Blasting off

Futures, Feb 2008 by Szala, Ginger

It's only the second week of the new year and 2008 has already been historic: First, crude oil prices hit for one brief moment - the $100 mark, then soybean futures broke into the teens for the first time ever, popping just over $13 per bushel, and gold continues to hit new highs, today touching $900 per ounce. When Dan Collins, our managing editor, came in to tell me about the gold move, one of my colleagues in the room said, "Boy those gold commercials have been saying buy gold for the last three years, guess I should have listened."

We laughed, but yes, perhaps he should have. In our world of covering the markets, we see the daily bump and grind of prices and sometimes we forget to take a step back and see the big (or longterm chart) picture. When crude oil tickled $100 right after the new year (some debate that) from a run up from $68 in August, it was a 47% rise. Gold was at $660 in mid August, and rose 36%, and soybeans, which were $8.50 a bushel in August, have gone up 56% since then, overcoming the perennial psychological ceiling of $13. No wonder why commodities traders are being hunted down and paid handsomely in London and elsewhere. Back in October it was reported by the Financial Times that JPMorgan Chase added 50 traders to its global commodities units while concurrently ravaging its investment banking area. Most of the additions were for global energy trading, but the trend has developed at other firms and across all commodity areas. Bottom line: commodities are king.

Wearing the crown for some time has been the energy complex, especially crude oil, which is coveted across the globe. Continued strife in the Middle East makes OPEC production always a wild card, but troubles elsewhere, such as Venezuela and Nigeria, heighten this effect. Add to that the increased demand in countries only recently making their impact: China and India. This will not end soon - probably not even in our lifetimes. So those soothsayers who say buy crude and ride that bull likely will be correct for the most part. However, like in any market (well at least before August 2007) there will be fits and starts.

This is made abundantly clear in our cover story, "Energy 2008: Higher prices and volatility," by Platts energy analysts Linda Rafield and Jeff Mower (page 22). Supply is a major problem, especially when the United States, the world's largest consumer, needs the type of crude that is low in sulfur, that is, light, sweet crude, which has a strained supply, of course, global-political events aside, other issues will help the gyration of energy prices this year, especially as much of it hasn't played out yet.

The U.S. (and yes, global) housing market has taken its toll on the economy to an extent that Goldman Sachs already is calling a recession. This could decrease demand of energy due to a slowing economy. Alternative fuel sources also could (and already do) curb the need for petrol; soybeans making new highs, with corn just behind, is not an aberration but a continually growing linkage of these markets. The debate of efficiency for grain-based fuels has heightened, but the truth is some type of replacement needs to be found, and like anything, it could take awhile to make it as efficient as possible. The U.S. dollar also has an impact on energy prices, as its weakness has helped spike the price of crude oil, which is priced in dollars.

Rising commodity prices most likely will continue through 2008, but expect a bumpy ride. For example, last week Toyota overtook Ford as the second largest U.S. auto maker; apparently there's more hunger for the hybrid Prius over gas guzzling Explorer. As a consumer, the United States seems to have evolved; now it's China, India and developing countries that will need to learn moderation. Hopefully faster.

Ginger Szala

E-mail me at gszala@futuresmag.com