A number of forces have aligned to drive commodity prices significantly higher in 2009. According to Deutsche Bank AG of London, the underlying fundamentals of supply and demand remain weak for many commodities, but commodities are benefiting from a combination of macro forces, including rising equity markets, a weakening U.S. dollar and a resurgent flow of funds into commodities. Since August 2008, oil prices have shown a strong link to movements in Standard & Poor’s 500 index. For every 50-point change in the S&P 500, there is a corresponding $7 per barrel move in the WTI crude oil price, reports the bank. At the same time, depreciation of the dollar is associated with rising commodity prices. For example, oil’s move from $35 per barrel in February, to $65 per barrel now, has coincided with the dollar moving from 1.26 to 1.41 per Euro. The more upbeat assessment of world economic outlook has been accompanied by a surge of inflows into commodities. While current equity markets have been responding to the favorable reports, during the past 20 years commodity prices have generally been negatively correlated with the U.S. dollar. Although Deutsche Bank’s three-month outlook allows for further weakening, its one-year view suggests the dollar may stage a mild recovery. “We believe U.S. growth needs to turn positive by September 2009 to justify the rally in global equity markets and to sustain inflows into commodities,” states the bank. “If U.S. growth disappoints, and the S&P 500 has to push back the date of a U.S. recovery, we believe the rapid surge in commodity price returns will reverse.” Several other factors are helping to propel commodities prices upward. These included the positive impact of government stimulus activities on infrastructure spending, the negative impact on expectations for future energy supply as lower prices and tight credit conditions have reduced capital spending, and worries that expansion of the Federal Reserve’s balance sheet indicates higher inflation ahead.
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