Oil Prices to Affect Property

Concern Over Rising Oil Prices

An article published in Business Day indicates that South African markets are braced for a tough few days ahead, as oil prices head towards $150 a barrel and the Reserve Bank is set to deliver more bad news in the form of another interest rate hike.

The price of oil reached an all time high of $139.12 a barrel on Friday in New York trade, which only served to reinforce concern amongst world leaders and market analysts that the steadily rising price will work to slow global economic growth even further.

Raymond Goss, joint head of Investec Securities in Johannesburg said yesterday that it was “going to be a hard day for the market all around” and that the JSE would “take its lead” from the closing market in the US, which was down by over 3% on Friday.

Goss explained that the oil price was “possibly the major factor” affecting the JSE within an extremely “inflationary environment”. The all share index lost 16.53, falling to just 31724.73 on Friday, taking its decline to 0.4% last week.

Expectations of rising inflation and a climbing oil price did not bode well for the outcome of the Reserve Bank’s monetary policy committee meeting on Thursday. The market had hoped that a “best case” scenario would entail a 50 basis point interest rate hike, but Goss was concerned that the recent oil price spike would cause the Bank to increase rates in a more aggressive manner.

Akira Amari, the Japanese trade minister said that oil prices topping $130 a barrel could slow global economic growth and urged the world’s biggest energy consumers to cut demand. The minister spoke at a meeting of energy ministers from the Group of Eight industrialized nations, plus China, India and South Korea at Aomori in Japan.

However, members of the Organisation of Petroleum Exporting Countries (OPEC) saw no need to pump more oil in response to the surge in oil prices last week. Shokri Ghanem, head of Libya’s National Oil Corporation thinks “there is enough oil in the market”.

The various energy ministers looked inward for solutions to oil’s spiraling prices, arguing the “need for domestic efficiency rather than piling pressure on a resistant OPEC to pump more crude”. It was decided to vigorously continue the promotion of policies and measures aimed at improving energy efficiency. The 11 ministers’ countries account for two thirds of the world’s energy consumption.

Goss said that the JSE was “already in the middle of a downturn” and there is danger in the belief that there was going to be a slowdown in the larger economies. A slowdown in commodities and resources would have a profound impact on the JSE, as they have been important for its growth in recent years.

Group director of retail investing at Stanlib, Paul Hansen said, “It will negatively affect the market in general. In particular, interest rate sensitive shares such as banks, life assurers, retailers and property. Those will be the first to be hit because a high oil price implies higher inflation and therefore potentially higher interest rates”.

Hansen also said that the high oil prices were partly responsible for the higher food prices, with maize in the US reaching an all time high on Friday of more than $7 per 27kg bushel. The World Bank forecast in January indicated that the global economy would expand at a more gradual pace of 3.3% in 2008 compared with last year, citing a poor US outlook.

In South Africa, the minister for minerals and energy, Buyelwa Sonjica proposed that the tax on fuel be reduced in a bid to lessen the burden of spiraling oil prices on consumers, particularly the poor. Europe and the UK are in the midst of protests by fishermen, trucking companies and taxi drivers over fuel taxes on top of an oil price that is said to be driving them out of business.

The information in this article is courtesy of Nick Wilson (“South Africa: Soaring Oil Prices Raise Fear Over Growth, Rates”, Business Day, 9 June 2008).

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