Rising oil price taking Commodities for a ride!

Rising oil price creating a global oil shock which is trading near $100/brl has been a much concern to the policy makers as benchmark prices for oil rose in all the major exchanges-West Texas Intermediate and the Nymex. Depreciating US$ has been much implicated as the cause of rising oil price besides other factors. High oil prices is also said to be affecting trade balances of some economies. The likely events driving oil price high are:

supply constraints
decreasing inventories in the US and elsewhere
lower OPEC's spare oil production capacity
Oil production shutdowns in some refineries due to bad weather conditions, hurricanes, typhoons
Middle-east crisis
Rising demand from EM's like China, India and non-co adjustability with effective supply trend(supply-shock)
Decrease in Global oil exploration activities
Lower output growth in oil producing countries


With decreasing inventories of oil in OECD countries and increased demand has created supply-demand imbalances in the oil sector. And with rising oil prices there have been a surge in non-fuel commodities prices since last year. Falling dollar contributed further to the problem as import costs rose considerably increasing the import bill. We have seen volatility in food and energy prices that contributed substantially to the equity market volatility in the EMs. Though there has not been any major effect of rising oil prices on the emerging economies till now, a continuous trend might prove otherwise in 2008. It is assumed that low-income oil importing countries and other small emerging nations might face the brunt with higher fuel costs affecting household budget.

Along with oil, we have seen commodities price bubble in 2007 which is not likely to moderate till Q2'08. Metal prices have also increased with Gold being one such, touching $850/ounce last year on the backdrop of a falling dollar. Other metals like lead and nickel have increased and steel prices touched new high in 2007. Growing food shortages in China propelled inflation to a record high of 7.1%, as pig meat shortages have been implicated as a cause of food price inflation. Wheat, Soya bean, milk and palm oil also rose with other food items like meat. As a result, this commodity price boom now has been favored as an alternative investment option or an alternative investment asset class.

Sources:Bloomberg, IMF, Rueters.