The Article… Futures... An Economic Field of dreams Since the Reagan years economists have spoke of the beauty of supply-side economics. Cut taxes and they will build it. Maybe not a baseball field in a cornfield but they will build something, somewhere, a building or maybe a business or whatever. And along the way they will provide jobs and increased economic growth and increased tax revenue as a result. Now some economists may have issues with supply-side economics despite the fact that it has been proven to work time and time again yet no economist would have a problem with the old definition of supply side economics. Because in the beginning the real law and basic truth of supply side economics was whether you have enough supply to meet demand. And the search for that age old question if the stuff dreams are made out of. Or maybe fortunes.
Of course for the futures markets the new millennium has been an economic field of dreams. The US economic expansion continues to fly high. The Economy was spurred out of an inherited recession by the Bush tax cuts spurring incredible growth and demand for goods and services. This growth has spurred economic expansion in many parts of the world and in doing so has caused a huge spike in demand for hard commodities all over the earth. China has been a major beneficiary of the US economic expansion. China of course has been under going through its own industrial revolution. By supplying the United States goods to meet its demand China has experience incredible growth. This Growth has also expanded to India which has feed China with goods. And underneath it all it has spurred incredible demand for commodities across the board. Not only to make goods for others but for their own comfort and appreciation.
Yet recently the incredible run in commodities seems to have lost its momentum. After its impressive run in recent weeks the hard commodities have been hit with some hard times. Sure gold, silver, platinum, copper and oil all hit either all time highs or at least multi- year highs but recently have seen some wicked corrections. Investors of course might wonder if the run is over and whether or not they have missed the boat. Is the great Commodity run over or has it just begun.
They say of course the best cure for high prices is in fact high prices. When prices are high supply sometimes seems to materialize out of no where. Or at certain prices levels alternatives are search out and we seem to shift from tight supply to oversupply. Sometimes this can take a matter of months and at other times it can be a matter of years.
The question you really have to ask is what it will take to correct the supply and demand imbalances that have caused the recent run-up in price. And in what period of time will it take to catch up to the incredible demand growth we have seen in recent years. What is the upside when it comes to places like China and India and other developing nations? Will the world be able to keep up feeding there insatiable appetites or will there growth moderate speeding up the inevitable surplus of supply. It seems based on recent market movements the high prices have increased supply enough to stop the unrelenting buying but the real question is whether this is a short term fix that will lead to an extended downtrend or is it a break in price and an abundance of material that will spur another round of buying and demand.
What will it take to correct the supply and demand?
Let’s take a look at oil for example. Oil has risen to all time highs on Hurricanes and crazy weather and tight supply yet more than anything has risen due to strong economic growth. But after the storms a dip in demand and oil released from the world’s strategic petroleum reserves seems to have alleviated tight supply. In fact based on the recent oil inventory reports if you take them at face value one would think we would have enough supply to last a lifetime. In fact if you read the headlines you would think the supply of crude is overwhelming and should if things stay on this path we will see a glut of crude that can actually stager the inanition., a glut that could cause a price crash of mythic proportions. And despite the huge dramatic correction from the highs it’s probably not an indicatio n the bull market in oil is over. Because when considering the price of a commodity not only to you have to worry about the supply side you have to focus on the demand side as well and whether or not the supply can keep up with that demand.
The oil market is an easy to relate to economy as every one has felt the effect of these rising prices. Oil supplies have risen to a seven year high and given that fact one might assume that oil prices should actually collapse. And there is no doubt that that information has brought the oil price down dramatically from its high. Just in January of this year oil came within a dollar and a few dimes from its all time high set after hurricane Katrina only to correct back down hard on reports on increasing supply. Yet when we analyze it that even though oil supply is at the highest levels in seven year high the demand for oil has grown dramatically in the last seven years. And we also have to remember that to get supplies to these levels world oil producers have had to pump oil at a near record pace.
In fact demand for oil has grown so much that the world’s oil producers have struggled to keep up. Indeed it has been the lack of spare production capacity against this backdrop of rising world demand that has driven prices higher and higher. After the recent drop in price, OPEC which has been pumping oil all out for the last few years is already showing concern’s about the rising inventories. OPEC has become accustomed to rising prices. The cartel now feels entitled to high prices. It is apparent that with demand growth OPEC must take on a major investment to expand capacity to meet demand. Saudi Arabia for one has ambitious plans to not only expand capacity but invest in building refineries so the can sell refined products as well. And if OPEC is going to stay a step ahead of alternative fuels they must have spare capacity to keep prices high but relatively stable. With this type of investment on the line it is unlikely that the cartel can allow prices to fall to high or inventories to rise too high. They know that for now they are the only game in town and they must keep prices high.
And you talk about oil it is obvious that you cannot ignore the fact that geo-political events can add even more to the price. We have seen the events around the globe keep a risk premium in the price of oil. Recent events in Nigeria, Russia, Iran and Nigeria have kept the bid premium underneath the market.
Yet if you look beyond the current supply fundamental look at the larger picture that for the foreseeable future our demand for oil will continue to grow. And the world will face major challenges to meet then every growing demand.
Obviously the story in the oil market is compelling but we are seeing are similar stories playing out in other markets as well. Similar demand price scenarios are playing out in different commodities across the spectrum. Commodity demand is affecting commodities from foods to metals to fiber. In fact recently it was reported in the Financial Times that Chocolate manufacturer Barry Callebaut has warned of a possible cocoa shortage. The reason is because you might have guessed stronger Asian demand. Gold and silver and platinum have surged. Some as Former Fed Chairman Alan Greenspan said due to terror fears but also due to demand for jewelry in India and china. And also the demand for steel and metal has been incredible.
The Growth in the US and China’s baby steps towards capitalism and a consumer economy has changed the landscape of the entire commodity complex. And China and Indies burgeoning Middle class now desires goods and services. Cars, TV’s, Camera’s, Homes you name it they want to have some comforts raise a family etc.. In some ways the Chinese want to live the American dream. These dreams of course are inherent to the nature of man. My thought is that this type of demand is not going to go away overnight. And it is unlikely that supply will overtake demand in the near term. So I believe that the field is wide open in some ways the moves remind us of moves in the past. But with the emergence of economies in Asia and the potential upside growth in those economies the commodity boom is more than likely far from over. And as long as the US economy stays on solid footing than for futures in continues to offer great opportunity. It is a wonderful field to invest in if you can afford to take the risk. There is high risk involved yet if you get involved the commodities markets look to be just like a field of dreams.
Disclaimer: All information on this web site is subject to change. The use of this web site constitutes acceptance
of our user agreement. All publisher financial articles at
FXtree.com are those of the individual authors and do not represent trading recommendations
of FXtree.com or its staff.
