Diego Parrilla on commodities
Comment of the Day

January 12 2010

Commentary by David Fuller

Diego Parrilla on commodities

David Fuller's view This is an interesting item on commodities from Bloomberg, although in the short term it may prove to be a contrary indicator. The produced it because commodities have been hot recently.

Fullermoney holds broadly similar medium to longer-term views, as subscribers may recognise, although I would be less certain about the forecast of oil at $100 by yearend, for reasons previously mentioned. Briefly, natural gas from shale rock and subsidised renewables are slowly making inroads on the demand for crude oil. This competition for the energy market can only increase in the future, and include the next generation of nuclear power stations. Nevertheless, crude oil remains in a ranging uptrend and it might only take another cold snap or a significant disruption of production in one of the major oil exporting countries to propel crude back towards $100 or more.

Another spike in oil prices, should it occur, would quickly become a significant headwind for a fragile global economic recovery. A temporary increase in inflationary pressures created by a surge in oil prices might bounce central banks into tightening interest rates more quickly than would otherwise occur. The combination of oil price inflation and tighter monetary conditions would bring the bull market in equities to a premature end. Ultimately, a surge in oil prices would prove to be deflationary, being equivalent to a massive tax on consumption and economic development in oil-importing countries.

Hopefully, we do not need to worry about this today. While winter in the west is far from over, oil's sharp rally during the cold snap has lost momentum against the background of a short-term overbought condition, as mentioned in last night's Audio.

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