Commodities bull-market continues
Chris Flood

Oil prices edged lower on the last trading day of 2006 as dealers squared their books and reflected on a remarkable year for commodities.

Record prices were achieved for crude oil and many metals in 2006 while agricultural commodities also joined the party as corn, wheat and orange juice soared to multi-year highs.

Stronger-than-expected demand growth and interruptions to supplies, particularly in Nigeria, helped Brent reach a record of $78.49 a barrel in August. Some dealers thought a spike above the $100 level was inevitable but prices retreated sharply in the autumn as it became apparent that the market remained well supplied.

US crude stocks remained well above their long-term average approaching winter and proved a key factor in dragging oil prices down by about 20 per cent from their peak to a year low below $56 a barrel in November.

The Organisation of the Petroleum Exporting Countries felt it necessary to stabilise the market and cut production in October and again in December, reducing output by a total of 1.7m barrels a day. Opec’s cuts tightened the market significantly and cemented a widespread perception that the $60 level was the acceptable price “floor” for the cartel.

US crude prices have averaged $66.12 a barrel this year, an increase of 16.8 per cent on 2005, well above the price range forecast by analysts at the start of 2006.

On Friday, ICE February Brent slipped 39 cents lower to $60.28 a barrel while Nymex February West Texas Intermediate eased 23 cents to $60.30 a barrel in thin trade.

The US natural gas market provided the year’s most noteable casulty with the demise of the hedge fund Amaranth which lost billions of dollars betting fatally on rising prices. Instead, US natural gas stocks swelled to record levels, ensuring severe pressure on prices. Nymex February Henry Hub traded at $6.20 per million British thermal units on Friday with the front-month contract down by 41 per cent since the start of the year.

Gold traded at $633.90 a troy ounce on Friday amid renewed concerns over Iran following the UN Security Council vote to impose sanctions in an attempt to halt Tehran’s nuclear enrichment programme.

Geo-political tensions and concerns over the inflationary impact of high oil prices were two key factors in pushing gold to a 26-year high of $730 a troy ounce in May. Gold averaged $604.42 a troy ounce this year, an increase of 35.7 per cent on 2005. Jewellery demand was hurt by high and volatile prices but gold exchange traded funds enjoyed strong inflows, reflecting investors interest.

The launch of a silver exchange traded fund helped silver prices rise to a 25-year peak of $15.17 a troy once in May. Silver averaged $11.56 a troy ounce in 2006, a 58 per cent increase on the previous year.

Platinum prices hit a record $1,395 a troy ounce in November, with increasingly strict environmental standards leading to growing demand from the autocatalyst sector. Platinum averaged $1,142 a troy ounce in 2006, a 27 per cent increase on the previous year.

Copper, nickel, zinc and lead all hit record highs this year as inventories remained at critically low levels so any interruptions or threats to supplies translated inexorably into upward pressure on prices.

Hedge funds and speculators found agricultural commodities provided some of the most rewarding price action of the year.

Global warming meant forecasts for this years’ world grain harvests were revised lower and drought conditions threatened to devastate Australian wheat production. In Chicago, wheat prices traded 7½ cents lower at $496¾ a bushel on Friday while March corn traded at $389¼ a bushel yesterday with both contracts hitting 10-year highs in November.

Orange juice prices traded at $2.015 a pound after hitting a near 30-year high earlier this month with this year’s Florida’s crop estimated at 140 million, 90-pound boxes, the smallest since the harvest of 1991-92.

Copyright The Financial Times Limited 2006