By Kunal Shah
Commodity prices have crashed during the last week mainly after the FOMC meeting. We have witnessed capitulation especially in the base metals complex and in commodities such as Silver where prices have corrected by more than 15-20%. In the FOMC meeting, the Federal Reserve chairman Ben Bernanke did not dole out a direct stimulus package. He launched a twist operation which is basically to tell the world that interest rates in the US will remain low in the coming years. Post that, what we have seen, would be described as a lsquo;bloodbath in the commodity space.

More than fundamentals, I believe the commodities boom was liquidity driven. The quantitative easing was one of the major reasons for commodity prices to move up. I tried understanding the demand supply parameters among commodities as to how Crude Oil would test $130/barrel which was the target given by large financial institutions, when huge inventories exist in the US and there is also the negative revision to the GDP estimates in the US. There were lots of forecasts that Copper prices may test $10000-$11000/tonne levels and there was there hype about a deficit of 300000 to 400000 tonnes which is nothing compared to production of around 17 million tonnes. Despite the massive inventories of Zinc and the surplus of more than 200000 tonnes, zinc prices were moving up.

I think prices of most commodities, except Gold and few agricultural commodities have picked up post the end of the quantitative easing (QE2). So now we have a scenario where there is credit crunch in Europe coupled with a sovereign crisis, cost of borrowing dollars has surged rapidly, unwinding of the dollar carry trade and no more quantitative easing programmes have been announced.

Commodity prices have not fallen just because of risk aversion. In fact, I feel they are falling on their own weight. One must understand that the level of commodity prices which have been witnessed was mainly because of massive liquidity that was chasing commodities and not because of the fact that fundamentals were very bullish.

After a huge correction, there can be a bounce back in prices of silver, gold, base metals and Crude Oil but I do not see any major up move and rallies should be sold at. We have a serious risk aversion at hand, until we have any clarity on how the credit crunch and sovereign crisis in Europe will be solved. It will be very interesting to see how policy makers in the US and Europe will deal with this crisis.

My view on the complex remains bearish. I feel by next week crude oil prices can test $75/barrel and Brent crude oil can touch levels of $97/barrel by next weekend. In agricultural commodities the edible oil complex will remain under pressure. Soy oil can test levels of Rs 532 by next week on account of this wave of risk aversion we are currently witnessing.

(The author is Head Commodities Research, Nirmal Bang Commodities Pvt Ltd)

Tags : Commodity
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