30/12/2007 (The Hindu Business Line), Mumbai - Commodity markets were shaken out of the laidback style that usually marks this time of the year, the holiday season. Perceived geopolitical risk following political developments in Pakistan on Thursday had an immediate impact on the crude market and on gold as well.

Uncertainty following the terror strike pushed crude higher ($96 a barrel). Concerns were developing in Northern Iraq too; and inventories across the OECD countries and especially in the US were declining. Market fundamentals continue to tighten, creating conditions for a surge in prices.

Not surprisingly, gold followed suit. Together with a weak dollar, the rising crude propelled gold to a recent high (above $830 an ounce). Gold is known as a safe haven investment and a hedge against inflation. In times of uncertainty, investors take refuge in the yellow metal.

What’s in store?
What has the New Year in store? As far as gold is concerned, there is belief the market could come in for some correction once the latest geopolitical dust settles down. The market will see a bit of profit taking. However, in medium-term there is optimism that prices will breach the $850/oz level on the back of weakening dollar and creeping inflation in the US.

Crude too is likely to maintain its uptrend in the medium-term, given the tightening fundamentals. Experts are revising upwards their price target for the first quarter of 2008. There is strong belief that crude would breach the psychological level of $100 a barrel in the New Year. That would be inflationary for economies dependent on oil imports.

Base metals complex has been under pressure in recent weeks in the wake of concerns over the possibility of US economic slowdown and slump in housing activity. But here again, market fundamentals are tightening, and 2008 may well see resumption of an upward march in the prices of many base metals, especially copper and nickel.

Agri Situation
Agricultural commodities such as wheat, corn and vegetable oils (soyabean oil, palm oil) have enjoyed a dream run in prices for the last several months. There is no respite in sight as far as vegetable oils are concerned. No doubt, inventories of palm oil are building up rapidly in Malaysia and Indonesia. There is also some slowdown in demand from the food sector.

But, biodiesel demand continues to look robust. With the prospects of crude market remaining strong, the possibility of a major correction in the vegetable oil market looks doubtful in the first quarter of 2008. To what extent supplies will respond to high prices will be known towards the end of the second quarter when acreages in major producing countries in the northern hemisphere are known.

The domestic agricultural commodity market looks set for a major inflationary spiral. On current reckoning, there is risk that the actual production of Rabi crops — wheat, oilseeds, pulses — may fall short of the target. Domestic prices will be increasingly dictated by international trends.

Sugar is perhaps the only major commodity that does not enjoy a major upside risk over the next three months; but in the second quarter the market could change direction.