Financial Market

The price of crude oil today reached a new high as the black gold hit the $142 a barrel mark, after concerns entered the market that oil producing nations could not meet the demand of the market.

On the London exchange Brent crude hit $142.13 a barrel and in New York light crude climbed to $142.26.

The cartel of oil producing nations OPEC has found itself under increasing pressure to raise production quotas which would ease concern and help bring prices below current levels, however the cartel seems to be split as to the whether it should raise output.

Saudi Arabia recently invited senior members from oil producing countries to discuss what to do about oil. It seems the case that many OPEC members, and senior figures in other oil producing nations, still have clear memories of the crash in oil prices a decade ago after the Asian financial crisis which lead to oil plummeting to $10.

It is these memories know as the “ghost of Jakarta” that apparently explains the reluctance of OPEC members to increase output in order to artificially lower prices.

Raising further concerns within the industry, Libya has recently threatened to cut production saying that the market is well supplied. This statement is thought to be in response to threats from the US against oil producing nations.

In the US the House of Representatives recently passed a bill allowing the Justice Department to sue OPEC members for restricting supplies and setting prices. The bill has not been voted on by the senate and the white house has already threatened to veto the bill.

Oil prices have continually been pushed higher recently by the combination of a weak dollar and concerns about volatile geopolitical situations that could disrupt supply.

Many analysts are now predicting the upward trend to continue, with Tom Pawlicki, an analyst with MF Global in Chicago stating:

“I think the up trend is going to continue, we could move up toward $150 over the next few weeks.”

Other metals continued to weaken today following the trading trends showed with Gold in yesterday’s trading after the dollar continued to strengthen.

Copper most notably fell in line with other commodities in early trading after interest in base metals continued to curb amid optimised that the worst of the credit crisis was over.

With the dollar’s resurgence making dollar price commodities are made more expensive to potential investors with other currencies therefore reducing there appeal.

‘Going forward it does look as though the course of the dollar is going to be all-important for most of the metals,’ - RBC Capital Markets analysts.

After the FED .25% rate cut temporarily halted the dollars resurgence, it returned in European trading after the market concluded that the US had in fact turned the corner on the credit crunch after higher than expected consumer spending data was released.

Although demand for metal commodities is falling with the resurgence of the greenback, copper prices are yet to see a dramatic slide after industrial action in Chile, the world’s largest producer, had dented supply.

At the same time LME-monitored copper stocks have declined 450 tonnes to 110,075 tonnes.

This week Gold slumped to a three month low to $850 an ounce after the US dollar continued to show further signs of recovery against the Euro after increasing optimism that the worst of the global credit crisis is over.

The yellow mental that has seen record highs in recent months has slumped by $25 since reaching $881.65 overnight. This overnight high was brought as a result of a temporary stalling of the dollars resurgence after the FED made a further interest rate cut.

Since the FEDs rate cut the US economy has been filled with an air of cautious optimism that the worst of the financial crisis has been weathered, helping push the dollar upwards. As a result the price of gold has seen a steady decline as its appeal to an alternative to the greenback has been diminished.

“The pace of decline, suggests gold will remain at risk to further corrections in the coming sessions, potentially testing below the psychological $850 an ounce mark before finding sufficient demand from bargain hunters and the physical sector.” - James Moore at TheBullionDesk.com

Although many had predicted a .25% rate cut by the FED to 2.0%, many were surprised by statements suggesting that further cuts could follow, weakening the dollar. US interest rates have now fallen from 5.25% since September 2007.

On Thursday however core inflation was higher than expected which many expect will halt any further rate cuts planned by the FED.

The resulting rise in confidence in US markets has seen an increase in the appetite for risk, which has further pressured gold, with investors redirecting money ploughed into commodities at the start of the year back into equities. A trend much expected with gold’s reputation as a safe store for wealth in times of economic uncertainty.

Oil jumped above $107 a barrel today after the continued conflict in Iraq led to saboteurs blowing up one of the countries two major export pipelines. The attack came amid the third day of Iraqi military operations, targeted towards loyal fighters of the Shi’ite cleric Moqtada al-Sadr in the town of Basra in the southern Iraq.

The explosion marked the first time since 2004 that the southern Iraqi supply route has been disrupted.

