GM folks. Why Crude Oil and Copper are on fire
Wednesday, 07 May 2008
Commodities are rallying, with oil leading the way. Crude oil rose $4 yesterday to trade a record above $120 a barrel at NYMEX. Crude has gained 22 percent since January alone. Energy costs have spurred inflation, depressed consumption, and distorted trade figures in nearly every G7 economy. Just as observers were starting to grapple with the idea of oil reaching $100 per barrel, it became apparent that $125 a barrel had nearly arrived.
Crude Oil has been supported by weakness in Dollar as well as strengthening of Dollar in recent times. As Crude oil is dollar denominated, weakness in dollar boost the appeal of Crude Oil. And when Dollar appreciates on positive economic data, Crude rises as it is assumed that growth in Consumption, manufacturing activity, etc will signal higher energy use.
Dollar Index made a record low on 17 March 2008 at 70.70. Crude had negative correlation with Dollar and had been rising through 5 years on weakness of Dollar and Crude also made a record high at $111.8 on same day. But ever since then correlation has become positive with Beta of 2, Dollar Index has risen 3.5 percent in 45 days and Crude Oil has risen 7 percent in same period.
Another commodity, which was in limelight yesterday, was Copper. Copper jumped as much as 44 cents, or 12 percent, to a record $4.2605 a pound in one hour, the highest ever on COMEX. The price was back below $4 around 45 minutes later.
More than 80 cents swing in copper within a matter of minutes was unbelievable. The move may have been exaggerated on a day when copper trade was thin globally, with the London Metal Exchange closed for a U.K. holiday.
Nobody could understand why there was such a volatility, whether there were some traders who may have been caught in a wrong-way bet on copper, triggering the surge or it was a combination of buy stops being activated above the contract record highs and a lack of selling with London closed.
Both these commodities are fundamentally not so strong, but Speculative and Technical buying could push the prices of Crude Oil to $130 a barrel at NYMEX and Copper to $5 a pound at COMEX.
Source: Commodity Online
