Goldman Sachs cashed in on crude oil, warning that high prices are creating demand destruction that will end the rally. Image: Moon Stars and Paper CC-BY-SA
Commodity prices, which have been rising since December, fell sharply Tuesday. Inflation is beginning to curb demand and slow economic growth. A note from Goldman Sachs that it was time to cash in on crude oil, copper, cotton and platinum triggered a sell-off that signaled a possible end to a historic commodities rally. The commodities rout was led by oil as high gas prices are beginning to force Americans to cut back on driving.
Goldman warns of demand destruction
After rising 25 percent since December and setting fresh peaks Monday, April 11, commodity prices halted their advance by the end of the day. A broad-based commodity rout began in earnest after Goldman Sachs warned that commodity prices would fall and Japan’s economic minister warned that damage from the March 11 earthquake and tsunami would be worse that originally expected for the world’s third largest economy. Oil fell more than 7 percent and copper ended Tuesday with its largest one-day loss since February. According to Goldman, although oil and gas prices are approaching levels seen in Spring 2008, high prices are resulting in “demand destruction” that has increased the risk of being long on oil. Plus, relatively peaceful elections in Nigeria and a potential cease-fire in Libya, two major oil producing countries, have dampened the enthusiasm of speculators whose bets on fear and risk have been driving up commodity prices.
Bringing commodity prices back down to earth
Some analysts think Goldman triggered the commodities rout in order to cash in and position itself for a more profitable entry point into a longer term upward trend. However, in addition to the oracle of Goldman, many recent headlines have pressured commodity prices. A report released Tuesday by the International Energy Agency suggested high oil prices threatened global economic growth. On Monday the International Monetary Fund projected that inflation borne by high commodity prices would slow global economic growth from 5 percent in 2010 to 4.5 percent in 2011 and 2012. In his daily remarks to subscribers Tuesday, Richard Russell, publisher of the Dow Theory Letters, said that the markets could be preparing for the end of the Federal Reserves quantitative easing program. The Feds purchase of $600 billion in Treasury securities has flooded the markets with cheap cash used by speculators to drive up commodity prices.
Will U.S. consumers triumph over speculators?
Besides Goldman Sachs, perhaps the most influential driver of a commodities rout led by oil is the U.S. consumer. A Mastercard report released Monday showed that gasoline sales declined for the fifth consecutive week. Before the decline, demand increased for two months and analysts expected the trend to continue as the economic recovery gathered steam. But the average gas price in the U.S. is already 41 cents higher than the same period in 2008, when the average gas price peaked at $4.11 in July. MasterCard reported sales of 2.7 billion gallons of gas last week, down 3.6 percent from the same period in 2010, when it the price was 80 cents lower. A March survey by the Oil Price Information Service showed that sales had fallen at 70 percent of U.S. gas station chains. More than 50 percent reported a decline of 3 percent or more.
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