Transcripts

Markets at Midyear 2008 - What's Driving Commodities Higher?

SUSIE GHARIB: As Suzanne reported, the direction of the stock market in recent months was driven mostly by what was happening with oil prices. But oil was just one of many commodities whose prices headed sharply higher in the first half. Midwest bureau chief Diane Eastabrook reports on the reasons behind that trend.

DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: A weak dollar and strong demand led to a surge in the prices of most commodities in the year's first half. The Reuters/Jeffries CRB index which tracks commodity prices was up more than 20 percent through the end of June. The energy sector led the way and although oil and gasoline grabbed most of the headlines, price rises were across the board. For example, natural gas prices increased roughly 70 percent in the first half of the year after a full winter drew down supplies. The price of oil went up almost continuously, breaking $100 in January and then continuing to set new records ultimately breaking past $140 a barrel. Besides the role of increased worldwide demand and the lower value of the dollar, the currency in which oil trades, unrest in the Middle East, also played a role in driving the price rise. Sheraz Mian, energy analyst for Zack's Investment Research thinks oil could remain volatile in the months ahead.

SHERAZ MIAN, ENERGY ANALYST, ZACK'S INVESTMENT RESEARCH: There will always be occasional short-term spikes from current levels. I don't expect crude prices to move substantially higher from current levels. I would expect crude prices in a $15-$20 range up or down from current levels.

EASTABROOK: Oil strength also played a role in driving crop prices higher by promoting the increased use of American corn in ethanol. Corn headed towards $8 a bushel. Wheat prices soared early this year when bad weather threatened crops in Argentina and Australia. In the spring, corn and soybean prices soared when torrential rains flooded parts of the Midwest. Shawn McCabridge, senior grant analyst for Prudential Bache Commodities says tight inventories of corn could drive prices even higher.

SHAWN MCCAMBRIDGE, SR. GRAIN ANALYST, PRUDENTIAL BACHE COMMODITIES: (INAUDIBLE) going well this year. We still have good demand. So the function of the market becomes to ration that demand through the higher prices. These volatile price levels are going to be with us quite some time.

EASTABROOK: A sluggish U.S. economy and the weak dollar put the shine to gold since it's seen as a safe haven when the dollar tanks. It soared to a record of nearly $1,000 an ounce in March when brokerage firm Bear Stearns nearly collapsed from bad loans. Prices have since backed off from that level but Danny O'Neal, executive vice president of futures for Options Express says a new economic worry is keeping the floor under gold.

DANNY O'NEIL, EXECUTIVE V.P. OF FUTURES, OPTIONSXPRESS: The other big factor is, of course, inflation concerns. Gold is widely recognized as an inflationary hedge that stores its value when traditional paper currencies might be eroding in value.

EASTABROOK: The bull market for commodities has drawn attention from Washington where lawmakers are investigating whether speculators are helping to push some prices higher than they should be. Analysts admit there has been strong investor interest in commodities but many think the sector is mostly responding to a global supply imbalance. Dianne Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.