The Organisation of Petroleum Exporting Countries (Opec) decided to freeze production at current levels at a meeting in Abu Dhabi in the first week of December. Opec justified the decision on its assessment that it is already pumping enough crude to meet winter fuel demand after a September decision to lift output. The conference emphasised the organisation’s determination to keep the market stable by maintaining a balance between supply and demand.
Crude oil prices jumped after the US Department of Energy warned that despite an economic slowdown in the US, global oil demand would grow much faster than non-Opec supply. That will leave Opec supplies and stocks to offset the resulting upward pressure on prices.
The Department of Energy forecast that oil will average $87 a barrel in the first quarter of 2008 and $84.8 over next year, well above Wall Street’s consensus of about $74.5 for 2008.
Prices rose further after an ice storm in the Midwest paralysed pipelines feeding a key US crude storage hub. Nymex January West Texas Intermediate rose $2.14 to settle at $90 a barrel, while ICE January Brent rose $1.90 to $89.94.
Oil prices had risen in recent days to above $89 a barrel, ahead of the meeting of the US Federal Reserve that was widely expected to cut interest rates. The Fed trimmed benchmark inter-bank interest rates by a quarter percentage point to 4.25 per cent and cut the discount rate it charges banks for loans by the same amount to 4.75 per cent
This move is likely to shore up US economic growth prospects and may pressure the dollar downward. The greenback’s weakness has been supportive for dollar denominated commodity markets such as oil. Still, high oil prices, if sustained, may damp global demand growth in the long run. The IEA has been trimming its forecasts for 2008.
Major crude producer Iran has completely stopped carrying out its oil transactions in dollars, Oil Minister Gholam Hossein Nozari said recently. The world’s fourth largest oil exporter, Iran has massively reduced its dependence on the dollar over the past year in the face of US pressures on its financial system and the fall in the dollar. In the past, most oil income was in euros, with a significant percentage in yen. Iran has in the past months been whittling down the proportion of dollars in its oil revenue income.
Gold had been stuck in a tight range in recent days, ahead of the US Federal Reserve’s decision on interest rates. Investors had avoided taking big positions because of the expected rate cut.
Gold has bounced almost 4 per cent since falling to $777 on December 3, its lowest since November 20, as investors and speculators booked profits ahead of the year-end after pushing up the price to its highest since January 1980 at $845.40 in early November.
A cut in interest rate tends to lower the dollar’s appeal as an attractive investment, with people switching to other assets, such as gold, for higher returns. Gold is also traditionally seen as a safe-haven asset in difficult times.
In industry news, South African gold output fell 5.8 per cent in volume terms in October compared with the same month the previous year, official data showed on December 11.
The Federal Reserve has recently announced the creation of a temporary short term lending facility to ease credit market strains in concert with market calming actions by the European Central Bank and the central banks of Canada, England and Switzerland.The Fed has also cut its interest rates by a quarter percentage point. An interest rate cut lowers the cost of borrowing and makes bullion more attractive compared with fixed income investments.
Gold futures dropped in the New York market in electronic trade, as bullion investors were disappointed that the Fed did not take more aggressive actions. The February contract hit a bottom of $802.2 in overnight sessions. Rising energy prices also boosted gold’s appeal as a hedge against oil led inflation US crude futures surged about $4 above $94 a barrel on December 12.
Analysts said weakness could be seen in gold near the end of the year and in 2008 Goldman Sachs forecasts spot gold to average $750 an ounce for the next 12 months.
Copper prices slipped in the London market as investors fretted over weaker demand for metals and the market remained wary of making big bets ahead of a US Federal Reserve rate decision.
Lead prices were down around 2 per cent after an Australian state environmental body strengthened expectations of lead exports resuming from Ivernia’s suspended Magellan mine in Australia.
Copper for delivery in three months on the London Metal Exchange was at $6,830 per tonne on December 10, down $81 from December 7.
Copper has lost almost 20 per cent since the start of October on signs of weakening demand from China, the world’s top consumer of the metal, and credit losses have weighed on industrial metals.
There was some weakness in lead prices, with the three month contract sinking 5.5 per cent to $2680 a tonne. The weakness has been attributed to the liquidation of long positions, which triggered technical selling.
Speculation that the Magellan mine in Australia, which produces 3 per cent of global lead output, could restart production next year has weakened sentiment towards the metal. The Australian government has yet to grant approval for a restart, but the recent news that Chinese buyers have agreed to take up to half Magellan’s output has encouraged hopes that production will be restored early in the new year.
Western Australia’s Environmental Protection Authority is due to decide shortly whether Ivernia, the Canadian company that owns Magellan, can use the port of Fremantle to ship some of its existing lead stockpiles, which would bring a further improvement in supply. Early weakness encouraged further selling by momentum players and the price dropped 8.2 per cent at one stage before recovering.
Lead prices have fallen 31.1 per cent since hitting a record $3,890 a tonne in October and traders said some of the negative sentiment towards lead had been fuelled by rumours that a large fund had been trying to exit from a substantial long position.Supplies from China, which accounts for almost one-quarter of global refined lead output, have been constrained by onerous tax changes and that the difference between LME and Shanghai prices is insufficient for Chinese smelters to export refined lead profitably.
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