WeiJia Qin's Blog

“The departure of real commodity prices from their mean has been so great that Grantham suggests there is a prospect for a significant correction…[such correction] will be amplified by speculation and will develop bubble-like overshooting” Says Marshall Auerback, global strategist at hedge fund Madison Street Partners. What does this mean? It means that the reason commodities such as cotton and minerals have had such a sharp rise in recent years may be due to the fact that there exists a commodity bubble not different from the housing bubble that set off financial distaster in the United States. There may come a day in the future when the prices of these goods ‘crash’ to very cheap levels.  According to Grantham’s findings, commodity prices have been declining at a rate of 1% each year since the 20th century.  In just the past ten years, however, the prices have gone up significantly.

However, as Globe and Mail columnist Eric Reguly argues, oil is a special exception when it comes to analyzing the future trends of commodity pricing.  The reason that oil prices are remaining relatviely high through the global financial crisis of 2008 and the European debt crisis is because of a pervasive resource deficit. According to the oil analysts at Barclays Capital in London, a global oil supply deficit is an enormous issue that is not being acknowledged to scale. The theme of global economic slowdown is wrongly the predominant theme within markets.

In the future, according to Reguly, it may be possible that oil prices will fall in order ot comply with their long-term average price. However, I don’t this this does much to solve the real problem: the global oil scarcity. I believe that the correct pricing of oil should be determined by its scarcity value.

This Globe and Mail column provides a great, detailed account of the situation.

Photo credit: http://www.seanews.com.tr/article/MARKETS/47957/Markets-Oil-prices/
Credit: http://www.theglobeandmail.com/report-on-business/commentary/eric-reguly/why-oil-isnt-behaving-like-other-commodities/article2201928/

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