The Reuters CRB Commodity index touched a three year high but is still more than 50% below peaks seen in 2008. The recent rally in crude oil and Aluminium is more due to supply concerns than demand surge, though an improving global economy has definitely improved prospects for commodity demand. However, the pace of global growth still lags growth seen in the 2000-2010 decade by a wide margin, especially China where growth is down from double digit levels to below 7% levels.
The move towards clean energy and the investments in electric vehicles, solar and wind power is also a deterrent for high growth in demand for oil. Commodities will move on supply disruptions and segmented demand but the commodity index is unlikely to go back towards peaks.
The Thomson Reuters/Core Commodity CRB index is a commodity index that tracks a basket of 19 commodities that are traded on the NYMEX, CBOT, LME, CME and COMEX Exchanges.
CRB index surged more than 4% in the last 10 trading sessions, touching the mark of 203, which is the highest level seen since October 2015. CRB index started surging mainly because of sudden jump in prices of Crude Oil, Gold, Aluminium, Cocoa & Nickel. Together these 4 commodities have a weight of 41% in CRB index.
The price of crude oil rose above USD 68 a barrel on 18th March 2018 for the first time since December 2014 after latest data from EIA showed US crude inventories fell by 1 million barrels. Risks of supply disruptions in the Middle East and Venezuela and renewed US sanctions against Iran also buoyed prices. Brent crude is trading at two and half years high of USD 74 per barrel.
Sudden rise in the price of crude oil can have an impact on the raw material costs for petroleum and petroleum derivative products. There are many sectors that depend directly or indirectly on crude oil as many of its fractional distillates and derivatives are used as raw materials in manufacturing of different varieties of chemicals. Sectors such as Paint, Aviation, Lubricants and FMCG will feel the burnt from rising oil prices.
Aluminium prices rose almost 24% in the last 10 trading sessions to USD 2537 per tonne on 18th April 2018, hitting the highest level since August 201,1 as concerns rose over Russian supplies. The metal prices have surged because the United States announced new sanctions on Rusal, the largest aluminium producer outside China.
Nickle prices rose almost 14% in the last 10 trading sessions to USD 15275 per metric tonne on 18th April 2018, hitting the highest level since January 2015 because of worries that Russia sanctions will hit Norilsk Nickle, the second largest producers in the world. Given higher growth prospects for Electric Vehicles, the demand for Nickle is witnessing an uptick in the spot market because of its key role in manufacturing Lithium ion batteries.
What would be the impact of rising commodity prices on global economies?
- Surging commodity prices would lead to higher inflation in both exporting and importing countries and global growth imbalances will be minimised. Currently technologically advanced countries such as US, Japan and Germany are growing faster than countries such as Russia, Brazil, Middle East and other commodity export driven economies, such economy growth imbalances would fall.
- India imports more than 75% of its oil requirement, this accounts for almost 1/3rd of total imports of India. Every USD 10 rise in oil price per barrel will increase current account deficit by USD 9.2 billion. Oil has recovered from all time lows of USD 32 per barrel to USD 74 per barrel, which translates to USD 36.8 billion increase in fiscal deficit.