Looking at the surge in most commodity prices since Christmas indicates that the world is on the verge of a new economic boom but it does not smell like that to me. Every bear market has its rallies and this is the grandaddy of all bear markets so a major rally should not have come as a surprise, except to the experts, commentators and industry big wigs who, having failed to forecast the long slump, got it wrong again and failed to anticipate the present rally.
Oil rallied by 50% in February and March but oil statistics are notoriously unreliable especially in emerging market countries. 800,000 barrels of oil go missing every day and nobody knows why and nobody knows where but disappear they do. Storage levels are expected to come down but even they are inaccurate and are not as high as generally assumed. Non Opec oil supplies are expected to contract this year for the first time since 2008.
One oil expert forecasts that Brent crude will reach $85 per barrel by the end of this year, whilst the majority claim that the Saudis will keep prices at between $35 and $45 per barrel for the rest of the year. The truth is that the Saudis still control the price of oil. They have forced the closure of 1,000 rigs in the US alone and they want to keep it that way. Rigs generally break even at $40 – $45 per barrel. The Saudis still have the punch to keep the price at under $40 per barrel to ensure that those US rigs remain closed whilst it gets a price at which it can survive..
So there you have it. The price of oil for the rest of 2016 will be somewhere between the high thirties and $85 per barrel but what reason is there for the rally to continue.
Iron ore is firmly in a bull market and has soared by 44% since mid December. The Australian government has forecast iron ore at $56 per tonne in 2017. Despite gloom about the Chinese economy, China’s imports of iron ore are still growing and this year, will for the first time, reach 1 billion tonnes.
In the first 3 months of 2016, gold has risen by 15%, its largest quarterly rise in 30 years but now it looks as if that rally is beginning to stall.
However you look at it, its a guessing game but looking at the real world in which most of us have to live, it does not feel that we are on the verge of a new golden age of prosperity.