Forex Investment and Currency Trading

Commodity prices have fallen further - the Dow Jones AIG commodity price index is down 45% from its peak in July. Market continues to expect commodity prices to struggle to recover before the second half of 2009 due to continued deleveraging, weak demand growth, and USD strength. However, much of the downside is now already in the price, and that supply cuts are beginning to have an impact, even where investor sentiment is poor.

Prices are approaching or below the marginal cost of production in some cases, including (to varying degrees) palm oil, soybeans, aluminium, zinc, and crude oil. The notable exception is copper. The complication is that marginal production costs are also falling as weaker commodity prices feed through the system. Expect further downward pressure on costs going forward, limiting the upside potential for prices for the time being.

Market forecast of average WTI crude oil for 2009 is USD 60 per barrel (pb). This reflects deteriorating growth prospects, a strengthening USD, and continued withdrawal of funds generally from commodity markets. Expect H1 to be weaker than H2 due to seasonal factors and anticipated USD strength over that period.

Beyond mid-year, however, expect the dollar to exhibit renewed weakness, which, combined with signs of recovery in some economies, should support a price recovery underpinned by renewed investor interest. By 2010 expect a significant recovery in emerging market economies and oil demand, pushing prices higher. In 2010 market expects prices to average USD 80pb.

Crude oil: Weakness reflects deteriorating demand outlook

The collapse in crude oil prices has been particularly dramatic, with the price of WTI near futures now hovering around USD 60pb, down from a high of USD 145pb as recently as July. OPEC’s decision to cut output by 1.5 million barrels per day (mbd) following an emergency meeting in October has done little to stem the decline in the face of deteriorating demand prospects. In the US, weekly data on products supplied to the domestic market suggests that demand fell by 6.7% y/y in October. The US accounts for 23% of global oil demand.

China’s crude oil imports were still robust in October, reflecting expanding refinery capacity, but lower oil product imports and higher oil product exports indicate softer end product demand growth. China accounts for a relatively modest 9% of global oil demand, but along with the Middle East, has driven oil demand growth over the last couple of years.