“Crude exports will be greatly affected because this is one of two main pipelines transporting crude to the southern terminals, we will lose about a third of crude exported through Basra,” - Oil Company official

In last Friday’s trading a commodities sell off saw oil take a sharp fall to below $100 a barrel, after record highs of $111.80 seen last earlier in the week, but todays rise is a further extension on the $4 gains made yesterday after a report showed lower than expected petrol stocks in the US.

US crude was up 43 cents to $106.33 this afternoon, after peaking at $107.70 earlier in the day. Any gains that were to come on the back of increasing conflict in Iraq were limited by a strengthening dollar which also showed gains after the FED eased recession worries.

The dollar gains were also backed by figures released which showed US jobless benefit claims fell by 9,000, with the greenback managing to regain some lost ground. In early trading it saw a rise of 0.6% to %1.5757 against the euro and a rise of 0.9% against the Yen.

Monday saw heavy losses to European stocks triggered by continued global gloom, but in early trading today showed signs of recovery after a positive session for Asian stocks. The FTSE 100 index was up 2%, the Dax up 1.8%, and the Cac 40 in Paris up 1.9% in early trading this Tuesday morning.

Asian markets also closed predominantly higher with the Nikkei closing 1.5% up, the Hang Seng up 1.4% and the Sensex in Mumbai up 2.0%. Shanghai’s main index did however fall 4% amid fears that Beijing will take action to slow her economy.

Mondays trading marked a wild session which many believe is a culmination of the several events that have rocked investor’s confidence in the past week. The collapse of respected US investment firm Bear Stearns, with its subsequent sale to another Wall Street player JPMorgan Chase at the rock bottom price of $2 a share, followed by emergency liquidity actions undertaken by the Federal Reserve on a Sunday night, and a continued confidence crisis in worldwide credit markets, together led to major European markets recording huge losses in Mondays trading.

The US stock market however didn’t record such losses thanks to bargain hunters taking advantage of the price tumbles, particularly in blue chip and technology sectors.

Shares in Bear Shares had fallen 84% on Monday to $4.31 whilst those of JPMorgan increased by 10% to $40.31.

“The Fed is treating Bear as if it were a large failed bank,” - S&P Economics.

As a result of the collapse many are predicted a prolonged global financial crisis, branching wider and deeper than previously predicted, marking a stark shift in opinion that could magnify any potential effects on world wide economies.

The action made by the FED on Sunday marked its first weekend move in nearly 30 years, making a quarter point cut and announcing it will lend to the twenty primary dealers that buy Treasury securities directly from it, a move not used since the Great Depression.

Largely responsible for the cut price sale of Bear Stearns, the FED will also finance the deal by providing up to $30 billion to JPMorgan.

Many are also awaiting further news today from the Fed, as they are widely expected to cut its benchmark interest rate by a full percentage point to 2.0% as it battles to restore confidence and boost the economy. With continued point cuts like this it could very much be the case that we will see the dollar as a free currency, the first currency to do so since the yen.

The price of Gold reached a new high in Thursdays trading hitting $1000 an ounce, fuelled by a weak US dollar and continuing fears about the US economy.

With economists concerned over a possible US recession investors are continuing to buy commodities as opposed to shares and the US dollar.

The rise in gold to a $1000 an ounce marks a 20% increase since the beginning of the year, on the back of an already impressive 32% rise in 2007. Following the high Gold did fall slightly closing at $993.80 an ounce, $13.30 above its starting price.

Every time data released reflects negatively on the US economy the value of gold continues to rise. The precious metal gets boosted in two different ways upon such news which has led to over a 50% rise in value in the past 15 months.

“First because it reinforces the return of its role as a safe-haven asset, and second because the dollar falls on expectations of further Federal Reserve rate cuts.”

In more good news for gold investors many analysts are now tipping the value of gold to rise even further now that the psychological $1000 barrier has been breached.

“Now that we have gotten above 1000, we are going to get a whole lot of momentum driven investors who are going to drive the price higher.” - JPMorgan Chase analyst John Bridges.

Traditionally gold has been denominated in US dollars, although the currency stopped being backed by gold in 1971. With the continuing weakness of the dollar against other leading world currencies, and notably the euro and the yen in recent days, investors are being driven evermore to the metal as a way of protecting themselves.

The current trend of gold is similar to that which was seen in 1979 when the metal hit $850 an ounce, as investors sought the metal amid fears of inflation.

