fujito predicted oil will be traded in the $50-$80 a barrel range through fall and $50-$100 toward year's end. He suggested prices will continue to depend on the prospects of a global economic recovery.

Yukino Yamada, senior strategist at Daiwa Institute of Research, meanwhile forecast oil will drop to the lower $50 range this month or next and then move back to around $65 toward year's end due to heating demands.

Teikoku Databank last month projected rising crude oil prices will push up commodity retail prices and the price of trade between firms.

Teikoku said that will likely up corporate costs, hurt profitability and reduce investment in plants and equipment.

Teikoku said oil's rise to $100 per barrel will reduce corporate investment in plants and equipment by 0.57 percentage points in fiscal 2010. It also estimated the rise will hike domestic corporate prices by 1.44 percentage points and consumer prices by 0.22 percentage point.

"Rising crude oil prices can again be a source of concern for corporate sectors that finally had weak but upward signs of growth," Teikoku warned.

As for the factors behind the recent rise, Fujito said the prime suspect was speculators' money that went into oil while key interest rates are nearly zero in the United States and 0.1 percent in Japan.

Fujito also pointed out the dollar has been weak against other currencies, which led investors to sell the greenback and buy units of countries with natural resources and commodities.



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The Japan Times

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