We have a tendency as individuals to assume what is now will always be, and that whatever the trend is now will remain the trend in the future.
Most of us have an inability to see change coming or accept that change will take place. So going into 2015 there is a widespread assumption that the downward trends of 2014 will continue in 2015, not so much the recovery of the US economy but the wider global economy and commodity prices which depend so much on global demand.
Oil prices went into a rapid decline in late 2014 and have continued into 2015 dropping from well over $100 per barrel to half that level. Likewise copper is facing it’s 4th weekly loss and is barely holding around 4-1/2 year lows according to Reuters in spite of commodity index rebalancing this week offering some support for copper prices at the expense of aluminum, nickel and zinc.
Weak commodity prices are said to be a direct result of slowing demand, illustrated most succinctly by China’s annual consumer price inflation hovering at a near 5-year low of 1.5% in December, little changed from November. Bloomberg reported this week that China’s factory-gate prices extended a record stretch of declines, with the sharpest drop in 2 years in December, as the producer-price index slumped 3.3% from a year earlier.
The paper was quoting data from the National Bureau of Statistics as tumbling oil and metal prices have extended the run of producer-price declines to a record 34 months, adding to deflationary pressures worldwide as China’s export prices drop.
Nowhere have the price falls been as dramatic as in the oil markets, and came as a shock in part because they had been high and steady for a long time prior to early 2014. But Michael Levi, senior fellow for energy at the Council on Foreign Relations is quoted by the NY Times as saying “Anything is possible” (regarding the future direction of the oil price this year), “but all the conditions for high volatility remain in place.
That’s the natural state of the oil market unless a cartel is in control. Part of the lesson from last year is that a small mismatch in supply and demand can result in a large and rapid change in prices. That works in both directions. If there’s an increase in global growth, geopolitical disruptions or a faster shutdown in North American production, then oil prices could definitely go up.”
Nor, he is quoted as saying, should Saudi Arabia’s potential influence be ignored. He noted that the kingdom waited until oil prices got into the $30-a-barrel range before curtailing production in the midst of the financial crisis.
“Just because Saudi Arabia hasn’t acted yet doesn’t mean it never will,” he said.
So while oil and metals prices are falling, and whilst this may in the medium-term be a good thing for global growth and consumer confidence – providing it doesn’t go too far and fuel outright deflation – we shouldn’t take it as read that 2015 will continue in this vein, some metals and oil are in surplus, but the margin of oversupply is not huge. As Mr. Levi observes, it wouldn’t take much to turn markets around and volatility is more likely than a straight-run decline.