There are however additional factors driving the current price of gold up which include slower production of gold mine, particularly in South Africa. Production of gold fields was cut in January for a three month period by 25% after severe blackouts caused mines to close. The mining firm responsible is Africa second largest, and accounted for 12% of global production in 2007.

It is also an increasing concern that global gold mines are aging leading to lower quality product and slow production.

“Mine supplies have been falling and central bankers have been less willing to sell gold from stock, and at the same time Asian demand for gold has been holding up,” added JPMorgan’s Bridges.

Oil prices toady reached new record highs as the US unveiled an unexpected drop in oil reserves. The US energy department reported that US stocks of oil had fallen by 3.1million barrels in the previous week to 305.4million barrels, defying the prediction of many analysts expecting an eight straight rise in reserve levels.

The oil cartel OPEC has been meeting in Vienna this week and has been urged to boost production to reduce the record highs being seen and subsequent pressure being placed on world economies.

After OPEC members expectantly voted on Wednesday to maintain production at current levels the price of light, sweet crude for April delivery touched 104.8 dollars in Asian trading. This topped last Wednesdays previous high which was just short of the $104 mark.

George Bush has openly criticised the cartel for damaging the US economy and “making it harder here in America for working families to save and for farmers to be prosperous and for small businesses to grow”.

OPEC had later responded stating the market was “well-supplied, with current commercial oil stocks standing above their five-year average, and that the current price environment does not reflect market fundamentals”.

In the stock market investors are increasingly pouring money into commodities and in particular oil to hedge against the fall of the dollar. This fall of which is being spurred on by cuts in US interest rates made in order to stave off recession, whilst inflation levels remain at dangerously high levels putting off investors.

OPEC’s president therefore blamed the rise in oil prices on the weakened dollar and Americas mismanaged economy.

“What is happening in the oil market is due to the mismanagement of the US economy,” - Chakib Khelil, OPEC’s president

In relation to the new highs being seen the AA has also released figures which demonstrate how these prices are being passed onto the end user. British motorists are now seeing average petrol prices across the UK of 105.7p, with diesel at 111.6p, an increase of 2.5p since the beginning of the year.

The Chancellor Alistair Darling has an additional 2p fuel duty rise planned in the budget due to be released next week.

On the back of the Commodities outlook for 2008 article at the end of January Financial Market predicted “mergers in (base metal) industry related firms could be the trend of 2008 with rising costs, labour shortages and generation of cashflow fostering the perfect conditions for mergers.”

It seems this has been demonstrated two weeks into February with mining firm Rio Tinto being unveiled as a potential hostile takeover target for rival BHP Billiton.

With £3.8billion profit for 2007, a 1% growth on 2006 profits, Rio Tinto has certainly benefited from surging commodity prices, leaving it in a good potion to fend off the hostile bid.

With demand for raw metals such as copper and coal from nations such as China driving consolidation in the sector, Anglio-Australian giant Rio Tinto rejected a £78.8billion takeover offer from its rival.

With commodity prices remaining high and production reaching record levels Rio’s chairman Paul Skinner said BHP Billiton needed to raise its offer “considerably” before the firm would enter talks.

“For us to become persuaded by the arguments for the combination we would need to see an offer for our shareholders that offers higher value than we could achieve ourselves” - Paul Skinner

BHP Billion’s bid offered 3.4 shares for each Rio Tinto share, already an increase from the unofficial 3 to 1 offer in December 2007, however BHP Billiton has warned it will not sweeten its offer.

Wheat may not have the same prestige as gold, but over the past twelve months investors have found much to please the eye and pocket in fields of the crop.

Known as ‘softs’ agricultural goods are the latest product to join the commodity boom that has already pushed up prices in oil, copper and nickel due to the demand from emerging markets such as China and India. As mentioned previously on Financial Market gold has also benefited thanks to its perception as a safe haven from troubled economies.

With oil breaching $100 a barrel and gold recording record highs in early January, Financial Market takes a look at the outlook for commodities in 2008.

Oil:
Oil prices have soared in the last twelve months and as such consumers have seen increased prices at the pumps, and with geopolitical factors such as civil unrest continuing in Iraq and Nigeria, and political stand off with Iran, prices should remain around this figure for the near future.

A continuing weak dollar will also support oil prices as importers buy dollar dominated oil supplies.The reluctance of OPEC to increase output, and the weakness in non-OPEC supplies, coupled with increasing demand from energy hungry India and China will help sustain high oil prices and perhaps even push them up further. Either way 2008 looks set to be the seventh consecutive year of oil price rises.

