A flight to safety has recently seen a boom in commodity prices. Last week gold hit its highest price in three months, timber has become a haven for long term investment and wholesale chocolate prices jumped above £2,000 a tonne level for the first time in almost 24 years. NYMEX contracts seem to follow this trend, at $45 today after a four year low of $34, but don’t be fooled – this is closer to a dead cat bounce than a real bull market.
The fundamental weakness is an overabundant supply compared to consumer demand. Due to the contango on market prices, where the spot price is significantly less than the futures price, institutions are buying oil at the low spot price and storing it for delivery in the future. This has led to record stockpiles which far outnumber expected consumer demand.
Some analysts expect American President Barack Obama’s stimulus package to boost the economy and thus oil demand, but this is tenuous at best, probably long term and not a valid reason for high prices today.
Many financial news outlets suggested the prices were due to OPEC strictly following the production cuts it announced last month. But this should conversely be a bearish indicator, OPEC is cutting supply because it expects demand to remain weak, if OPEC believed oil really was seeing a return to high prices, it would delay or simply ignore the production cuts.
The commodities mentioned above are either demand independent, self supporting safe havens (in the case of gold and timber) or demand for them genuinely outweighs supply (harsh weather has led to weak crops of chocolate and orange juice).
Oil is currently neither a safe haven or a scarce commodity. Oil Energy Money will go on a limb and predict traders will come to their senses (and sense is a relative term when discussing commodity investors) around Wednesday, when the American Department of Energy releases its weekly status report. If crude stockpiles increase again, and there are few indications otherwise, the bears will make a killing.
We need to utilize everything in out power to reduce our dependence on foreign oil including using our own natural resources.OPEC will continue to cut production until they achieve their desired 80-100. per barrel. The high cost of fuel this past year seriously damaged our economy and society. Oil is finite. We are using oil globally at the rate of 2X faster than new oil is being discovered. We need to take some of these billions in bail out bucks and bail ourselves out of our dependence on foreign oil. Jeff Wilson has a really good new book out called The Manhattan Project of 2009 Energy Independence Now. He explores our uses of oil besides gasoline, our depletion, out reserves and stores as well as viable options to replace oil.Oil is finite, it will run out in the not too distant future. The historic high price of gas this past year did serious damage to our economy and society. WE should never allow others to have that much power over our economy again. Everyone of our elected officials needs to read this book as well as our school children.
By: Sherry on January 26, 2009
at 11:33 am