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Markets

Commodities

OIL SINKS BELOW $120 AS COMMODITIES RETREAT
By Chris Flood

Financial Times
August 4, 2008

http://www.ft.com/cms/s/0/ebd8337c-620e-11dd-9ff9-000077b07658.html

Oil prices sank below the $120 level for the first time since early May while base metals and grains retreated as selling pressure swept across commodity markets on Monday.

NYMEX September West Texas Intermediate sank to a low of $119.50 before recovering slightly to trade $4.20 lower at $120.90 a barrel while ICE September fell $3.78 to $120.40 a barrel after dropping to a low of $118.80.

Mounting evidence of a slowdown in industrial activity across the developed world and signs that OPEC has boosted crude supplies has led to increased selling pressure in oil markets.

Jonathan Waghorn and Mark Lacey, co-managers of the Investec Global Energy Fund, noted that crude prices have corrected by 20 per cent on 12 occasions since 1999 and said the pullback was “an inevitable part of the longer-term up cycle in energy commodity prices”.

Investec said the market’s focus on demand destruction had turned attention away from equally important risks to future global oil supply.

“The [oil] industry needs to carry out at least a further 10 years of significant infrastructure investment to deliver any meaningful production growth and to rebuild a reasonable spare capacity cushion,” said Investec. “This is an exceptionally robust long-term outlook.”

Francisco Blanch, commodity strategist at Merrill Lynch, expects rapid expansion in oil consumption in emerging markets to continue in the second half of this year, ensuring that energy markets remain relatively tight. Merrill reiterated its forecasts for WTI to average $124 a barrel in the third quarter and $119 a barrel in the fourth quarter of this year.

The latest data from the Commodity Futures Trading Commission showed that hedge funds were almost equally balanced between those betting on further declines for oil prices and those expecting prices to rally in the week ending July 29 when WTI reached $122.19 with the speculative net short position declining almost 82 per cent to 660 lots from 3,640 in the previous week.

On Monday, oil traders kept a watch on weather forecasts with tropical storm Edouard expected to develop to hurricane strength and due to reach Texas or Louisiana shortly. The U.S. Coast Guard said the port of Houston would be closed yesterday night due to the approaching storm.

The security situation in Nigeria continues to concern oil traders. More violence was reported over the weekend with gunmen kidnapping two French nationals near Port Harcourt, the hub of the Niger Delta’s oil industry, while at least three people were killed after more than a dozen gunmen ambushed a local bar and exchanged fire with navy personnel.

Gold sank below the $900 level in late London trading, falling 1.2 per cent to $898.50 a troy ounce after touching a low of $895.70. Traders said the outlook for gold was becoming increasingly polarized with bulls encouraged by concerns over the likelihood of further problems in the U.S. financial system and bears finding support from any bouts of dollar strength.

In Chicago, agricultural commodities retreated amid a further improvement in growing conditions in the midwest with CBOT September corn down 39 cents to $5.35 a bushel while CBOT September soyabeans lost 70 cents to $12.87½ a bushel and CBOT September wheat fell 35 cents to $7.59 a bushel.