Saturday, May 10, 2008

Commodity price inflation, should I follow the crowd?

WSJ says
The global surge in food and energy prices is being driven primarily by fundamental market conditions, rather than an investment bubble, say the majority of economists in the latest Wall Street Journal forecasting survey.

Is it true that prices are driven by fundamentals? Take oil for example, there was evidence leading to that, reported by Xinhua(April 29) and Reuters

According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China's apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to91.8 million tonnes.

ROME, April 21 (Reuters) - Indian oil demand is expected to grow by 8-10 percent this year, a rate which is unsustainable, said Sarthak Behuria, chairman of state-run Indian Oil Corp (IOC.BO: Quote, Profile, Research), on Monday.

Indian oil demand growth is outpacing growth in refining capacity to meet domestic demand, Behuria said.

"India is building a string of new refineries but much of the new supply has been earmarked for exports," he told Reuters in an interview.

Most the economists think demand-supply responsible for about 60% of the price run up.

We actually can lump others into policy category because lax monetary policy destroys the dollar value, caused flight of the dollars, caused more speculation and etc. In short, this is the 40% contributors.

The question is: are we having an asymmetry cause-effect situation? Could 60% of demand-supply contributes 20% while 40% of policy related cause 80% of inflation? or just any other ratio which is nothing but a guesswork. It's intellectually entertaining.

Something looks very similar to me, government will start to intervene, giving warnings and etc but they can only feel helpless because the crowd will just ignore it. Crude price seems to be on one way street: only UP, UP and Away.

NEW YORK ( 09) -- As part of their plan to tame record oil prices, lawmakers are urging the President to stop putting oil in the nation's Strategic Petroleum Reserve. But some analysts say that won't do much to lower gas prices.

Crude oil is really getting expensive in relative to gold. There were not many occasions we have this situation. Gold used to buy 15 times oil but now drops to 7 times. Either gold is way too cheap or crude oil is too expensive. Either one has to give in - I will be real careful chasing after crude oil.

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