Random thoughts on commodity - I

After speculative funds exited the commodity complex, the world of commodity will have to be governed by supply and demand. Demand is depending heavily on the economic activities.



There is no need of me to point out the obvious fact of the worldwide economy is weak. IMF predicts global recession in 2009.



http://news.bbc.co.uk/1/hi/business/7952377.stm

Weak economic activities impacted demand. US crude oil inventory swelled this week to highest level in 16 years - jumped 3.3 million barrel to 356 million barrel.



Supply cuts is quite rapid to match demand roughly to about 84 million barrel.



This week economic scorecard came in surprisingly stronger than expected. This has fueled further optimism the "worst is behind" us.



However, the bearish camp thinks the stronger housing sales was just a blip like in the past and still stuck in a down trend. After stuck in 16 months of recession, personally I think it's not a sin to be bullish.



To answer how sharp the price action can snap back from the bottom is depending on the shape of recovery - V shape, L shape or U shape ?

The below chart is still an unsolved Alfred Hitchcock story to me. Two ways of looking at this chart. Half full: supply did not response more than 87 million as it did fulfill the demand, the parabolic price was driven by speculative fund. The CFTC pricked the bubble that did not give us a chance to test the other half-empty theory. Half empty: 87 million barrel was the max, if supply went beyond that would have pricked the parabolic price action. I'm just curious to find out what will be the crude oil supply response when demand goes to 90 million barrel. Don't forget that we were lucky last round because the US economy was weakening but emerging economies were doing fine. If the next upturn with the US and emerging economies are running at full throttle, do we have sufficient supply? I'm really excited to find the answer to the half empty view.



(Click on image to enlarge)

Let me end part I with Jim's view:

I know it does because nobody has discovered any major oil fields for 40 years. The number of acres devoted to wheat farming has been declining for 30 years. Only one lead mine has been opened in the whole world in the past 25 years. The last lead smelter constructed in the U.S. was built in 1969. There’s just no capacity and it takes a long time to discover oil fields or bring mines on stream.

The world has a long way to go in this particular bull market. That’s not to say there won’t be setbacks along the way and consolidation. There always are in every bull market, and that has been true in every market throughout the world and throughout history, so we can expect more consolidation. But, on the other hand, there is a secular bull market in commodities and it is one of the few, if not the only, bull market I know of right now.