Oil, commodities set to plunge between 25% and 40%
Commodity prices have a major bearing on inflation, global monetary policy and GDP growth; hence, it is essential to understand important turning points and trend reversals. Some blame the current correction in commodities on algorithmic trading and others on Chinese monetary tightening. A narrow focus on every tweak in China's monetary policy risks missing the bigger picture. Demand has indeed weakened in China to the point where its imports of key commodities are dwindling. It is further evidence of demand destruction globally resulting from an earlier surge in commodity prices, led by commodity-in-chief , oil.
As the chart shows, there is a relationship between the change in commodity prices and indicators of global economic activity, such as the OECD global leading indicator (GLI). However , the recent rise in commodity prices has been much more than it 'should' have been, based on the strength of the GLI, suggesting that easy money could have influenced prices. There was a notion that commodities were a one-way bet. This tied substances which had little to do with one another - industrial commodities like oil and copper, renewable ones such as wheat and corn, and those with largely intrinsic value such as silver and gold - to the same fate.
Some commodities were in blatant speculative bubbles. Silver's price relative to gold doubled during first three months of 2011 to reach a 30-year high and then fell 30% in two weeks. But silver is still as expensive as on March 18. Gold remains above its 50-day moving average, a short-term trend measure. Brent crude, in spite of its sharp selloff , has dropped below its 50-day moving average, for the first time since last September, an abnormally long upward streak. The run-up in oil went further last time, but the end looked similar to first week of May - right down to the weekly fall of 13.8%, against May first week's 13.3%. Demand is slowing down from the torrid pace of a year ago.
The International Energy Agency forecasts a growth of just 1.3 million barrels per day (mb/d) in 2011, down from a near record 2.8 mb/d last year, showing a fall in demand driven by high prices. Eurozone debt problems and the arrest of IMF's chief have amplified concerns. The flash crash in oil prices still leaves Brent crude well above the first quarter average. It will need to come down much further before global growth comes to above-trend levels. "Dr Copper" lived up to its reputation as the only metal with an economics PhD in 2008, as its daily close peaked three months before the wider commodity crash. This year, it peaked in February. From high to low in the two weeks after oil plunged in July 2008, copper fell 9.62 %.
As the chart shows, there is a relationship between the change in commodity prices and indicators of global economic activity, such as the OECD global leading indicator (GLI). However , the recent rise in commodity prices has been much more than it 'should' have been, based on the strength of the GLI, suggesting that easy money could have influenced prices. There was a notion that commodities were a one-way bet. This tied substances which had little to do with one another - industrial commodities like oil and copper, renewable ones such as wheat and corn, and those with largely intrinsic value such as silver and gold - to the same fate.
Some commodities were in blatant speculative bubbles. Silver's price relative to gold doubled during first three months of 2011 to reach a 30-year high and then fell 30% in two weeks. But silver is still as expensive as on March 18. Gold remains above its 50-day moving average, a short-term trend measure. Brent crude, in spite of its sharp selloff , has dropped below its 50-day moving average, for the first time since last September, an abnormally long upward streak. The run-up in oil went further last time, but the end looked similar to first week of May - right down to the weekly fall of 13.8%, against May first week's 13.3%. Demand is slowing down from the torrid pace of a year ago.
The International Energy Agency forecasts a growth of just 1.3 million barrels per day (mb/d) in 2011, down from a near record 2.8 mb/d last year, showing a fall in demand driven by high prices. Eurozone debt problems and the arrest of IMF's chief have amplified concerns. The flash crash in oil prices still leaves Brent crude well above the first quarter average. It will need to come down much further before global growth comes to above-trend levels. "Dr Copper" lived up to its reputation as the only metal with an economics PhD in 2008, as its daily close peaked three months before the wider commodity crash. This year, it peaked in February. From high to low in the two weeks after oil plunged in July 2008, copper fell 9.62 %.
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