Research Dept. News
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Monthly Report, num 305 - September 2007
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International review - Raw materials
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Raw materials: sharp correction in oil prices
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Lower demand, now and expected, and exit of more speculative investors brings drop in oil prices.
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After marking up annual highs in July above 77 dollars a barrel for Brent quality for one-month delivery, August brought a substantial drop in oil prices which put quotes in the area of 69-72 dollars a barrel at the end of the month. This notable downward adjustment was mainly due to three factors. First, the gap between supply and demand of crude has been gradually narrowing. Latest figures indicate that growth of world demand for oil is slowing down (especially in the industrialized countries) while completion of maintenance work in the extraction and refining sectors is making possible a substantial increase in supply, both in the Organization of Petroleum Exporting Countries (OPEC) group and among non-OPEC producers.
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Metal prices show downward corrections over past three months, a trend sharpening as result of financial crisis.
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A second factor is that it is now felt that future demand will tend to grow less than expected some months ago, to some extent reflecting the effects on the real economy of the recent financial market upsets, particularly the consequences for economic activity of a possible scenario of credit restriction. Finally, a third factor precisely linked to the financial crisis, has been the withdrawal of the more speculative funds from the oil market.
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However, while oil has offered some relief from its climb, other raw materials have shown uneven moves. Metals have tended to be corrected downward since last June. Now, to some extent as a result of the exit of the more speculative investors from the market, this downward sensation has strengthened. On the other hand, farm raw materials, especially wheat, are continuing to show a notable upward trend.
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Wheat at all-time highs due to growing food demand and poor harvest prospects this year.
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Wheat reached all-time highs in August within a notable upward move (more than 725 cents a bushel). The determining factor for this trend was the growing concern about global demand for food and the difficulties in meeting the increasing demand. This perception was worsened in the case of wheat because major world producers, such as United States, are replacing part of those lands under wheat with crops of maize, a cereal used in producing ethanol, a «green» fuel now on the increase in these times of dealing with climate change. In addition, poor weather has had a negative effect on harvests in Canada, Europe and Australia. Overall world demand for wheat in the 2007-2008 season will be 614 million tonnes but the harvest will amount to only 607 million tonnes, according to estimates by the International Cereals Council.
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