Why commodity prices are surging on Libyan crisis

By Jon Nadler

Global powers did not come any closer to creating a Libyan no-fly zone and Col. Gaddafi’s loyalists appeared to gain the upper hand against rebels in at least one coastal city of the country on Wednesday. The situation prompted traders to keep bids on WTI oil prices just above $105 per barrel, and US dollar selling came back into the picture as well. NYMEX oil has now risen 20% over the past month, and Brent crude was trading at just above $114 in London this morning.

Yet, the US’ EIA inventory reports are believed to be showing a gain of 600,000 barrels for the week ending on March 4th, when they will be released later today. When the API released its report on Tuesday, the figures revealed that roughly 40 million barrels of dino juice are being stored in Cushing, Okla. –the delivery point for NYMEX crude. Let’s call that a near-glut in oil while the speculators dance away in New York and forecasters continue to chant about $200 oil as being just around the corner…

According to the top economics official at the US State Department in Washington, the current spike in crude oil prices does not reflect the fundamentals present in that market. Most market watchers concur that the disruption in Libyan oil flows is not a material threat to the overall oil supply picture and that intense speculative activity is what is really driving black gold to headline-generating levels at the present time. File that one under “what a surprise!”

Mr. Robert Hormats, the Undersecretary of State for Economic, Business and Agricultural Affairs remarked that he believes that: “the increase in prices is considerably greater than the decline in supply would ordinarily suggest." If there is any positive to the rise in oil values, well, it would have to be the fact that the oil production tax revenues of several states (Texas, Alaska, and Louisiana come to mind) have been getting a hefty boost and are helping to mitigate their budget deficits as well as lift the local economies.

The aforementioned combination of market impact factors (oil) drove precious metals higher following the apparent indecision in price patterns that was on display on Tuesday when it appeared more likely that something in the way of a positive development was going to come out of Tripoli. Efforts to stop the bloodshed in Libya appear to be stalled as politicians try to seek consensus on how to proceed with an intervention and are thought to be looking to the UN for some sign of approval for such strategies.

Spot metals dealings started the midweek session with decent gains across the board. Gold was bid at $1,435.70 per ounce (up $6.80) in New York, while silver advanced 27 cents to open at $36.32 on the bid side. Platinum and palladium gained $8 and $7 respectively, with the former opening at $1,813.00 and the latter showing a bid at $797.00 per troy ounce. Prices are thought to continue to receive support from the yet-to-be-resolved Libyan situation, but there are also more and more caution flags being raised about gold and silver’s future price prospects, interim gains to new possible records notwithstanding.

For example, while allowing for the possibility that there is [still] some potential upside in gold over the next 12 months, Steven Cunningham, Director of Research and Education at the American Institute for Economic Research, believes that “we've [already] witnessed the biggest part of the run-up in gold.” Mr. Cunningham opines that gold, at present, "is overpriced and overbought," and he advises taking profits and also reducing one's overall exposure to gold to 10%, and then maintaining that fixed percentage. Ten percent is precisely what this writer has been recommending as an untouchable, core, insurance holding in the yellow metals since…oh, about 1976. Stick with it. You cannot go wrong.

Another, similarly less-than-uber-bullish opinion comes from Ms. Pauline Shum, an associate Professor of Finance at the Schulich School of Business at York University. Ms. Shum cautions that "it is unrealistic to expect gold to repeat its performance [of the last decade] in the next 10 years." Meanwhile, another academician is a tad more…blunt when it comes to dispelling the prognostications and assertions being made about gold nowadays all over the blogosphere. According to Economics Professor Michael Dooley at UC Santa Cruz, and a partner at Cabezon Capital Markets LLC, those who suggest that gold and silver are the new currency, “They are nuts. Gold and silver will never again be used as currency or to back currencies.” Now there is one Marketwatch piece that will very likely generate several hundred comments (and flames) before the day is over. Emotions are running high enough that it has already elicited 85 impassioned posts since when it appeared at midnight last night. (complete with allegations that it is nothing but a “hit piece on gold”).

Of course, at a time when “news” that is really not news (heard it dozens of times, ever since India bought 200 tonnes of gold), but a lot of bullish noise is still being made about it, such as the latest Chinese academic advising his central bank to sell dollars and buy gold, one can clearly see that the bull/bear camps are as divided as ever, and that the ‘twain shall never meet on neutral ground. That neutral ground –quite possibly- could be that same 10% set-and-forget allocation strategy that ignores annual gold price movements and focuses on the core presence of gold in a portfolio, instead.

In the market’s background today, the US dollar was down 0.15 on the trade-weighted index and was quoted at 76.64, while crude oil remained resilient and was indicated at $105.14 following a small, 12-cent rise. The pivotal 76.20 mark in the US dollar on the charts has not yet materialized, but traders are keeping a close eye on it potentially being touched and sparking further weakness (towards the 74 area) if in fact a close at or beneath that key figure does become reality.

Something that will very likely soon become a reality, are higher interest rates. Over the past month, more and more central bankers have started to sound more and more hawkish, despite the perceived threat that Col. Gaddfi’s descent into madness is thought to possibly pose to the world’s recovering economies. Spiking oil prices have prompted NYU Prof. Nouriel Roubini to prognosticate another dip and another round of QE to come from the Fed.

However, on Tuesday, European Central Bank Governing Council member Axel Weber said he doesn’t want to defuse market expectations for as many as three separate [!] quarter-point hikes in the ECB’s benchmark interest rate, and that they are likely to take place this year. Mr. Weber told Bloomberg News that he “wouldn’t do anything here to try to correct market expectations at this point. It was the intention of the ECB to bring forward market expectations and I see no reason at this stage to signal any dissent with how markets priced future policies,” he said.

Over in the US, the latest report in a relatively light-on-statistics week shows that mortgage applications gained 16% in the week ending on March the 4th, and that was the largest such rise since June of 2010. Purchases and refinancing on the rise may be signaling that the US housing market is finally stabilizing. Housing conditions and the jobs situation are the two pivotal “to-watch” items on the Fed’s and the Obama administration’s current agenda.

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