Sunday, 8 May 2011

Osama the reason for the drop in commodity prices - I think NOT!

Many commentators have said that the reason for the 'flash crash' in oil prices is due to Osama Bin Laden's death.

"The killing of Osama Bin Laden may have been the catalyst for this week's rout in oil prices that's deflating commodity prices around the world," an article on Bloomberg read.

 It seems unlikely that Osama's death had much to do with the slide in commodity prices. It is thought that "the death of bin Laden… changed the focus to the demand picture, which is worrisome".- Bloomberg

The real reason is suggest that the sudden drop in commodities is due to 1) concerns about the eurozone (Portugal, Greece and Republic of Ireland), 2) gains in the dollar and 3) rising US inventories of oil.

1) Concerns about the eurozone:

I recently spoke about Portugal receiving a bail-out from the EU and recent talks with Greece about debt restructuring (after they borrowed  €110bn from the EU). It has also been reported that Ireland is now requesting a lower rate after they borrowed €67.5bn. The single European currency fell the most in 4 months against the dollar last week after president of the European Central Bank, signalled that interest rates may not move higher next month, leading to a lack of confidence in the euro.

2) Gains in the Dollar:

The dollar index, which measures the performance of the US currency against a basket of six currencies bounced all last week after hitting a 12 month low of 72.933 on April 29. Since June last year the index has plunged 18& – but last week staged a bounce-back of almost 3%. When the dollar rises this makes commodities more expensive in other currencies. 

3) Rising US inventories in oil:

The Energy Information Administration in its weekly crude oil report said US commercial crude oil inventories increased by 3.4m in the week ending April 29 to 366.5m barrels. This means oil stocks remain above the upper limit of the average range for this time of year.

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