Source: The Straits Times, Goh Eng Yeow
NO WONDER investors were jumpy: Almost a year to the day after Wall Street crashed by nearly 1,000 points in a matter of minutes, crude oil prices plunged almost 10 per cent - the biggest one-day fall in history - last Thursday.
Like the flash crash last year, the rout was initially greeted with trepidation but as crude stabilised the following day, there was renewed confidence that the two-year market rally was still intact. Business as usual, in other words.
But it is worth examining the reasons behind the worst sell-off in crude since the collapse of US investment bank Lehman Brothers in September 2008 sent prices plunging 75 per cent in three months.
After all, as the Financial Times observed, the rout not only saw billions of dollars go down the drain, it probably also buried some funds and individual investors in a blizzard of margin calls last week.
Recent history is replete with the woes inflicted by wild swings in oil prices. Take China Aviation Oil, which almost collapsed in 2004 after losing US$550 million (S$682 million) dabbling in oil futures.
One interesting factor this time is that the oil crash came in the wake of a similar rout in silver, which fell almost 20 per cent last week after almost tripling in price over the past seven months to a record US$49 an ounce.
For investors chasing higher yield in the low-interest rate, high-inflation environment, the commodities market has become a favoured playground as they try to cash in on demand for food, metals and energy sources such as coal and crude oil.
So while there is no correlation between any of the commodities where usage is concerned, all have been moving in lock-step where prices are concerned.
A favourite strategy for traders is to 'long' crude oil which has risen by up to 24 per cent since January and 'short' the US dollar, down 7.7 per cent against other major currencies over the same period.
What they failed to reckon with is a perfect storm: The US dollar strengthened in the past week while demand for oil looks to be softening in big emerging economies like China as they take further measures to fight inflation.
There are also jitters in the commodities market as the quantitative easing programme - a US$600 billion scheme by the US central bank to expand the money supply by buying US government bonds - draws to a close next month.
This will force hedge funds and other sophisticated investors to decide on whether to cash in on the gains they have made in commodities or risk losing it all like in 2008 when oil prices plunged 80 per cent in six months after hitting a record US$145 a barrel in July that year.
The four hikes in margin requirements on silver made by the Chicago Mercantile Exchange - the world's largest commodities exchange - in the past two weeks also helped prick the commodities bubble.
In some ways, its actions were similar to those taken by brokerages in Singapore a few years ago when they demanded upfront cash payment from clients on keenly sought penny stocks which had become too hot for them to handle.
Still, it is unclear if the hike in margins will dampen the speculative fervour that has built up in the commodities market. It may simply clear out weak players who are unable to hold their positions, leaving the field open to those with deep enough pockets to step in and drive prices still higher.
The sharp drop in crude prices may also reflect the unease among big oil traders over efforts by the US government to root out what it believes to be an illegal manipulation of the energy market in the wake of surging pump prices.
But US hedge fund manager Jeremy Grantham, whose asset management firm GMO manages US$107 billion in assets, noted in a recent newsletter that high commodities prices may be here to stay.
'The rise in population, the tenfold increase in wealth in developed countries and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertiliser, available land and water,' he said.
As huge economies like China and India are consuming more of every raw material from crude oil to iron ore, hopes of a peak in prices may be futile.
'The 102 years to 2002 saw almost each individual commodity - both metals and agricultural - hit all-time lows. But since 2002, we have the most remarkable price rise, in real terms, ever recorded,' he said.
As such, Mr Grantham believes that speculation plays only a small role in driving up the prices of commodities such as crude oil.
Even if China's economy stumbles and the weather turns out to be better than expected, generating a bumper harvest for wheat and other crops, any drop in commodities prices would only be temporary.
In the long run, the more important issue is the increasing scarcity of commodities and the upsurge in demand.
For investors, the road ahead may be a short boom-and-bust cycle occurring with distressing regularity.
No comments:
Post a Comment