WSJ.com - Crude Oil Fuels Commodities Rally
WSJ.com - Crude Oil Fuels Commodities Rally
Led by Highflying Energy Sector,
Indexes Are Near Highs for Year;
Signs of Inflation Spark Concern
By PETER A. MCKAY
Staff Reporter of THE WALL STREET JOURNAL
October 3, 2005; Page C9
Soaring energy prices have grabbed most of the attention since the hurricanes that smashed into the Gulf Coast, but the rest of the commodity sector also is booming, with no end in sight in the fourth quarter, economists say.
Both the broad-based Dow Jones-AIG Index of 20 commodities and the Reuters/Jefferies CRB Index, another broad-based commodity indicator, are near their highs for the year.
THE JOURNAL REPORT
See the complete Stock Market Quarterly Review.Zinc is near an eight-year high at around $1,420 a metric ton, copper is near a record, at $1.7275 a pound, and lumber is up almost 10% since Hurricane Katrina struck in late August -- each boosted in part by its necessity in the vast rebuilding effort along the Gulf Coast. A metric ton is equal to 2,204.62 pounds.
Led by the energy sector, the Dow Jones-AIG Index ended the third quarter up 16.6%, or 25.37 points, at 178.25, while the CRB index rose 8.7%, or 26.66 points, to 332.97.
Although the price of crude oil is back near pre-Hurricane Katrina levels, at $66.24 a barrel, natural gas has posted the biggest gains, up more than 42% since the storm hit in late August and nearly double in price for the quarter, to $13.921 a million British thermal units. Inventories of natural gas and heating oil are low heading into winter -- a situation expected to produce massive heating bills for consumers.
Gold futures are up 6.8%, or $30.20, since the first storm struck, and are up 8.1% for the quarter, near an 18-year high at $472.30 a troy ounce in New York trading -- a sign of rising inflation fears.
Investors' attention seems to have quickly shifted to possible inflation -- and away from a possible short-term slowdown in economic growth -- following Hurricane Katrina. Initially, traders worried that consumers would be spooked, and that skyrocketing gasoline prices would cut into consumers' purchases of other goods. Wall Street professionals even pondered whether the Federal Reserve might end its series of interest-rate increases to prod Americans to keep spending.
That changed quickly. The $200 billion-plus President Bush has promised in federal relief was viewed by investors as economic stimulus. Bottlenecks at ports proved to be a manageable hindrance, and Hurricane Rita turned out to be a weaker follow-up storm. The Fed raised rates again by a quarter-point in September. Commodity prices -- often a barometer of inflationary pressure -- took off again.
The hurricanes hit as the bull market for raw materials, which had run for more than three years, was considered to be past its prime by many analysts. Now, many economists say they don't expect a significant pullback in commodity demand and prices until sometime next year, perhaps by June.
"We're now in the phase of the economic cycle when you should start to pay attention to these successive rounds of price increases," says economist Ethan Harris of Lehman Brothers. "Usually, people just shrug off commodity-price inflation until they see" a long-term rally.
One notable exception to recent commodity gains has been grain-futures prices, which fell when investors feared U.S. exports wouldn't be able to get out of the Port of New Orleans. Because such contracts guarantee delivery of grain stored in U.S. warehouses, their prices tend to go down if traders are worried that stockpiles are stranded, unable to get to markets overseas that are supposed to be their final destination. Those fears soon eased, but then bumper harvests sparked a fresh wave of selling.
On the Chicago Board of Trade, contracts on corn soybeans and corn are off more than 4% since Hurricane Katrina and are off more than 11% for the quarter. Wheat futures bucked the trend, up 4.4% on the quarter and 5.7% post-Hurricane Katrina, at $3.4625 a bushel on the CBOT.
The recent strength in most of the commodity sector is unusual because it has come in the absence of a weakening dollar, says Richard W. Asplund, chief economist for the Commodity Research Bureau.
In the first few years of commodities' latest run-up, many analysts cited a weaker dollar as a catalyst. Most commodities are traded globally in dollar terms. When the dollar declines in value, it takes more dollars to buy the same amount of resources, so prices tend to increase, all other factors being equal.
Mr. Asplund and other experts believe this year's gains have been demand driven, because the Federal Reserve's series of rate increases have, in effect, taken dollars out of circulation, supported the currency's value, and eliminated it as a concern for commodity traders.
The Fed is widely expected to stop raising interest rates early next year. If that happens, commodities could take off again, in a surge that could finally push prices high enough to prompt users to cut back, Mr. Asplund says, thus causing prices to decline.
"Until that point, you could just see commodity prices chopping around in a tight range the rest of the year," he says.
Economist James Glassman of J.P. Morgan Chase & Co. expects to see an economic "soft spot" in the first half of 2006, after the effect of big heating bills begins to hit consumers, leading them to cut back other purchases.
Unlike some of his peers, though, Mr. Glassman isn't too worried about inflation in the latest commodity rally. "The thing that keeps the higher prices from being inflationary is that businesses are saving money on labor, because of low-cost competition from China and other places," he says. "If businesses spend more on commodities, but less on labor, they keep their overall spending in check."
