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Commodity nightmare to continue

Published Friday, November 20th, 2015

These are awful times for commodities. The TR/CRB index is at 13 year lows, copper at six and a half year lows, the OPEC basket price below $40 bbl and the Baltic Dry index at record lows. So much for the rebound. The health of commodities and the Baltic Dry have always been seen as barometers of global economic health. If that is still the case the message is loud and clear, the global economy is not in good health.

According to Goldman Sachs there is more commodity pain to come. The S&P/GSCI index is down 26.2% year to date and Goldman are forecasting -8% in three months, -4% in six months and -1% in twelve months. How can this signal of bad health be reconciled with relatively buoyant stock markets? The most obvious answer is that stock markets are dancing to the tune of low interest rates and the lack of alternatives. A second is that the commodity problem is as much to do with excess supply as lack of demand.

In the case of oil, supply is most definitely the culprit as demand this year is +1.6 mbpd over last year’s levels basis the EIA/IEA/OPEC consensus. The problem is that global supply has risen by over 2 mbpd. The excess comes on top of an excess that was already running at 1 mbpd coming into the year.

to read the rest of the report, please click here

Posted by David Hufton