'High oil prices Could Curb Hong Kong, China output'
High oil prices, which remained above US$53 per barrel at the weekend, could curb both Hong Kong and China's economies if prices do not come down, analysts warned.
Although 86 per cent of the SAR's economy is derived from services and most of its workers travel on its rapid transit system, sustained high energy prices since July could shave as much as a full percentage point off gross domestic product this year, warned Chan Mou-fung, managing director of Noble Apex Advisors in Hong Kong.
Crude prices, driven by a mix of production and supply bottlenecks, Middle East political risk and Caribbean hurricanes, were expected to remain high at least until second-quarter 2005, energy analysts said, with prices between US$48 (HK$374,40) and US$50 a barrel. The risk premium for terrorism alone is US$10-US$15 a barrel, Chan said. That is an ominous cocktail of problems for China, one of the world's least efficient energy users. The country is now nearly 50 per cent import-dependent for fuel oil. Its 500,000-odd boilers operate 10 to 20 per cent less efficiently than advanced boilers, the US Department of Energy says.
"China is a manufacturing base and if the crude oil price stays consistently high, coupled with a slowdown in certain sectors, the affect could be severe,'' Chan said.
It is partly China's torrid oil demand, only recently slowed from the 30 per cent annual increases seen in May and June, that has kept crude prices high, said Katherine Spector, an oil analyst at JPMorgan Chase Bank.
China's demand growth continues to outpace most of the world at nearly 10 per cent annually. Diesel, she said, dominates China's energy needs amid surging demand to run power generators in an energy-short environment.
Even though on a macro level high oil prices could affect economic growth in China and Hong Kong, the prices are enriching Chinese energy companies.
"Chinese oil companies are benefiting hugely,'' says Michael Lee, an analyst with UOB Kay Hian. Other energy analysts say that the mainland oil companies should continue to benefit from high oil prices until second-quarter 2005.
PetroChina posted a 17 per cent increase in its net profit in the first half this year on soaring oil prices.
Spector added that continuing disruptions of Iraqi exports pose the biggest threat to supply. "We continue to see Yukos disruptions more as political posturing than a true threat to physical supply,'' Spector said in a note to clients.
"Nigeria and Brazil, however, are now on our radar as potential supply hotspots,'' she said.
Chan said he expected crude prices to ease in second-quarter 2005 as the Organisation of Petroleum Exporting Countries (Opec) increases its production and geopolitical pressures ease.
"The past several weeks have seen hurricane disruptions, ongoing Iraqi violence, and now signs of renewed unrest in Nigeria. These factors make it as good a time as any to push the market higher,'' Chan said.
Spector said for 2005 JPMorgan Chase expects supply and demand to synchronise and that the call on Opec crude would fall between the fourth quarter of this year and second-quarter 2005.
"If the winter turns out to be colder than anticipated, the markets will run,'' said Esa Ramasamy, Asian oil markets reporting director at Platts, an energy agency whose analyses are widely used benchmarks in international spot trade.
"If this happens, you will see US$55 as not a problem any more. It becomes a reality and US$60 is within reach,'' Ramasamy told Agence France-Presse.
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