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S. Balakrishnan

That a week is a long time in financial markets was proved yet again last week.

Less than a fortnight back, the talk was of $150 and beyond oil, a continuing bull run in commodities and a further eclipse of the dollar.

But sentiment — as it has a nasty habit of doing in financial markets — turned all of a sudden.

The long-suffering oil consumer saw some relief when the price fell all the way from $147 to $113 in days.

Equally significant was the dollar recovery from the depths of close to $1.60 to below $1.50 against the euro.

Clearly fortunes must have been won and lost in what is perhaps one of the most stunning turnarounds in currency markets in recent times – an upmove of 1200 pips in euro/dollar in short order.

Gold too has fallen from the heights. It was in hailing distance of $1000 for a second time in the last few months but failed to make it, going instead into free fall to just over $800.

Other commodities — base metals and agris — too were badly hit.

The obvious question is whether the commodity boom has run its course or these are temporary setbacks in a secular bull run.

Market gurus like Mr Marc Faber and Mr Jim Rogers, the earliest and best-known seers of the commodity price bubble, have, of late, turned bearish - so fast and high prices have risen.

Mr Rogers thinks agris are a better bet than energy. And many believe oil’s best is still to come.

For Governments and central banks, the problem is here and now. They would like to know where oil is headed today, not where it will be in an ill-defined ‘long-term’.

A combination of factors has dragged down oil. First, there is the distinct consumption drop in the US, in response to soaring gasoline prices.

Second is the fact that supplies are adequate, if not ample. No sign here of ‘peak’ oil, in which reserves, dwindling in relation to production, drive up prices. Speculators are, obviously, keeping their distance.

Very important is the cooperative role played by the dollar. As the dollar rose, oil fell, underlying the importance of currency markets in commodity prices.

Thus, fundamental to the behaviour of commodities is the behaviour of the dollar. The US Fed Chairman, Mr Ben Bernanke, more or less, said as much some weeks back.

It will not be a one-way street or an easy ride to lower oil prices, however.

OPEC is hardly likely to relish the correction. It wouldn’t surprise if it soon says production cuts are on the anvil, boosting prices again.

That might be short-lived as the consumption and technology response to expensive oil has been unexpectedly rapid and strong.

When Mr Boone Pickens, an oilman, if ever there was one, starts throwing money at solar, the tide must be turning.

More Stories on : Financial Markets | Commodities | Financial Scan | Petroleum

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