In the London market, oil prices rose on August 17, with Brent crude rising above $70 a barrel, lifted by the Fed’s monetary policy change a day earlier and fears that Hurricane Dean could damage energy facilities in the Gulf of Mexico.
Markets have been hit by fears of financial instability after troubles with risky US. mortgages and a credit squeeze that had already prompted central banks, including the Fed, to pour money into the financial system.
It was a roller-coaster of a week for oil prices, as they fell steeply on August 16 when hefty declines on world stock markets left traders fretting about potentially risky investments in the commodities markets.
Traders had said that some speculators and investment funds were moving cash into more secure investments and out of riskier holdings, and that some of this movement had dented the oil market.
Oil prices rebounded on August 17, however, owing to the Fed action and news that Hurricane Dean was forecast to become a major hurricane within the next 24 hours.
Crude futures won support also from news that crude inventories had fallen a week earlier. The US Department of Energy said that US crude inventories slumped by 5.2 million barrels last week — more than double a fall of 2.5 million forecast by analysts.
The Organisation of the Petroleum Exporting Countries meanwhile increased its forecast for world oil demand growth in 2007. Opec said in a monthly report that it would hit 1.3 million barrels per day, “slightly higher” that the estimate given in July.
The Centre for Global Energy Studies (CGES) in its Monthly Oil Report for August says, Opec needs to reconsider its policy of maintaining a tight grip on oil production, because it is negatively impacting the world economy. Opec began making formal output cuts in October 2006 and has continued to do so, even though market demand has tightened, says the CGES report. It has placed “the blame for rising prices on geopolitical tensions and bottlenecks in the global refining system”, it says.
“The result has been three consecutive quarters during which global inventories have fallen and, with no sign of output rising, a further two quarters of decreasing global oil stocks are expected. This looks very much like a reversion by Opec to its earlier policy, only abandoned in 2004, of deliberately keeping the world short of oil in order to force down stocks,” it continues.
The CGES also says: “Opec appears content to sacrifice future oil demand growth for immediate revenue gains. Four years of high, and rising, oil prices have taken their toll on global oil demand growth and look set to continue to do so,”
CGES forecasts show that it total Opec output crept up “by only little more than the rise of Angola’s production over the coming winter then oil prices will remain above $72/bbl for Brent and $68/bbl for Opec’s Reference basket (ORB)”. But even if Opec were to cut output, by say 0.7 million bpd, to compensate for slower growth, prices would still be high, argues the CGES. “The strong prices expected in the first half of 2008 would still yield an increase of around five per cent in the annual average oil price between 2007 and 2008”, it says.
If oil demand growth were to slow by 0.2 per cent (only 0.2 million bpd) in 2008, oil prices would fall sharply in the second half of the year and the decline could begin immediately, it forecasts. But if global oil demand turns out to be more robust than the base case used by CGES, “prices could surge again in 2008,” it says. “In an environment of tight Opec control over output levels, even global oil demand growth of just 0.7 per cent (600,000 bpd) next year would be enough to put oil prices on a rapidly rising path,” it notes.
Moreover, if Opec output were to increase by only 0.2 million bpd each quarter until the middle of each year, the trend of rising oil prices seen in the first half of the year would continue, says the CGES, “taking Dated Brent up to almost $100/bbl during 3Q08”.
Gold:
In the week ended August 19, gold, silver, palladium and platinum prices all dropped owing to the financial uncertainty. Gold fell on the London Bullion Market to $657.50 an ounce on August 17, from $670.50 a week earlier.
Silver declined to $11.69 an ounce from $12.89. On the London Platinum and Palladium Market, platinum slipped to $1,245 an ounce at the late fixing on August 17, from $1,269 a week earlier. Palladium decreased to $334 an ounce from $349.
On August 22, stronger equity markets and a weaker dollar lifted gold prices in Europe, but the market remained wary as credit squeeze fears persisted. European equities rose further and US stocks opened higher, sending the Nasdaq composite index up 1 per cent, as investors bet that the Federal Reserve might cut its benchmark interest rate to calm turbulent markets.
Fears of a global liquidity crisis triggered a sell-off in financial markets a week earlier that spilled into commodities and sent gold to a seven-week low of $641.10 today — a sign that safe-haven gold was now behaving much like other assets.
Investors sold gold for cash to cover margin calls on losses arising from a meltdown in the US sub-prime mortgage market. The metal also got support from a weaker dollar against the euro, making dollar-priced gold cheaper for holders of other currencies.
A quarterly study by precious metals consultant GFMS Ltd. released recently said gold de-hedging hit a new high in the second quarter of 2007, with 5.2 million ounces (161 tonnes) removed from producers’ hedge books compared with the first quarter. In recent years, mining companies have increasingly reduced hedges to take advantage of the rising bullion prices.
Copper:
In recent weeks, copper has risen. At current levels, copper is around 11 per cent higher since the start of the year, but 15 per cent lower than its May high.
Demand for the metal from China, world number one copper consumer is high as it was still buying vast amounts of the metal. China’s refined copper imports in July were up almost 70 per cent on the same month in 2006 at 98,489 tonnes, customs data showed. Month-on-month imports eased nine per cent. Net imports were around 72,000 tonnes. The Chinese still have a tremendous appetite even if Western demand cools off, the LME dealer said.
Investors shrugged off China’s fourth interest rate rise this year as the government tries to counter inflation after consumer, prices rose in July.