Oil, commodities continue retreat on global economic slowdown concerns

Posted Aug 8th 2008 11:25AM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Other Issues, Good news, Commodities

Oil continued its month-long decline Friday, as investors and traders reduced their stakes in the world's most vital commodity on concerns slower global growth will slow demand for commodities and raw materials.

Oil fell $3.62 to $116.40 in mid-day Friday trading. Other major commodities also declined. Gold fell $18.30 to $859.60 per ounce, silver fell 87 cents to $15.38 per ounce, and copper declined $223 to $7,442 per metric ton.

The other major energy commodities also fell Friday. Unleaded gasoline fell 8 cents to $2.92 per gallon, heating oil declined about 10 cents to $3.13 per gallon, and natural gas dropped 19 cents to $8.37 per million BTUs.

Likely slower global GDP growth weighs on oil

Economist Glen Langan told BloggingStocks Friday two factors are driving oil lower. First, the prospect of slower economic growth will likely slow oil demand growth in emerging markets. Second, a stronger U.S. dollar is reducing the appeal of oil as a currency hedge.

The dollar strengthened about 3 cents versus the euro to $1.5043 and about 2.5 cents versus the British pound to $1.9190 on Friday at mid-day.

"Regarding oil and gasoline we know that demand destruction is occurring in the United States. Now, at least initially, it appears slowing trade and global GDP growth will affect oil demand in emerging markets, as well. If the latter is the case, oil could fall below $100 or even below $90 per barrel," Langan said.

Still, Langan was careful to point out to investors / readers two salient facts regarding oil's month-long push lower: 1) the short-term nature of the current move and 2) the power, secular, long-term, bullish factors regarding oil.

"Investors and consumers, for that matter, have to keep in mind the nature of what they're looking at regarding oil's price. We've seen an enormous bull run for oil in the past year alone, with oil up 100% when it hit $147 earlier this year. So the $30 drop can still be viewed as corrective," Langan said. "And when you pull the lens back even more, you see that oil sold for about $23 per barrel in early 2003, so a considerable move down, even $50 or $60, can occur and still be seen as merely profit-taking by long-term players."

"Also, the long-term demand factors remain in place. Emerging market growth and development will eventually resume after a slowdown, resuming pressure on oil, absent an affordable substitute," Langan said. "So no one should assume a return to 'cheap oil.' "

Oil Analysis: Economist Langan's analysis cautions against any euphoria regarding oil. A moderation in oil's price is welcome, and here's hoping it continues to the $90 or $80 level. But that shouldn't deflect businesses and consumers from long-term changes to use less oil, nor deflect the U.S. from finding oil substitutes.

Tags: British pound, copper, dollar, emerging markets, euro, gasoline prices, gdp, globalization, gold, inthenews, oil prices, oil shock, silver, U.S. economy