Financial Stories Of The Year - 2015

Crumbling Commodity Prices

 "From Beginner's Point of View"

"We just have too much energy hitting the world," says Suzanne Minter, manager for oil and gas consulting at Bentek Energy, a division of Platts.

MCX INDIA- 2015

The year has witnessed a substantial decrease in commodity prices, or in other words, anything that can be burnt to power a car, heat a home, make electricity or ship people and goods around the globe is being sold at bargain basement prices. The prices of necessary commodities, natural gas, diesel, gasoline are almost nothing as compared to the values of same a few years back.

So, its a finance based story, and the tagline itself screams out loud -'Commodity prices'.  Let's define it first to make it simple for a beginner- "Commodity prices are the prices associated with the purchase of a commodity". These commodities may be priced based on weight, or in the case of oil, by barrel.

Consumers are refilled with a hope of profit and they are jubilated by the changing trend of commodity exchange. Fossil fuel companies are reeling. Countries that import energy, such as the U.S., China, Japan and those in the European Union, are getting an economic boost. Exporters, such as Russia, Saudi Arabia and Venezuela are facing lower income and budget shortfalls.

Moving on, an introduction of another term is needed on the course of this write-up, i.e. Commodity Index.

" It is an index that tracks a basket of commodities to measure their performance. These indexes are often traded on exchanges, allowing investors to gain easier access to commodities without having to enter the futures market. The value of these indexes fluctuates based on their underlying commodities, and this value can be traded on an exchange in much the same way as stock index futures."

Let's take a glance over the Commodity Price Index chart of 5 year interval, taken between November,2010 and November,2015 (Source: International Monetary Fund) :

(Click to Enlarge)

One can easily derive the current position of commodity prices from the graph. The influence on the prices of basic commodities is tremendous and the reasons are given as under (Source: NBC news):

Crude oil

Huge increases in oil production in the U.S. and Canada, along with sizable gains in Iraq and elsewhere, helped boost global supplies. Saudi Arabia and other OPEC (Organization of the Petroleum Exporting Countries) nations kept pumping crude at high levels. Iranian crude could soon return to the market after being kept off by sanctions. Meanwhile, global demand for crude is not as strong as expected because China's growth has cooled and other economies have become more energy efficient.

Coal

Demand for coal is growing globally, but local mining capacity is also growing. Pollution concerns and slower global economic growth are also keeping a lid on coal demand.Coal is sitting in piles or being left underground as U.S. electric power generators burn cheap natural gas instead. In April natural gas briefly overtook coal as the top fuel for electric power for the first time.

Fuels

When oil prices fall, the cost for refiners to turn it into petroleum products and fuels goes down. U.S. refineries have been running at full strength, and big new refineries in Saudi Arabia and elsewhere have added to global supplies of fuels.

Natural Gas

Relatively mild weather has tempered demand for heating and electricity generated by gas-burning power plants. Around the world, natural gas prices have also fallen because they are often linked to the price of crude and production of liquefied natural gas that can be shipped overseas is ramping up.

The Financial Doctor's Perspective

Low price of commodities do have some shortcomings and brilliance at the same time, while the low prices are good for consumers, the energy company profits are crushed manifold. Sales at retailers haven't spiked, as economists thought they might, consumer spending is growing faster than the overall economy, suggesting lower fuel prices have helped.

Let's wait and watch what the year 2016 is packed with, whether the consumers will get more money to spend and bloom in this decreasing index, or the grand companies like, Shell, Chevron, Exxon, BP etc. will find a way to get their profit shares back.