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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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:
"...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
Record High Oil Price: Keep Speculators Out!
It's time something was done about the price of oil. It hit another record overnight – US$95 a barrel – and will likely reach US$100 a barrel before long. Everyone is paying more, from individuals fueling up their cars at the petrol station, to companies which need energy to operate their machines. Add taxes, and it's getting prohibitive. My gripe with this is not just that the price is high. Afterall, in a sense it is an affirmation that the economy is strong, and that demand from China will keep demand for Singapore products and services high, too. But my gripe is more targeted at the speculators, which are contributing to its rise. Imagine how much less we'd be paying if it weren't for the speculators. If it means that the speculators need to be weeded out, so be it.
It seems completely ridiculous that we're all paying more because a bunch of 20 or 30-something traders with a laptop and an interet connection are pushing up the price. The impact this has on people, particularly in developing markets not protected by subsidies, is unconscionable. Governments paying subsidies have less money to spend on essential services. All for what?! To fatten the trading account of some traders? Oh, please.
Quantifying the impact is difficult, but the Federal Reserve of St. Louis wrote the price would be US$10 to US$15 a barrel lower if it weren't for the speculators. It quoted acting OPEC Secretary General Maizar Rahman, who may very well be correct in his assessment, although we should keep in mind that he has a vested interest in blaming people other than the cartel's own members for the high prices.
(Story continues below poll).
Still, it would be better for everyone if the price was US$80 to US$85 a barrel, or less. Think of the extra resources at the disposal of governments to build schools, hospitals, etc. Think of the additional disposable income you would have for food, school fees, and so on.
One counter-argument to lower prices might be that it reduces consumption. After all, all that oil that is burnt each day leaves significant traces in our atmosphere. The result: we're breathing in more polluted air, and paying more for the priviledge! But I am yet to see conclusive proof that the high prices have actually dampened consumption.
Another counter-argument could be that the higher the price of oil rises, the greater the impetus to find renewable energy sources. But again, the link is not conclusive.
So my view is, ways need to be found to keep speculators out of the market. We will all be better off for it.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
It seems completely ridiculous that we're all paying more because a bunch of 20 or 30-something traders with a laptop and an interet connection are pushing up the price. The impact this has on people, particularly in developing markets not protected by subsidies, is unconscionable. Governments paying subsidies have less money to spend on essential services. All for what?! To fatten the trading account of some traders? Oh, please.
Quantifying the impact is difficult, but the Federal Reserve of St. Louis wrote the price would be US$10 to US$15 a barrel lower if it weren't for the speculators. It quoted acting OPEC Secretary General Maizar Rahman, who may very well be correct in his assessment, although we should keep in mind that he has a vested interest in blaming people other than the cartel's own members for the high prices.
(Story continues below poll).
Still, it would be better for everyone if the price was US$80 to US$85 a barrel, or less. Think of the extra resources at the disposal of governments to build schools, hospitals, etc. Think of the additional disposable income you would have for food, school fees, and so on.
One counter-argument to lower prices might be that it reduces consumption. After all, all that oil that is burnt each day leaves significant traces in our atmosphere. The result: we're breathing in more polluted air, and paying more for the priviledge! But I am yet to see conclusive proof that the high prices have actually dampened consumption.
Another counter-argument could be that the higher the price of oil rises, the greater the impetus to find renewable energy sources. But again, the link is not conclusive.
So my view is, ways need to be found to keep speculators out of the market. We will all be better off for it.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Labels: Alan Greenspan, crude oil prices, OPEC, speculators
Crude Oil Prices Hit US$80 mark
Year 2004. August. Oil prices hit another new high after Russian oil giant Yukos announced it will not be allowed to use frozen funds to pay for operations. The market grips its chair in tension and scrutinizes charts as oil prices reach - $44.
Year 2007. September. Crude oil prices hit US$80. And frankly the market doesn't care. In Singapore, the STI closed at 1.69 points lower yesterday. And according to the Straits Times today, economists and analysts don't think very much of this new figure nor future record highs.
US$100 per barrel . So freakin what?
The question ringing in my head now is - we're not too far off from 2004, so why the big difference in the reactions now? I think i've got an idea. Remember that our economy is in a boom. GDP for Q2 2007 saw a 13.6% quarter on quarter growth and the optimism is still growing on strong.
And that's where the little increases – no matter how many – don't count. GST increase, grumble grumble. Bus fares increase, grumble grumble. And that's it. Everybody's in too optimistic a mood to throw a wet blanket on the party. Inflation creeps out at us but we don't care.
But we should. The US is experiencing the pains of ignoring this crafty little thing call inflation. Alan Greenspan just admitted last week on a CBS News programme, 60s that While he was aware a lot of these practices were going on, he had no idea how significant sub prime mortgages were going to be until very late.
See what that late realisation did to the markets?
We're in trouble of making that same mistake and not realise it until we reach the brink of a recession. Could be too late by then.
Ashley Choo
ArchivesYear 2007. September. Crude oil prices hit US$80. And frankly the market doesn't care. In Singapore, the STI closed at 1.69 points lower yesterday. And according to the Straits Times today, economists and analysts don't think very much of this new figure nor future record highs.
US$100 per barrel . So freakin what?
The question ringing in my head now is - we're not too far off from 2004, so why the big difference in the reactions now? I think i've got an idea. Remember that our economy is in a boom. GDP for Q2 2007 saw a 13.6% quarter on quarter growth and the optimism is still growing on strong.
And that's where the little increases – no matter how many – don't count. GST increase, grumble grumble. Bus fares increase, grumble grumble. And that's it. Everybody's in too optimistic a mood to throw a wet blanket on the party. Inflation creeps out at us but we don't care.
But we should. The US is experiencing the pains of ignoring this crafty little thing call inflation. Alan Greenspan just admitted last week on a CBS News programme, 60s that While he was aware a lot of these practices were going on, he had no idea how significant sub prime mortgages were going to be until very late.
See what that late realisation did to the markets?
We're in trouble of making that same mistake and not realise it until we reach the brink of a recession. Could be too late by then.
Ashley Choo
Labels: Alan Greenspan, crude oil prices, grumble, GST hike, inflation
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