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10-09-08
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Market Commentary: Oil price retreats - support for financial markets
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Since the beginning of July commodity, and in particular energy, prices have declined sharply. Whereas a barrel of crude oil cost a little short of USD 150 at the end of June, it
is now edging toward USD 100, as we forecast. Prices soared so fast in the first half of the year that they overshot, so a correction was overdue. The overall increase in energy
prices is a reflection of the demand for energy in the emerging markets on the one hand and, particularly in this year, the influence of speculative capital on commodity markets
on the other. But attempts to put the blame for commodity price increases on hedge funds and financial investors are half-baked. Hedge funds do not create trends; at best they
strengthen them. Thus, after the global economy started slowing in July, demand for commodities fell in response, and financial investors reacted by selling. It is remarkable that
neither the crisis in Georgia, with its potential repercussions for energy supplies, nor the threat that Hurricanes posed to US energy production in and off the southern states
affected the downward trend in oil prices.
The decline in energy prices supports our scenario that toward the end of this year and in the coming year inflation will fall rapidly from its current high level. This will
reduce pressure on central banks - in particular in Europe - to raise interest rates. Lower commodity prices will have a positive effect on Asian economies, which are on
balance importers of commodities, and a negative effect on producers in Latin America. But even oil prices of between USD 80 and 100 are still high enough to generate a hefty
stream of petrodollars for Russia and the Arabian states. Lower commodity prices will have a positive effect on corporate earnings and increase consumers' real buying
power.
That said, in the coming years the global economy will have to adjust to the reality of generally higher energy prices. It is a demonstrable fact that oil reserves are falling, so
when the global economy starts to recover oil prices will pick up again. But as with currency movements, the important point for the economy is that price changes occur gradually,
without triggering an economic shock. In this event, companies have time to adjust to alternatives.
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Dr. Thomas Steinemann
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| Chief Strategist of the Vontobel Group |
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| +41 (0)58 283 78 44 |
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Contact
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