Commodity strategists: biofuels frenzy may cause oil prices to decline

Crude oil prices in New York may tumble to US$40 a barrel next year as demand for biofuels made from crops spurs investors to switch from energy to agricultural commodities, says Tetsu Emori, chief commodities strategist at Japan's Mitsui Bussan Futures Ltd. This means biofuels are beginning to have a real macro-economic impact on the world economy.

Shifting to biodiesel and ethanol additives may slow the growth of demand for gasoline and diesel in the US, Europe, and Japan. Earlier, Emori predicted oil would rise to $96 a barrel in August this year because of the hurricanes in the US Gulf. Prices fell from a peak of $78.40 on July 14 after a calmer-than-usual storm season.

"Some people may say the 2006 oil bubble eventually was short-lived like a firework that sparks and disappears," Emori said. "People called me crazy when I projected a couple of years ago oil to surge this year. They may do that again because I said oil may touch the $40 a barrel mark next year."

Oil consumers are increasing use of fuels and additives that derive from corn, soybean, sugar cane, and oilseeds, as they try to reduce greenhouse gas emissions. The switch may cause a shift of money from oil futures on the New York Mercantile Exchange to the grain futures market in Chicago, Emori said in Tokyo:
ethanol :: biodiesel ::biobutanol :: biomass :: bioenergy :: biofuels :: energy :: sustainability :: petroleum :: crude oil :: futures :: commodities ::

Biofuels may account for 7 percent of global transportation energy by 2030, provided governments implement International Energy Agency policies to promote alternatives to oil, the Paris-based adviser to oil-consuming nations said in its World Energy Outlook 2006 report. Currently, biofuels make up 3% of global transport fuels.

'Epoch of Change'
Oil prices in New York have dropped 20 percent from the record set in July and traded at $62.71 a barrel in Tokyo.

"Biofuels may be an epoch of great change for oil, possibly ending the spike in prices of crude we've seen in the past few years, and attract pension and commodity fund managers to pour more money into grains," Emori said. "A record of $78.40 a barrel set on July 14 may eventually be the peak of oil in the years through the end of 2010."

Biofuels include gasoline blended with ethanol that's made from sugar cane or grain and diesel mixed with vegetable oils. Prices for corn, used to make ethanol, have risen 47 percent in Chicago this year. Oil has gained 2.4 percent. Emori started at Mitsui Bussan, a unit of Japan's second- largest trading company, in 2000. Before that he worked at Sumitomo Corp. and German commodity trader Metallgesellschaft AG.

Crude oil will average $62 a barrel next year and $61 in 2008 in New York, according to the median forecast of 35 analysts surveyed by Bloomberg News.

Japan's Refiners
Shinzo Abe's government, an IEA member country, plans to increase consumption of biofuel for transportation to 500,000 kiloliters (3.15 million barrels) by the end of 2010 as part of efforts to cut greenhouse gas emissions and meet targets set under the Kyoto Protocol. Japan currently doesn't use biofuel.

Starting in April 2010, Nippon Oil Corp. and other Japanese refiners aim to supply about 12 million kiloliters of ethanol- blended gasoline, about 20 percent of the country's total consumption, the Petroleum Association of Japan said in a statement in April. In doing so, they need a total of 360,000 kiloliters of ethanol for blending.

"The growth of gasoline and diesel demand may slow at a faster-than-expected pace if the government subsidizes companies distributing the biofuels and further pushes promoting use of the environmental-friendly fuel," Emori said.

Big Ethanol
In the U.S., a Democratic-controlled Congress is expected to boost demand for the corn-based fuel. Collin Peterson of Minnesota, in line to take over the House Agriculture Committee, said Nov. 8 he will be more aggressive in seeking ethanol subsidies.

"Democrats' victory means a lot and big plus for the U.S. ethanol industry," Emori said. Democrats picked up at least 27 House seats in November elections, ensuring control of the House in January, after being out of power for 12 years.

Californian Nancy Pelosi has proposed a doubling of the amount of ethanol required by law to be blended into gasoline by 2012, to 15 billion gallons. In August, ethanol output rose 27 percent to an all-time high average of 329,000 barrels, or 13.8 million gallons a day, according to the Energy Department.

China, Brazil and Europe booming
Brazil's shipments of ethanol to overseas markets jumped 91 percent last month to 545 million liters (144 million gallons) from 286 million liters a year earlier, according to the Trade Ministry.

China and Europe, too, are expanding their biofuel industries. "In particular, we should closely monitor China's biofuels policy, which could affect the nation's appetite for oil in the coming years," Emori said.

A rosy biofuels demand outlook helped bolster trading of agricultural futures in Chicago, Emori said. "The global race for agri-products may be intensifying, while fierce competition for energy assets may ease," he said.

The Chicago Board of Trade, the second-biggest U.S. futures market, registered record trading in agricultural contracts in October as turnover rose 35 percent from a year earlier.