August 5 2005 Commodities Commodity Strength Continues
The ongoing strength of the global economy, and in particular the US, China and India, continues to underpin demand for energy products and base metals. In fact, China is a key variable. With economic growth running at well over 9.0%, and showing no signs of letting up, appetite for key commodities continues apace. With regards to oil, one interesting fact is that just 0.73% of the Chinese population owns a car. Given the economic expansion and wealth creation being generated, this figure has the potential to explode over the coming years. Unless an alternative to oil is discovered, the commodity is unlikely to suffer any major price declines over a prolonged period of time, unless there is a global recession just around the corner – which we think unlikely. In fact, for now, the price of front month Brent crude still looks bid, even at US$61.00/b, in line with our long-held bullish view, and appears set to break even higher. Trendline support exists at US$58.00/b, with major support at US$54.00/b. Apart from the demand-side pressures, supply-side risks remain too, including recent refinery problems in the US. The key risk to supply, though, comes from the Middle-East where the ongoing violence in Iraq shows no sign of ending. In addition, Iran’s nuclear fuel programme has the potential to destabilise the whole region, and will keep the geopolitical risk premium on oil prices. We have concerns too about the lack of investment in oil production infrastructure in Russia, where new government legislation could limit the potential for foreign companies to drive the business forward. As for copper, the uptrend still appears very much in place too, although the front contract is currently meeting resistance at US$1.70/lb. Key support levels to watch are US$1.56 and US$1.52/lb.
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