Stellar gains posted by several Asian currencies have come to the rescue of various crude oil buyers in the Far East, with South Korean and Thai end-users especially enjoying the benefits of their domestic currency strength as the won and baht appreciation helps to offset the global oil price rise.
Many refining companies in Asia had little to cheer about over the past several months as global benchmark crude prices have been riding on a steady uptrend since early in the third quarter amid ongoing efforts by OPEC members to cut global supply, while major Middle Eastern producers consistently hiked their monthly official selling prices.
However, it wasn’t all doom and gloom for the Asian buyers, as the sharp rise in regional currencies against the US dollar helped to counter higher price tags put on their term crude barrels.
The South Korean Won emerged as one of the top gainers in the international foreign exchange market this year, boosting the crude purchasing power for many refining companies in Asia’s fourth biggest energy consumer.
“There’s no denying in the benefits of the strong currency. Korea buys millions of barrels every day and that’s a lot of money in US dollar bills,” a sour crude trader at a South Korean refining and petrochemicals company said.
In Southeast Asia, Thailand’s Baht has outperformed in the ASEAN foreign exchange complex so far this year, subsequently aiding the country’s major crude oil buyers such as PTT and Thai Oil to cope with rising procurement costs.
“I can’t remember the last time Middle Eastern OSPs got cut… it’s been a long time… but refineries are [drawing a lot of] comfort from the strong baht,” a sweet and sour crude trader at a Thai refining company said.
CURRENCY STRENGTH OFFSETS MIDDLE EAST PRICE RALLY
Refinery sources in South Korea and Thailand noted that the recent currency market trend bodes well for the companies’ operating margins.
“When the local currency is stronger, refiners can minimize or even lower their [crude] buying costs and that’s good for the final profit margin,” the Thai refinery trader said.
Despite the multi-month uptrend seen in international crude prices, South Korean refinery sources indicated that the US dollar/Won exchange rate’s sharp decline since early January would imply a cost cut of around Won 50 to Won 200 (roughly 4-18 cents) for a barrel of crude compared to Q4 2016.
“A stronger won definitely helps us minimize [the impact of crude flat] prices shooting higher,” a crude trading manager based in Seoul said.
With South Korea’s stellar Q3 GDP growth of 3.8% year on year and 1.5% quarter on quarter, coupled with Bank of Korea’s recent interest rate hike, the won rallied to its highest level in more than two years against the US dollar in recent weeks.
Most Asian currencies are highly sensitive to economic indicators and global growth outlook, as many countries in the Far East are predominantly export-dependent economies.
In addition, central bank rate hikes typically contribute heavily to the strengthening of domestic currency as the monetary tightening measure often leads to an increase in foreign fund inflows with many offshore investors seeking to take advantage of higher local interest rates and government treasury bond yields.
In November, the BOK announced a 25-basis point hike in the country’s benchmark interest rate to 1.5%, putting an end to the record-low interest rate era and placing South Korea as the first major Asian economy to raise the policy rate since more than three years ago.
The US dollar/Won tumbled to 1,079.33 on November 29 in Seoul, the pair’s lowest level since 1,076.44 on April 30, 2015, according to a daily settlement price chart seen by S&P Global Platts. The pair closed the Seoul trading session at 1,094.00 on Thursday, a fall of close to 10% so far this year.
Similarly, the Thai Baht also drew plenty of support from healthy Q3 economic data with the Southeast Asian economy expanding 4.3% year on year during the period, the fastest pace of growth since Q1 2013, according to Thailand’s National Economic and Social Development Board.
The Thai unit jumped to a multi-year high against the greenback in recent weeks, with the US dollar/Baht falling to 32.55 late last month, its lowest level since touching 32.36 on April 24, 2015. The currency pair has fallen more than 9% year-to-date, according to a USD/Baht price chart seen by Platts. In comparison, front-month Platts cash Dubai — the Middle Eastern physical crude pricing benchmark — was assessed at an outright value of $59.46/b Thursday, up 10.4% from $53.85/b on December 30 last year, the final assessment day of 2016.
Meanwhile, major Persian Gulf producers continued to increase their monthly selling prices with the Abu Dhabi National Oil Company recently pegging the November OSP of its Murban crude at $63.65/b, up from $58.10/b set for October.
JAPANESE REFINERS
Japanese refiners, on the other hand, were less fortunate than their fellow Asian counterparts as the value of the yen lagged behind most of the regional currencies.
The US dollar/Yen exchange rate has fallen around 3.3% since the end of last year, compared to more than 6% declines seen in many other Asian currency pairs, including the US dollar/Malaysian Ringgit, US dollar/Indian Rupee and US dollar/Taiwan dollar.
“[The yen] didn’t move much this year… Japanese end-users [are very much taking the full] brunt of rising oil prices and [higher Middle East] OSPs,” a sour crude trader at a Japanese refining company said.
Unlike the majority of Asian currencies, the yen tends to draw little support from healthy economic indicators and upbeat global investor sentiment, often moving inversely to the risk-sensitive emerging market units.
Instead, money market participants broadly consider the yen as a safe-haven unit due largely to decades of Japan’s strong track record of current account surpluses, as well as the country’s giant net creditor status. The Japanese unit typically strengthens on risk-averse sentiment as yen-funded carry trade investors typically repatriate capital back to Tokyo during times of economic uncertainties.
At 0235 GMT, the USD/Yen was quoted at 113.34, up from Thursday’s settlement in New York at 113.20.
Source: Hellenicshippingnews
Key words: analysis, currency strength, boost, Asia, crude oil, purchasing power
