Commodities "Dramatic Secular Reversal" Coming? (And Qatar Says Oil Markets "Oversupplied")

The old saying is that the cure for high prices is high prices. In the case of commodities, high prices reduce demand and also lead to efforts to expand supply. That has happened with wheat, which witnessed a sharp price decline today as it was revealed that US farmers had increased their wheat acreage.

Experts see more of this sort of thing in the offing, From Bloomberg:

Commodities are heading for their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply….

High costs are slowing the pace of demand for gasoline in the U.S., and gold purchases in India, the biggest buyer, plunged 50 percent from a year earlier. Producers are expanding supplies of wheat in the U.S. and steel in China.

“We’re near some kind of reckoning” in commodities, said Michael Aronstein, president of Marketfield Asset Management in New York, who returned 15 percent a year in the 1990s managing commodity investments. “I’ve probably been positive for seven years and this is the first time I think there could be really a dramatic secular reversal, that it’s not just a pullback.”

High energy costs will deter consumers and reduce second- half prices, after oil doubled in the past year to a record $143.67 a barrel today, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd….

Gold demand from jewelers, the biggest users, has stalled since September, London-based UBS AG analyst John Reade said May 29. After reaching a record $1,033.90 an ounce March 17, gold will average $850 this year and $750 next year, he said. The World Gold Council said May 20 that first-quarter demand fell to a five-year low….

Commodities advanced this year during a “buying orgy” by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March….

The prospect of increased regulation also may make investing in raw materials less attractive, said Dennis Gartman…

Investors also may shift away from commodities as an alternative to dollar assets. The U.S. currency will end a two- year slide and advance in the second half, according to forecasts compiled by Bloomberg.

And Qatar insists (hat tip reader Michael) oil markets are currently oversupplied:

Oil markets are oversupplied but it would not be wise for any OPEC exporter to tighten the taps given the risk of exacerbating prices, Qatari Oil Minister Abdullah Al-Attiyah said yesterday. Attiyah’s remarks came after Libya’s most senior oil official said on Thursday he was studying the possibility of reducing output in response to a US threat to sue OPEC members, although he said the North African country had no concrete plans to do so for now. “It is not wise today to cut supplies even though there is a surplus because we do not want to create a psychological problem,” Attiyah told Reuters. “I’m not in favor of it at all. We want to try to help to ease the psychological heat.

But the Qatari minister criticized a move by US politicians to sue the Organization of the Oil Exporting Countries if the oil club did not pump an amount of oil that Washington sees sufficient. “The Congress should look to increase exploration inside the United States,” Attiyah said. “It is strange to ask what I should produce. It’s an issue of sovereignty.”…

Attiyah said if enacted, the measure could create a problem for the US market as many producers would avoid US buyers. “You will see a lot of oil suppliers will avoid the American market and you will create another big problem.”

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  1. Melancholy Korean

    I agree about commodities being “overbought,” but there’s no way you could pay me to trade that market these days. A little too crazy.

    As for oil, why exactly are we threatening to sue OPEC? To look like we are doing something, ok, I understand that logic. But we have no leverage here, right? Do we? Am I missing something? I mean, I studied ancient Greek in school, and not business, so maybe I don’t get it, but something about this negotiating tactic doesn’t seem quite right.

  2. Anonymous

    Amazing. Everything said about gold is only true if investment demand is discounted. India and jewellery demand may be down, but demand is certainly not! These guys are talking their own book.

  3. Lune

    I’m with Anon 5:25 here. Gold is a little different from other commodities in that most “investors” in gold (as opposed to consumers) use it to hedge against inflation. As long as inflation risks are high, gold will probably stay high. But I do hope they’re right about the other commodities.

  4. Anonymous

    Yeah right, As long as the US of Assholes continues to debase it’s currency to prop up asset prices it doesn’t matter.

  5. Mara

    If I were an OPEC nation, the US would go off my client list immediately if there were a suit. Nei ho ma, Beijing, need some more oil? I don’t understand the legal basis for the suit in any case. If they’re suing them because they’re a cartel, they’re about 35 years late for that. Geez, it’s even in their name. If you’re a bellicose, retard lawyer, you always have a future in congress. If anything there should be legal action taken against the oil bourses in NY and London who actually set the price and take a fat margin. They are the ones not adding value to the transaction.

    I’m glad to see slippage on the other commodity prices, tho I think the bit about gold going lower is indeed, someone ‘talking their book’.

  6. Anonymous

    Sy Krass said…

    There is no way commodities or the dollar are going to reverse. The FED is making it very clear we are going the road of hyperinflation. Why? To protect the investment bankers I guess.

  7. mxq

    btw…Brazil’s Lula says that the cost of drilling oil does not reach $35bbl.

    IMO, marginal cost is one of two data points where oil prices can be argued.

    The other, obviously, being the highly contentious supply/demand equilibrium data point.

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