Crude oil has surged for a fourth day as the feeble dollar and lacklustre stock markets increased the appeal of commodities for investors.
Oil and gold prices surged to record highs yesterday as the dollar fell to close to its lowest level ever against the euro.
Gold hit a new high near $980 an ounce, and crude oil set an all-time high of above $103 a barrel – both beating the real-terms peaks reached in 1979-80. Many traders believe that gold at $1,000 an ounce is now well within reach.
Corn and soya beans have also tested new records. New York silver futures, meanwhile, broke the much-anticipated $20-an-ounce level.
Commodities that are traded and denominated in dollars usually move for technical reasons in the opposite direction to the US currency. A falling greenback makes dollar-denominated commodities cheaper for holders of other currencies, though the scale of recent movements has few parallels. Gold is also a traditional hedge against inflation, especially in Asia.
It was a question of dollar weakness rather than commodity strength per se. The dollar fell to the lowest for almost three years against the yen and endured its biggest drop against the euro since September as the markets bet that the Federal Reserve will continue its policy of aggressively cutting rates, making the returns from dollar investments look less attractive. Fed vice-chairman Donald Kohn in effect said last week that economic weakness was a bigger concern than inflation.
During yesterday, oil prices eased from their earlier record highs as supply concerns linked to particular production problems in Ecuador, Nigeria and the UK were partly allayed. A fire at the Shell Bacton natural gas terminal in Norfolk, for example, will not affect energy supplies overall, as was at one point feared.
There is also doubt as to what Opec ministers will decide on production levels at their summit in Vienna next week. The group of 11 nations including Saudi Arabia, Kuwait and Venezuela account for about 40 per cent of world oil production, and about two thirds of the world's proven oil reserves. They are widely expected to roll over their current quotas.
"Opec will probably not cut output as the market is too sensitive, but I do not think they are seeing much demand for oil," said Olivier Jakob of Petromatrix. "Not many refiners are saying Opec should increase production ... Prices are being driven by the currency markets. The central banks have more control over the oil price than Opec, so I don't see them [Opec] taking any action at this meeting."
Some analysts are sceptical about the extent to which non-Opec producers such as Norway, Russia and Kazakhstan can increase production. Geopolitical tensions in the Middle East, Iraq and Iran are destabilising the market. Analysts at Deutsche Bank added: "The five largest Opec members are Saudi, Iran, Venezuela, Nigeria and Iraq. With the exception of Saudi, none is investing sufficiently aggressively to meet their future role in world oil supply." The breakneck pace of economic growth in China and other emerging nations also underpins commodity prices.
Poor economic data from the US didn't help sentiment, with the confirmation that the American economy expanded by an annualised rate of 0.6 per cent in the last quarter of 2007. That compares with the annualised 4.9 per cent growth rate in the third quarter. Without export growth on the back of a weakening dollar, GDP growth would have turned negative. Such a sharp deceleration has few precedents in US economic history.
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