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Bear market to continue or just a correction?
Tue, Aug 5 2008, 14:07 GMT
by Arne Lohmann Rasmussen
The commodity market experienced one of its biggest corrections since 1980 in July. Once again the commodity complex is taking its cue from the oil market, where a shift in sentiment seems to have occurred. The obvious question now is if this is the beginning of the end of the commodity bull run, or just a normal correction exaggerated by fund and speculative money exiting commodities?
We have earlier written about how US demand for oil and corn (input to ethanol) has coming under pressure in the past couple of months due to the cyclical weakness in the US economy and the elevated prices for energy (see, eg, the July issue of Commodity Monthly). This price/demand effect that apparently did not become visible until the oil price went above USD 120 a barrel is often referred to as .demand destruction.. In our view this is exactly what is happening at the moment. US gasoline demand in the past four weeks was 3% below the level seen a year ago, and in May total driven mileage in the US dropped 3.7% y/y. One would have to go back to the second oil crisis to see such a steep drop in mileage. On top of this comes a steady stream of news about airlines grounding planes and the weakness in the US economy apparently spreading to Europe. Previously held beliefs that Europe and Asia could decouple from the US downturn clearly seem wrong now.
The question is, of course, whether this is a seismic shift in sentiment that could spell significantly more downside for commodities. Is this the start of a long-lasting bear market, or is it just a correction that could provide the opportunity to hedge commodity exposure or invest in commodities. There is a clear possibility that increased pessimism on global growth in the next couple of months could drive commodity prices lower, so we would certainly recommend caution. However, as we have elaborated several times, we very much believe that the commodity bull run has been fuelled by fundamentals. And while the June peak in oil prices might have been an exaggeration, we have to remember that non-OPEC oil supply problems, OPEC.s hawkish stance and strong oil demand in Asia and the Middle East remain intact. Supply problems are also growing in base metals, and the costs push in agricultural is evident. That said, given the shift in market sentiment, with focus on demand destruction, weaker global activity numbers and the stronger USD, we have revised down most of our commodity forecasts for Q3 and Q4, while we have left our 2009 forecast more or less unchanged.
Published on Tue, Aug 5 2008, 14:13 GMT
Archive
- Commodity supply under pressure
Published On Wed, Nov 5 2008, 14:03 GMT - Commodity forecast update
Published On Fri, Oct 17 2008, 08:07 GMT - Financial meltdown bad for commodities
Published On Tue, Sep 30 2008, 16:49 GMT - It's the economy, stupid!
Published On Fri, Sep 5 2008, 15:32 GMT - Bear market to continue or just a correction?
Published On Tue, Aug 5 2008, 14:07 GMT
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