Gold:
The impressive performance of gold over the last year as documented in the article ‘Gold breaks a 28 year high as investors look to dollar priced commodities’ has meant that investors now need look no further for a reason to invest in some gold jewellery.

Rising more than 30% in 2007, recording new price highs in the process, gold has benefited from increased demand off the back of the sub-prime market crisis. Investors have increasingly looked toward the yellow metal as a safe haven investment, and a continued weakened dollar and mounting inflation fears will continue to push demand in 2008.

Base Metals:
Base metals such as copper and tin have in essence been the building blocks of the economic growth, particularly in India and China. But for all the benefit gained from emerging economic powers base metals as a commodity also suffer in times of economic weakness and as a result copper, lead, nickel and zinc all fell in the last quarter of 2007.

That said tight supply, particularly in copper, coupled with strong demand outside of the US should mean that base metals have a firm standing in the long term. That said if the American economic problems spread across global markets this outlook could swiftly change.

Mergers in industry related firms could be the trend of 2008 with rising costs, labour shortages and generation of cashflow fostering the perfect conditions for mergers.

Agriculture:
Many market experts believe the rally in agricultural prices may be only the beginning, and if the trends of metals and energy were seen in agricultural fields then the price of soybeans could rise another 80%.

In real terms, agricultural prices are still very, very cheap,” said Deutsche Bank’s Mr Lewis.

In 2008 world wheat stocks are expected to hit a 30 year low, partly due to heavy droughts in Australia which halved the winter wheat crop by 12 million tonnes. With poor harvests such as this, low inventories and growing demand through bio fuels, soft commodities look set to be well supported in 2008.

The Federal reserve today cut interest rates by three quarters of a point to take interest rates to 3.5%, 90 minutes before US trading opened. The dramatic cut was drastic action taken by the FED in order to stop markets falling after Europe and Asia recorded record losses on Monday, when US markets were closed.

The cut failed to work however with US markets recording sharp falls when Wall Street opened for Tuesday trading. Throughout the course of Tuesday trading other markets had closed even further down on yesterday, indicating the US would too open down. The FTSE 100 briefly rallied upon news of the FEDs actions after falling 3% early on, only to fall back again later on.

The actions of the FED are a clear indication of its concern, and weren’t meant to meet until next week, making this cut something of a panic move.

The underlying factor is that the real economy has not changed much in the last week, and as such the FED would not have to act now to make a decision on interest rates. What has ushered this move is financial market developments that are threatening to impact the real economy.

In essence if financial markets panic about what is going on in the real economy it can affect the real economy, leading to a nightmare for economy policy makers, which is a feedback mechanism of the markets being spooked by the economy, feeding back into the economy, sending everything into a tail spin.

Therefore the rate cut by the FED is designed to prevent this tail spin, but at the same time destroys confidence.

For mechanical reasons rate cuts will make it easier to borrow money and buy shares, and therefore can be used to prop up stock markets, but when market is determined to fall it is difficult to stop it. This is a similar pattern to drastic rises what a quarter point rise tends not to have an effect on growth, another cut wont solve the current downturn, but this downward phase for many is seen as a correction of the upward phase seen over recent years.

It is hard to steer and control financial markets, and central banks will say it is there doctrine not to control stock markets but to stop the economy going into a spin and if that means further rate cuts then so be it.

The implications of the FEDs cut on the UK are expected to be minimal. The UK are based in sterling and the Bank of England shouldn’t feel any pressure by the Fed to cut UK interest rates accordingly. Central banks are however looking to perceive that they understand and are in control, which in turn does put some pressure on the Bank of England to act, making the expected cut next month even more of a certainty. A FED style out of hours meeting is unlikely though unless further chaos continues in the market.

In terms of the global volatility of markets witnessed over the past two days many do expect a bumpy year although not on the same levels, and as such many experts expect markets to settle down.

But it is important to understand that this market downturn is not like 9/11, this market downturn has an economic underpinning where world markets are trying to adapt their view of the American economy. World markets have been late in understanding the crisis facing the American economy and its decline over the past year. At the moment world markets are correcting itself in a sense, a process which can be messy. The Economy will settle down and markets will learn to live with where the economy will settle down, which in turn will bring an element of stability back.