Asia Tries to Prick the Petroleum Bubble

The Financial Times reports that some Asian governments finally are coming to their senses and reducing the subsidies on gasoline that have made their consumers so price insensitive in the face of soaring petroleum prices. Even though China has billions in dollar reserves, it, too, must come to its senses soon. Impact graphs from the FT:

As crude oil pushed through $135 a barrel for the first time, Taiwan, Malaysia and Indonesia announced plans for urgent action to free prices or cut subsidy costs. China denied rumours of an imminent increase in retail prices, but may relax price controls. “It is probably more affordable for a country like China to subsidise than Indonesia,” said Peter Gastreich, oil and gas analyst at UBS in Hong Kong. “But if oil prices keep going up, it is simply not in any country’s best interest to keep subsidising these prices indefinitely.”

In Taiwan, the first act of the newly elected administration of President Ma Ying-jeou was to abolish price controls on petrol and diesel from June 1. The new government also said it would raise electricity prices in July. Malaysia said it would soon announce a new petroleum subsidy scheme to keep its fuel subsidy bill at around last year’s level of M$40bn ($12.5bn) in spite of rising oil prices. With oil at $130 a barrel, the bill would reach M$48bn in the current fiscal year, exceeding the M$40bn that the government plans to spend on infrastructure and other development projects.

On Thursday, I warned here that the speculative petroleum bubble was sure to be punctured sooner or later. It turns out that others were having the same thoughts and posted them on Seeking Alpha. Petroleum prices and the prices of energy stocks fell a bit yesterday, after touching record highs Wednesday. The markets are working even though the governments of producing countries have been manipulating the markets for years with war threats and other tactics designed to boost petroleum prices. Not only are consumers in Europe and America cutting consumption in the face of unaffordable gasoline prices, but also some governments in Asia have had it with the oil bubble.

The idea that China and India will continue to increase petroleum consumption regardless of price is a fairy tale. At some point, they will have make their consumers price sensitive enough that they will reduce their consumption. If the Asian governments follow through on announcements reported in the Financial Times, that may be what it takes to puncture the bubble, which apparently has been inflated in recent days by short covering in the futures markets.

Just the idea that Asians will become price sensitive and cut consumption and that China might follow suit could be enough to puncture the oil price bubble. Markets are fickle, and fickle up usually is followed by fickle down. No one can predict near term nor long-term price movements in commodities prices or in any other prices, but it sure looks like this may be an important turning point in the petroleum markets.

More short covering in the oil futures markets could cause a rally during the next few days, but when the shorts are out of the markets, petroleum prices could go through a major correction.

Full Disclosure: I don’t have positions in any energy stocks or futures.

Comments

[richjoy:]

It's still (Friday) morning, oil prices are still up about 1.5%.

I would not be surprised to see it close lower, as many longs won't want to go into our 3-day weekend long in a bubble.

You know the bubble is about to burst when the oil stocks go down even as the commodity goes up.

2008 May 23 11:33 AM

[Prudent Man...:]

Subsidizing any commodity consumption is a fools game. When those countries realize the cost their treasury, considering their political systems are more tyrannical than the U.S, they will pull the plug.

The U.S. Congress just overrode a veto and passed a rapacious

Farm Bill subsidizing wealthy farmers and manipulated the law of supply and demand for purely political purposes. This could only be done because we allow career politicians to have a monopoly on their offices by the power of incumbancy and not have to be responsible to the electorate.

Hopefully, for the good of the country and our children, the populace wakes up and quit blaming presidents for their problems and stifle the fraudulent Congress by enacting term limits.

2008 May 23 12:36 PM

[ship shape ...:]

richjoy

You can't just look at price. The Energy sector had a nice run so far this year. Last week there was a lot of profit taking going on.

However, the money flows tell a different story:

online.wsj.com/mdc/pub...

There is lots of buying on weakness going on. Energy is still the strongest sector.

2008 May 24 08:10 AM

[seeksome:]

This bubble will burst soon!No market can sustain this run up there is no reason for this run up since December nothing has changed NOTHING there is no shortage or supply problems. There is already a small leak in this bubble soon it will burst! To save money and gas in the meantime please visit:seeksomething.com

2008 May 24 09:04 AM

[ship shape ...:]

So let it come down 30$ or 50$.

Does anyone think, that we can have a decent world economy without a decent demand for commodities? (The Starbucks-economy is dead!)

When prices come down, that stimulates demand and prices go up again. Only a global recession will bring down prices. Since it doesn't smell like recession in the world economy, I think we are going to see a correction in oil, but not a crash. 100$ is a strong support, because it was tested so often as a resistance.

2008 May 24 09:36 AM

[FuturePundit:]

Chinese demand will not go down. The rate at which it goes up might slow. But the rapid rate of economic growth in China makes a decrease in energy consumption very unlikely.

2008 May 24 08:15 PM