Commodity markets are falling again but for how long? Is this just a correction? There is clearly some profit taking from traders and anyone who spread bet on commodities. Naturally many companies that benefit from high prices eg the Oil Companies are hedging their bets by betting on the market to go down. That causes a reasonable amount of pressure on the market to go down.



For a while, more and more traders were backing commodities prices to increase. And pretty much any commodity. The feeling seemed to be if you can ?Mine it?, Drill for it? or ?Grow it? then someone somewhere will buy it, irrespective of the price.

Reading many, probably misinformed, comments about the imminent demise of Crude Oil reserves you start to wonder where these people get their information from. Declared recoverable reserves (always conservative anyway) give some 130+ years of supply at current extraction rates. Even if we were to double production over the next 10 years (highly implausible and almost impossible) then they would still last some 70 years. The point about a shortage of a material causing price inflation is that until such time as the shortfall becomes a problem the price will remain at reasonable levels. I cannot see anyone storing oil for 70 years.

Advances in technology and new alternative energy sources will also mean that there is every possibility that the current crude reserves will last even longer. The average small car now does 50 mpg. 30 years ago it was well below 30 mpg. All this does not even consider the fact that, even now, there are still vast areas of the globe that have not been ?prospected?. As the world gets ever more dependent (or desperate) who is going to bet against the eventual commencement of ?ecologically sensitive extraction? from the Arctic / Antarctic regions. Do not forget that the Russians have already planted their flag in the seabed.

As Simon Denom of Capital Spreads pointed out ?Other commodities are, likewise, not exactly ?running out?. Well copper is apparently looking a little thin these days and soft commodities like Corn and Wheat look like an accident waiting to happen. As one product becomes ever more expensive so our food producers shift production. We may find that the large swathes of land that were ?set aside? across Europe suddenly get a bit of tender loving care.?

The whole point about this article is not to suggest that commodity prices are going to collapse but to point out that the one way traffic of the last year or so is probably more of a catching up exercise after decades of being left behind in the inflation stakes. Before the recent moves most commodities were comparable with prices from the ?80s.

It is interesting to note that on the whole, crude oil predictions being made on supply and demand fundamentals are suggesting prices will not return to $30-50 but will settle back at $60-80 dollars per barrel.

Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.