Led by Highflying Energy Sector,
Indexes Are Near Highs for Year;
Signs of Inflation Spark Concern
By PETER A. MCKAY
Staff Reporter of THE WALL STREET JOURNAL
October 3, 2005; Page C9
Soaring energy prices have grabbed most of the attention since the hurricanes that smashed into the Gulf Coast, but the rest of the commodity sector also is booming, with no end in sight in the fourth quarter, economists say.
Both the broad-based Dow Jones-AIG Index of 20 commodities and the Reuters/Jefferies CRB Index, another broad-based commodity indicator, are near their highs for the year.
THE JOURNAL REPORT
See the complete Stock Market Quarterly Review.Zinc is near an eight-year high at around $1,420 a metric ton, copper is near a record, at $1.7275 a pound, and lumber is up almost 10% since Hurricane Katrina struck in late August -- each boosted in part by its necessity in the vast rebuilding effort along the Gulf Coast. A metric ton is equal to 2,204.62 pounds.
Led by the energy sector, the Dow Jones-AIG Index ended the third quarter up 16.6%, or 25.37 points, at 178.25, while the CRB index rose 8.7%, or 26.66 points, to 332.97.
Although the price of crude oil is back near pre-Hurricane Katrina levels, at $66.24 a barrel, natural gas has posted the biggest gains, up more than 42% since the storm hit in late August and nearly double in price for the quarter, to $13.921 a million British thermal units. Inventories of natural gas and heating oil are low heading into winter -- a situation expected to produce massive heating bills for consumers.
Gold futures are up 6.8%, or $30.20, since the first storm struck, and are up 8.1% for the quarter, near an 18-year high at $472.30 a troy ounce in New York trading -- a sign of rising inflation fears.
Investors' attention seems to have quickly shifted to possible inflation -- and away from a possible short-term slowdown in economic growth -- following Hurricane Katrina. Initially, traders worried that consumers would be spooked, and that skyrocketing gasoline prices would cut into consumers' purchases of other goods. Wall Street professionals even pondered whether the Federal Reserve might end its series of interest-rate increases to prod Americans to keep spending.
That changed quickly. The $200 billion-plus President Bush has promised in federal relief was viewed by investors as economic stimulus. Bottlenecks at ports proved to be a manageable hindrance, and Hurricane Rita turned out to be a weaker follow-up storm. The Fed raised rates again by a quarter-point in September. Commodity prices -- often a barometer of inflationary pressure -- took off again.
The hurricanes hit as the bull market for raw materials, which had run for more than three years, was considered to be past its prime by many analysts. Now, many economists say they don't expect a significant pullback in commodity demand and prices until sometime next year, perhaps by June.
"We're now in the phase of the economic cycle when you should start to pay attention to these successive rounds of price increases," says economist Ethan Harris of Lehman Brothers. "Usually, people just shrug off commodity-price inflation until they see" a long-term rally.
One notable exception to recent commodity gains has been grain-futures prices, which fell when investors feared U.S. exports wouldn't be able to get out of the Port of New Orleans. Because such contracts guarantee delivery of grain stored in U.S. warehouses, their prices tend to go down if traders are worried that stockpiles are stranded, unable to get to markets overseas that are supposed to be their final destination. Those fears soon eased, but then bumper harvests sparked a fresh wave of selling.
On the Chicago Board of Trade, contracts on corn soybeans and corn are off more than 4% since Hurricane Katrina and are off more than 11% for the quarter. Wheat futures bucked the trend, up 4.4% on the quarter and 5.7% post-Hurricane Katrina, at $3.4625 a bushel on the CBOT.
The recent strength in most of the commodity sector is unusual because it has come in the absence of a weakening dollar, says Richard W. Asplund, chief economist for the Commodity Research Bureau.
In the first few years of commodities' latest run-up, many analysts cited a weaker dollar as a catalyst. Most commodities are traded globally in dollar terms. When the dollar declines in value, it takes more dollars to buy the same amount of resources, so prices tend to increase, all other factors being equal.
Mr. Asplund and other experts believe this year's gains have been demand driven, because the Federal Reserve's series of rate increases have, in effect, taken dollars out of circulation, supported the currency's value, and eliminated it as a concern for commodity traders.
The Fed is widely expected to stop raising interest rates early next year. If that happens, commodities could take off again, in a surge that could finally push prices high enough to prompt users to cut back, Mr. Asplund says, thus causing prices to decline.
"Until that point, you could just see commodity prices chopping around in a tight range the rest of the year," he says.
Economist James Glassman of J.P. Morgan Chase & Co. expects to see an economic "soft spot" in the first half of 2006, after the effect of big heating bills begins to hit consumers, leading them to cut back other purchases.
Unlike some of his peers, though, Mr. Glassman isn't too worried about inflation in the latest commodity rally. "The thing that keeps the higher prices from being inflationary is that businesses are saving money on labor, because of low-cost competition from China and other places," he says. "If businesses spend more on commodities, but less on labor, they keep their overall spending in check."
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