The recent rally in the prices of crude oil and other commodities like copper has more legs. Prices of most commodities, including crude oil, have risen by at least 12 per cent since the low point seen in June on weakening dollar and rising demand.
“I remain bullish on crude oil. A marginal consolidation may happen around $80-per-barrel level in the fourth quarter, but I expect it to reach $100 next year,” said Suzlon Energy Chief Economist Ishwar Hegde.
The uptrend in crude oil has serious implications for the Indian economy, which meets more than 80 per cent of its requirement through imports. While it will expand the government subsidy on petroleum products from the current estimate of Rs 53,000 crore, a further rise could also lead to increase in petrol prices, which stand decontrolled. The oil companies have taken two price increases in petrol since September. Oil and Natural Gas Corporation Chairman R S Sharma said, going by fundamentals, crude oil prices should move up from these levels.
“The key risk is that we are being too cautious and the threat of $100 a barrel oil, implicit in our fourth-quarter oil forecast, arrives much sooner than we expect, driven by not only a weak dollar, but also by demand from Chinese and emerging market, the rebuilding of French strategic stocks, and an upward bias to food prices,” Bloomberg quoted Lawrence Eagles, head of commodity strategy for JPMorgan in New York, as saying today in a monthly oil market report. JPMorgan said it expected the dollar to weaken by four to five per cent over the next six months, giving oil a boost.
While the weakening dollar has affected prices, part of the increase is also attributed to the role of speculative elements. Hegde opines that speculation has also played a role in the rally of crude oil and copper.
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Copper and aluminum, considered the most widely-traded base metals, have also rallied by a staggering 38 and 26 per cent, respectively. “The fundamentals of most base metals markets are significantly stronger than they were at any point last year, with copper and tin particularly tight. These markets have already returned to supply deficits, as has nickel. Lead will join them in deficit in 2011,” Metal Bulletin Managing Director Raju Daswani said in his outlook report released earlier this week.
Apart from these hard commodities, the prices of grains also began to rise sharply in July, when it became clear the Russian wheat crop was suffering severe damage from widespread wildfires. Earlier this month, grain prices soared again when the US Department of Agriculture indicated in a report the US grain production would disappoint this year. These are clearly supply issues that are considered mostly if not completely responsible for the rise in grain prices.