Supply concerns likely to dictate oil, sugar prices

KOLKATA: Echoes of the recent price volatility in gold, silver and copper are likely to be felt in the price of crude oil and sugar which happen to be quintessential commodities in India. Trading data emanating from global commodity bourses tends to suggest that the bull run in these two commodities could begin soon. Though high sugar prices are unlikely to hit India instantly since government controls the supply side, high oil prices could actually fuel inflation.

Incidentally, oil prices zoomed to a four-and-a-half month peak at nearly $68 a barrel. The current surge, it is learnt, has been sparked by supply fears arising from Iran's diplomatic stand-off with the West over its nuclear programme.Besides political tensions in West Asia, oil prices turn volatile amid threat perceptions from terrorists.

At present, India imports close to a million barrels of crude every year which is nearly 70% of its annual requirement. Since it has to meet the import bill at the prevailing international price, the total import bill could exceed Rs 270 crore. Each dollar variation in crude price affects at least a dozen essential energy products in India, in turn, influencing the rate of inflation. Apart from the four core distillates of crude (LPG, diesel, petrol and kerosene), where pricing is state-controlled, pricing of other distillates are linked to market forces.

In so far as sugar prices go, India's position is largely secure. Besides a widely expected bumper crop, demand for ethanol (a sugar bi-product) may not be too large this year. Incidentally, the price of cane, is fixed by the government under the 'statutory minimum price' (SMP) mechanism, which is declared before the crushing season. The SMP for the current crop has been fixed at Rs 74.5 a quintal, which is nearly 10% over last year's reference price. The government also determines the flow of sugar supply in the open market through a control mechanism.

Back to crude, latest US data suggests that speculative buying positions have increased in the New York Mercantile Exchange (Nymex). In the week ending January 24, total buy commitments touched 151,138, up 3,082 in 7 days. At present, raw sugar is trading at close to $13 a pound in the benchmark New York Board of Trade, while crude is trading at roughly $68 a barrel in Nymex.

-ARINDAM SAHA
Economic Times
January 30, 2006