Commodity markets finally saw a touch of profit taking and my comments about the possible short squeeze on Crude Oil on Monday proved neatly prophetic.
More and more traders are getting ever longer of commodities (any commodities) and the sentiment appears to be if you ‘drill for’, ‘mine for’ or ‘grow’ it then somebody somewhere will buy it. No matter what the price.
Reading many misinformed comments about the imminent demise of Oil reserves across the globe one wonders where people get this information. Declared recoverable reserves (always conservative anyway) give some 130 years of supply at current extraction rates. Even if we doubled this production over the next 10 years (almost impossible) then they would still last some 70 years. The point about a shortage of a material causing price inflation is that until such time as the shortfall becomes a problem the price will remain at reasonable levels (nobody is going to store oil for 70 years).
Advances in technology and new alternative energy sources will also mean that there is every possibility that the current oil reserves will last even longer. The average small car will now go over fifty miles to the gallon, thirty years ago this was below 30. All this does not even consider the fact that, even now, there are still vast areas of the globe that have not been ‘prospected’. As the world gets ever more dependent (or desperate) who is going to bet against the eventual commencement of “ecologically sensitive extraction” from the Arctic / Antarctic regions especially from the Russians (remember that sub planting the flag on the sea bed a few months ago).
Other commodities are, likewise, not exactly ‘running out’ (although copper is reputed to be looking a tad thin on the ground) and ‘softs’ are an accident waiting to happen. As one product becomes ever more expensive so our food producers (farmers!) shift production. We may find that large swathes of ‘set aside’ across Europe suddenly get a bit of love and attention.
The whole point about this article is not to suggest that commodity prices are going to collapse but to point out that the one way traffic of the last year or so is probably more of a catching up exercise after decades of being left behind in the inflation stakes. Before the recent moves most commodities were comparable with prices from the eighties.
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'Commodities Price Correction' edited by SD, updated 06-Mar-08
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