Commodity Bubble is Losing Air

Though oil prices have not yet burst, many of the other commodities that were causing global inflation are falling fast. Here is a note from my friend Vince Farrell (of CNBC fame).

Miles driven in March, the last month data is available for, were down 4.3%. MasterCard samples data from gas stations and reports that gasoline purchased on the Memorial Day weekend was 7.6% lower than last year, but MF Global and John Kilduff’s research show that gas pumped may have been 10% lower. Sales of gas guzzling SUV’s are off by a large double digit percentage.
Overseas, Indonesia, Malaysia, and Taiwan have started to cut their gas subsidies. They have to. Indonesia’s subsidy was approaching 3% of GDP (the Economist) and 7% of GDP in Malaysia. India imports 70% of its oil needs and the state oil company is projecting a $50 billion deficit. Morgan Stanley figures that the combination of state and central government subsidies add up to 9% of India’s GDP. India has an election next year and is still recognizing the necessity of raising prices (thus destroying demand.) The Indian economy grew 8.8% in the first quarter, but inflation was approaching 8% as well. China’s subsidy is only about 1% of GDP and it’s running a budget surplus so they probably won’t feel the need to take action until after the Olympics, if then.
While oil is starting to show signs of a correction, other commodities are running ahead of oil in their price decline. The Goldman Sachs Non-Oil Commodity Index is off 13.5% since mid March. This while the energy index gained 22% even with lasts week’s small correction. Last week copper dropped below $8000 a ton in London for the first time in two months. Zinc was off 7% last week, lead 6.6%, and tin fell 10% to $21,200 a ton from its recent high of $25,500 a ton. In “soft” commodities, rice prices in Chicago fell to their lowest level in ten weeks and wheat continued its significant decline. Corn closed at $5.82 a bushel. Still high, but below the psychologically important $6 level.
I continue to guess (hope) that oil will pull back towards $100 which would represent a 50% correction of its huge move up this past year. 
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0 Responses to Commodity Bubble is Losing Air

  1. Brian says:

    Good news for the Fed in that rates can remain the same if inflation normalizes. On the demand side though, if gas falls back ‘down’ to $3.00 a gallon, will demand in America ramp back up? I think it will take $6.00 a gallon gas to instill permanent change and that will result in tax increases as urban and suburban areas cope with overburdened mass transit systems.

    Back to the supply side, the media is already hyping the hurricane forecast and predicting dire consequences for prices should a hurricane occur in the Gulf of Mexico. The cost of heating oil is holding up long term contracts for next winter in New England. Some state budgets that provide heating oil assistance for the poor were greatly affected by this past winter’s run up in prices and already they are higher now. If however the situation in the Middle East worsens or the current administration feels compelled to attack Iran, then the current $4.00 a gallon gasoline will be a fond memory.

    “Do you remember back in June 2008? When gas was only four dollars a gallon? Lordy, those were the good ol’ days, for sure.”

  2. Dan says:

    If the price of gas falls, then of course demand will go back up. And sales for gas-guzzlers will go right back up.

    I’m all for providing incentives to increase mileage and gradually move away from fossil-fuel burning vehicles. But I don’t see dumping extra trillions into the coffers of the oil companies and the Saudi royal family as the way to do it. That’s what’s happening right now.

    Yes, it does seem like there’s a consistent message in the press for the past several months: “Get ready to pay more and more and more for energy.”

    You can almost hear somebody saying, “So the global warming types say that we’ll have more and worse hurricanes…let’s see…how can we turn that to our advantage…pave the way for six dollars a…I’VE GOT IT!”

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