In October last year, Brent crude oil was trading at around $80 per barrel. In January this year, it was trading just below $100, and on Monday of this week, it exceeded $126 per barrel, a high not seen since early 2008. However, in the past two days we have seen the price drop by $5 per barrel, and the price of gold has also dropped significantly. This begs the question –has the rally in commodity prices (as driven by oil prices) run out of steam?
The trigger for the recent sharp decline in oil prices on Tuesday can be attributed to Goldman Sach’s, who earlier suggested that investors should take profits after the International Monetary Fund voiced concerns that higher energy prices could hinder the global economic recovery. Speculators quickly jumped on Goldman’s advice; accentuating the price decline and making clear that the drop was the result of an independent intervention from a major market player rather than a natural slide.
So what’s the outlook for oil prices? Well, based on the International Monetary Fund’s downgraded economic growth estimates for the US and for Japan (two of the world’s largest three economies), demand for oil looks set to decline. However, geo-political tensions in the Middle-East are constraining the supply side and OPEC recently announced that Saudi Arabia is unable to increase output to cover the decrease in Libyan output.
In a recent blog on the Wall Street Journal Digital Network, a strong argument indicating that June could be a point at which commodity prices come off their peaks. In November 2008, Brent crude was trading under $50 per barrel, since then it has been on a steady uptrend. What triggered this rally? The Federal Reserve’s quantitative easing programme. – which is set to draw to a close in June; potentially cutting short the supply of funds currently directed into oil futures.
How might this affect the currency markets? Oil producing states such as Canada, Russia, Norway, and other commodity-linked economies such as Australia are currently benefitting from greater profits on their exports. This has been a major factor in the strong performance of their currencies in recent months. If oil prices continue to show signs of topping out, it may trigger investors to take profit on considerable gains made on riskier currencies.
Richard Driver
Currency Analyst – Caxton FX
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