Does OPEC cut in oil production = a Cooler world??

The straight forward answer would be to say…lesser consumption leads to lesser demand leads to lesser production results in lesser green house gasses and in turn a cooler earth.
But digging a little deeper we find that the reduction in production is OPEC’s way to ensure that the Oil price atleast staibizes, around $45 mark if not march towards its recent glory.
So if falling prices are the motivation to reduce production then lower prices should also result in an increase in consumption, albeit with a lag. The general consumer is cautious given the recent super spike in oil.
If the prices remain subdued for a fairly long time, the consumers are bound to return to gas guzzling vehicles and heavy energy use.
Though we should remember that this time around there have been substantial investments and initiatives towards alternative energies. These should start to become commercially viable in a few years time (hopefully by the time next oil spike is ready to happen).
What we do not know is that how these alternative sources of energy would impact the global warming. In a few years time we might realise that the energy harvested from the oceans impacts the ocean currents which in turn adversely effects the weather pattern thereby increasing the global warming. There could be similar undiscovered effects using the nuclear energy, wind power, hydro power etc.
So if you want a “cooler” earth, reducing energy consumption is the only long term viable option!

Low Risk Options

Strangles and Guts are widely used strategies in the derivative markets. Both of these are option strategies using a Call option and a Put option each.
Here we explore the difference between these two strategies and see how they can be used together to produce low risk returns.
What is a s Strangle? Strangles are created by either buying or selling, a call option and a put option. When we create this position by buying options, we call it a Long Strangle.
Similarly, when we create it by selling options, it is called a Short Strangle. The important point here is that the Put option has a lower strike price than the Call option. Table 1 and Chart 1 explains the pay off of a Long Strangle on the Nifty. The total premium outlay is Rs 70 + Rs 25 = Rs 95. The break-even points are 4004 and 4295 (calculations not shown here). 

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SGD/INR Uptrend: Causes and impact on average Indian

SGD/INR Up Trend: Cause and Impact on the average Indian

The Singapore dollar broke its historic highs of Rs.29.63 (25th July 2006) against the INR on 24th April 2008 – the closing price that day was Rs.29.65 per Singapore dollar. A fairly range bound pair that oscillated in the range of Rs.26 to Rs.29.5 per Singapore dollar has been in an uptrend ever since.

The long term volatility remained at 5% which made this a relatively stable currency pair.

We will try to analyse the possible reasons and for this uptrend and the impact on the average Indian.

What’s causing this spike?
1. Inflation
The island city country imports most of the consumables from food to gasoline to clothes from neighboring and other countries. The steady price rise and demand supply imbalances in these exporting countries have created inflationary pressures. Singapore which has enjoyed a low inflation of around 2.5 ~ 3 % for last few years is now expected to face inflationary trends of up to 5%. The MAS (Monetary Authority of Singapore) has been forced to undertake a gradual appreciation of the Singapore Dollar to maintain the purchasing power parity of its nationals.

2. Reduction in the Dollar Peg
The Sing dollar was historically pegged against the US dollars but with the recent USD weakness the currency as now been pegged against a basket of currencies which has a reasonable Euro bias. The Euro has been strengthening against all major currencies thereby imparting strength to SGD as well.

3. Crude oil Prices
The unprecedented rise of the Crude oil price from US$ 53, 3 years back to the current prices of US$136 has also caused this range bound pair to move in the same direction.
Singapore imports all petrol and other crude oil products for its use. A simple analyses shows a direct correlation between the pair (SGD/INR) and the crude oil.

Table1. Co-Relation SGD/INR to Crude Oil
Co-Relation 3.5 years 1.5 years 6 months
SGD/INR to WTI 0.42 0.46 0.95

Chart 1: SGD/INR against WTI Crude (West Texas Intermediate – a type of Crude)

1. Exports
With INR weakening against the SGD, the exporters have all the reasons to cheer. Singapore just might be the platform for them in to the South East Asian markets.

2. Employed in Singapore
The Indian expatriate population in Singapore is around .25 million people and the rising SGD has brought smiles to their faces. The remittances to the home country are bound to rise but with the increasing cost of living the upside there might be limited. In a nutshell their remittances have been adjusted for Oil led inflation.

3. The Vacationer
Singapore has been the favored tourist destination for Indian’s but with the SGD having appreciated by close to 16% the holiday costs are on the upside. The Indian vacationers could start to limit their tours to Malaysia and Thailand as a result of these costs.

The Road Ahead…
The MAS has indicated to allow the SGD to strengthen against the USD up to 1.25 by the end of this year dependant on need to reign in inflationary pressures. The current rate is 1.36 and was 1.43 for USD/SGD at the beginning of this year.
If the USD/INR stays at the current levels of Rs.42.5 / USD the year end rate for SGD/INR could reach Rs.34 / SGD if everything else remains the same. Given that Oil is traded in USD and India is a net importer of oil the demand for USD should rise in turn pushing the USD/INR upwards.

The mathematical model encapsulating the above information indicates the SGD/INR movements with respect to crude Oil as tabulated below:

Crude Oil Price SGD/INR rate
80 27.92
90 28.29
100 28.77
110 29.38
120 30.11
130 30.96
140 31.92
150 33.01
160 34.22
170 35.54
180 36.99
190 38.56
200 40.24

SGD just might be your hedge against the rising Oil Prices!!

Copyright: Aditya Ladia, ACA (India), ASI (UK)
Sources: and for data on Exchange Rates and Crude Oil.

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