Commodities: the next market to collapse
If you thought tumbling equities market were merely correcting from a bubble, just wait for a big collapse in the commodities market. Not all commodities will fall, but there are clearly some which are defying fundamentals in the same way stocks did prior to the big bust. Longer term, I certainly buy the argument that commodities will be supported by growing consumer demand. But in the short term, my personal view is that the big gains have more to do with 30-something day traders with laptops and a trading account than strong demand.
The three commodities I want to focus on are oil, copper and crude palm oil.
Oil. The price of Nymex light sweet crude continues to hold above US$100 a barrel - inconceivable just a few years ago. Yet the US economy is slowing. Refineries aren't at full capacity. At 300 mln barrels, stockpiles are not just very high historically, but actually very normal by recent standards for this time of the year. The US has more gasoline (=petrol in standard English) in reserve than at any time in the last 15 years. 15 years!! Whether you believe those who are looking toward the inevitable drying up of oil wells in 50 years from now, or writers like John Cassidy who predicts a 50% decline in prices, the fact is that:
'Nuff said.
Copper. The three-month contract in London recently hit a record US$8,820 per tonne. On the one hand, you hear comments that stockpiles are at their lowest since October. But then you read "inventories in Asia are rising and Chinese demand is likely to fall further, after the world's top copper consumer imported so much of the metal it is now oversupplied". Further, "experts expect that the copper price will eventually be lowered to some extent as copper output will rise by some 850,000 tonnes when new mines are put into operation in major copper-producing countries such as Chile in the second half of this year". If that's not enough, back in June last year, when London stockpiles were around 120,000 tonnes, the price was around US$7,415. Now with stockpiles up to around 200,000 tonnes, we're supposed to believe that the price at US$8,820 is justified? Come on!
Crude Palm Oil. Prices have recently come down from records around 4,000 Malaysian Ringgit per tonne. And about time. Stockpiles are near records (1.88 mln tonnes in January). There is a limit to how much all these can be explained away by long-term demand, geopolitical issues, declines in the US Dollar, and all the other reasons financial journalists usually clasp for when writing their stories. Sooner or later, the house of cards crumbles to its foundations (=fundamentals).
As I mentioned, not every commodity is in the "fundamentally overpriced" category. A report in the New York Times says global wheat stockpiles are at 30 year lows and US stockpiles at 60 year lows. Demand is growing while drought is hitting supply. There are plenty of reports from around the region that support this view. These are flowing through to the consumer in the form of higher prices.
People like my good friend Jim Rogers keep talking up commodities. And he'll probably be right in most cases, and in the long run. But you can say that about equities too. Just like equities, I won't be surprised if the rout spreads to the commodities market in the meantime.
Mark Laudi, who was recently told by an executive in the oil industry that it still costs only US$25 a barrel to produce that stuff.
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ArchivesThe three commodities I want to focus on are oil, copper and crude palm oil.
Oil. The price of Nymex light sweet crude continues to hold above US$100 a barrel - inconceivable just a few years ago. Yet the US economy is slowing. Refineries aren't at full capacity. At 300 mln barrels, stockpiles are not just very high historically, but actually very normal by recent standards for this time of the year. The US has more gasoline (=petrol in standard English) in reserve than at any time in the last 15 years. 15 years!! Whether you believe those who are looking toward the inevitable drying up of oil wells in 50 years from now, or writers like John Cassidy who predicts a 50% decline in prices, the fact is that:
"...crude's rise despite swelling inventories highlights the disconnect between supply and demand fundamentals and the current, speculator-driven price.
"It [early March inventory report] is a ridiculously bearish report," said Stephen Schork, editor of The Schork Report.
"We have major concerns regarding the economy in the United States, rising supply, falling demand. Why is crude oil trading at over $100 per barrel? It makes no fundamental sense."
'Nuff said.
Copper. The three-month contract in London recently hit a record US$8,820 per tonne. On the one hand, you hear comments that stockpiles are at their lowest since October. But then you read "inventories in Asia are rising and Chinese demand is likely to fall further, after the world's top copper consumer imported so much of the metal it is now oversupplied". Further, "experts expect that the copper price will eventually be lowered to some extent as copper output will rise by some 850,000 tonnes when new mines are put into operation in major copper-producing countries such as Chile in the second half of this year". If that's not enough, back in June last year, when London stockpiles were around 120,000 tonnes, the price was around US$7,415. Now with stockpiles up to around 200,000 tonnes, we're supposed to believe that the price at US$8,820 is justified? Come on!
Crude Palm Oil. Prices have recently come down from records around 4,000 Malaysian Ringgit per tonne. And about time. Stockpiles are near records (1.88 mln tonnes in January). There is a limit to how much all these can be explained away by long-term demand, geopolitical issues, declines in the US Dollar, and all the other reasons financial journalists usually clasp for when writing their stories. Sooner or later, the house of cards crumbles to its foundations (=fundamentals).
As I mentioned, not every commodity is in the "fundamentally overpriced" category. A report in the New York Times says global wheat stockpiles are at 30 year lows and US stockpiles at 60 year lows. Demand is growing while drought is hitting supply. There are plenty of reports from around the region that support this view. These are flowing through to the consumer in the form of higher prices.
People like my good friend Jim Rogers keep talking up commodities. And he'll probably be right in most cases, and in the long run. But you can say that about equities too. Just like equities, I won't be surprised if the rout spreads to the commodities market in the meantime.
Mark Laudi, who was recently told by an executive in the oil industry that it still costs only US$25 a barrel to produce that stuff.
To comment on this blog, go to the Investor Central blog.
Visit the brand new Investor Central website! for free SMS alerts to news about stocks in your watchlist
Labels: copper, CPO, crude oil prices, crude palm oil, gasoline, stockpiles, wheat
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