ANALYSIS: Federal Reserve stokes commodity prices, including oil
New York (Platts)--15Nov2010/955 am EST/1455 GMT
________________________ ________________________ ______________________
Oil prices have soared in recent weeks with other commodities as the US
Federal Reserve took steps to boost the economy, with the mere mention of
action sending prices jumping.
Prior to the Fed's announcement November 3 that the US central bank would
purchase an additional $600 billion of securities for its balance sheet,
commodities were already in the throes of another bull run, either in
anticipation of quantitative easing and/or the result of tighter global
supply/demand balances in petroleum, base and precious metals, grains and
softs -- coffee, sugar, cocoa.
From November 3 through November 10, when the New York Federal Reserve
announced the tentative outright Treasury operation schedule where $105
billion of purchases including agency debt and mortgage-backed securities
would be received between November 12 and December 9, the run-up in commodity
prices steepened as was the central banks intention.
Only deflation is worse than inflation.
From November 2 through November 11, the front-month crude contract on
NYMEX rallied to settle at $87.81/barrel from $83.90/b, up $3.29/b for an
appreciation of 4.22%. The front-month gold contract on COMEX traded up to
$1,403.3/oz from $1,356.90/oz, a gain of $46.40/oz or up 3.42%.
Front-month wheat on the Chicago Board of Trade climbed to $7.04/bushel
from $6.942, up 9.8 cents, a gain of 1.41% while cotton on ICE US jumped to
$1.4421/pound from $1.3426/pound, plus 9.95 cents/lb, an appreciation of
7.41%.
The rally in industrial metals in particular was breathtaking with the
front-month silver contract on COMEX soaring $2.569/oz, to $27.405/oz, a
30-year high and an appreciation of 10.34% while copper futures rose 18.35
cents/pound to $4.0225/lb, a gain of 4.78%.
In just about all of these futures markets, the rally was well underway
end-October and the rally in the first two weeks of November was simply a test
of even higher prices.
Already in the first nine months of 2010, the US consumer price index was
a little hotter than in 2009. In 2009 there were eight consecutive months
where consumer prices were lower in percentage terms than the same month in
2009, according to data from the Bureau of Labor Statistics, and resulting in
deflationary concerns.
The last time consumer prices in the US were lower than the previous year
and for several consecutive months was 1955 when GDP was 7.5%. GDP for 2009
was down 2.6%, according to the most recent data from the Bureau of Economic
Analysis.
By contrast, in October, the consumer price index in China went up by
4.4% year-over-year, or 0.8 percentage points higher than the September rise
this year, the National Bureau of Statistics in China reported Friday, while
producer prices for manufactured goods went up by 5.0% year-over-year, or 0.7
percentage points higher than in the previous month.
The data out of China raises the specter of an increase in reserve
requirements which the People's Bank of China has already done once this year
to slow the rate of economic growth by tightening lending.
Insofar as the commodity complex is concerned, which will have the
greater impact on prices -- a slowdown in the rate of growth in China or
quantitative easing in the US.
China, India, Brazil and other emerging markets such as the Middle East
were behind the run-up in global commodity prices over the past eight years,
not the developed market economies. Any slowdown in those regions which would
be induced by a tightening in interest rates to slow the pace of economic
growth would probably more than offset cheap money in the US.
--Linda Rafield, linda_rafield@platts.com
