Credit Crisis Dropping Price of Oil and Other Commodities

It wasn't long ago (three weeks to be exact) that everyone was talking about the threat of inflation. Now as commodity prices collapse, everyone is talking about deflation. The credit crisis has done the Fed's work on the inflation front. I expect rates are going to drop.

It wasn't long ago (three weeks to be exact) that everyone was talking about the threat of inflation.  Now as commodity prices collapse, everyone is talking about deflation.  The credit crisis has done the Fed's work on the inflation front.  I expect rates are going to drop. 

According to Bloomberg:

"The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. UBS AG, the Zurich-based bank that bought Enron Corp.'s energy unit in 2002, plans to exit most commodity trading. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back.

The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 36 percent, and corn, down 43 percent.

``The day of steadily rising commodity prices is over,'' said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.''

Oil is now below $90 a gallon and is poised to fall further.  It's clear that the speculators have been washed out by the credit crisis.  At least that's one benefit of everything that has happened over the past several weeks.

Look for the Fed to drop rates.  We've already seen drops in CD rates as banks anticipate falling rates and their demand for dollars lessens with the passage of the bailout plan.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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