Commodities, inflation and interest rates

The upside price potential for crude oil is severely
limited:
• Since the last reduction of its daily production quota
in December 2008, OPEC has kept its daily output
unchanged at 25 million bpd. In the meantime, the
heightened demand has been satisfied by non-
OPEC countries such as Russia and Brazil. Because
many OPEC members are already exceeding their
quotas, it is likely that an official quota increase will
be announced in June.
• Given America’s reasonably buoyant economy, it is
improbable that the Fed will inject even more dollar
liquidity into the system. That will also drain fuel
from the commodity markets.
• The dollar is stable.
• Inventories are high.
• Monetary policy tightening in Asia is preventing a
further acceleration of growth in the commodityintensive
economies.
• For year’s end, we are currently reckoning with a
crude oil price of between USD 85 and105.
VP Bank crude oil forecast (WTI)
160
140
120
100
80
60
40
20
0
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Source: VP Bank, Bloomberg
VP Bank (Min & Max) Oil price (USD)
The bottom line:
The price of oil has adapted to the economic
conditions. Over the medium term, we expect to see
sideways trading in a range of USD 85–105. In terms of
the soft commodities, the upcoming harvest season will
dictate further price developments. The recent
increases have mainly been the result of special factors.
The related effects on inflation and inflation
expectations will be addressed in our next issue of
«News from the financial markets».
4/5 | Commodities, inflation and interest rates: Part 1 – Where will the commodity markets go from here?| February, 2011 | Economics & Investment Office