In the London market, oil fell by around $2 a barrel to $126 on June 3, after the US Federal Reserve issued a warning on the inflationary risk posed by a weak dollar.

One of the factors driving investment in commodities this year has been the weakness of the US currency, which encourages the buying of dollar-denominated commodities as a hedge against inflation.

Some analysts say oil’s rapid rise of about 30 per cent since the start of the year had a speculative element. That was the view of influential hedge fund manager George Soros.

Analysts said there was mounting evidence demand for oil was easing and expectations that Asian economies, which have led growth in fuel takes consumption, will slash subsidies because they have become too costly.

Indonesia, Sri Lanka and Taiwan have already announced cuts to subsidies, while Malaysia said it would scrap fuel price controls in August in a move that could double pump prices.

On June 4, oil prices fell below $123 in the New York market after the Energy Department said gasoline demand had fallen sharply a week earlier, while fuel inventories jumped more than expected.

In its weekly inventory report, the department’s Energy Information Administration said demand for gasoline fell by 1.4 per cent over the last four weeks. Meanwhile, gasoline inventories rose by 2.9 million barrels last week, more than three times the increase analysts polled by energy research firm Platts had expected.

Inventories of distillates, which include diesel and heating oil, rose by 2.3 million barrels. Investors shrugged off an unexpected decrease in crude oil inventories.

The Organisation of Petroleum Exporting Countries boosted crude oil output in May. According to estimates, daily production by all 13 of the group’s members in May rose by 1.35 per cent or 432,000 barrels a day from the previous month to 32.39 million barrels a day.

May’s production hike was largely driven by Opec’s top producer, Saudi Arabia, which at 9.35 million barrels a day pumped an additional 250,000 barrels a day of crude compared with April.

Although Iraq has managed to keep oil production at sustained high levels in recent months, it remains constrained since the US invasion in 2003. From the beginning of the year, the country is the only one outside Opec’s quota system.

Output was up by 30,000 barrels a day in Nigeria although production remained below capacity due to ongoing losses in supply as a result of unrest and sabotage in the Niger Delta, which have added to already heightened supply concerns. Nigeria’s production stood at 1.85 million barrels a day in May. Rising Opec output comes ahead of an expected increase in global oil demand in the next quarter as summer driving season in the US the world’s largest oil consumer, kicks in.

The 13-nation oil group, whose output meets around 40 per cent of the 87 million barrels consumed globally each day, is facing increased pressure from consumers in Europe and the US where there is rising concern that high fuel costs my lead to a steep economic downturn.

On June 5, oil jumped by $4 to over $126 a barrel in the New York market, as the dollar slid after the European Central Bank signaled it could raise interest rates this year. Investors have rushed into oil and other commodities as a hedge against the weak dollar and inflation helping drive crude to a record $135 a barrel in May.

Gold:

In the London market, spot gold fell as low as $875.10 an ounce on June 2. Earlier it touched an intraday high of $897.10 an ounce. A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

“Gold prices are likely to trade in a range-bound fashion over the forthcoming weeks as physical buying has shown signs of picking up as prices have dipped,” Barclays Capital said in a daily market report. But prices are most likely in need of a new catalyst to stimulate a sustained move higher.

South Africa’s Chamber of Mines said the country’s gold output fell 15.6 per cent to 52,228 kg in the first quarter of 2008, against the fourth quarter of 2007 due to a power shortage.

Platinum fell to $1,987/2,007 from $2,000/2,020 an ounce, but was seen underpinned by supply concerns, after Aquarius Platinum said on June 2 that a strike at its Everest mine would cost the producer some 1,300 ounce of metal.

Platinum spiked to a new all-time high earlier this year amid fears to electricity shortages in South Africa, the world’s largest producer, would cause a major supply shortfall.

Copper:

In the London market, copper prices fell on June 4, as investors retreated on fears about global economic growth and lower demand from China and the US, the world’s top two consumers.

The metal, used widely in the power and construction industries, traded at $7,870 a tonne in official ring, compared with $7,915 at the close a day earlier. Analysts reckon China consumes about 25 per cent of global copper output, estimated at around 18 million tones, while the United States uses about 15 per cent.

Growing perceptions that Chinese demand for copper will slip as the country’s government tries to curb growth and price pressures are fast gaining ground and have weighed on copper since it hit a record high of $8,880 a tone on April 17.

Copper stocks in LME warehouses fell 650 tonnes to 122,250, while aluminum stocks slipped 1,525 tonnes to 1,073,375.

Aluminum, used in power, packaging and transport, traded lower at $2,902 a tonne from $2,926 a tonne on June 3. Current levels are not far from the costs paid by the highest cost or marginal cost producers.

Severe winter weather in China earlier this year, which hit power supplies, convinced many investors to buy aluminum. Many are betting that power disruptions over the summer months in China, with about 30 per cent of global aluminum production, could push prices towards the record $3,310 a tonne set in May 2006.