Commodities have come under broad pressure in the past couple of weeks. Oil prices in particular have been facing headwinds, and have fallen from $147/bbl to $125/bbl, but metal and food prices have also cor-rected. Corn, for example, has fallen almost 20% from its peak in late June. Lower commodity prices are good news for the world's central banks, not least the ECB and Sweden's Riksbank, which have been heavily fo-cused on headline inflation.
Oil is the commodity benchmark - and sentiment has shifted. The players in the oil market have suddenly re-alised that the global economy is starting to react to elevated oil prices. Not only has the economic slow-down deepened in the US, it has also spread across the Atlantic to Euroland. The US is still the world's largest consumer of oil, but US petrol consumption is now 3% down on a year ago and the number of kilometres driven has fallen 3.7% y/y. Airlines have cancelled routes and grounded planes. However, the clearest il-lustration of how expensive oil has affected behaviour is probably large pick-up and SUV sales - which are down a whopping 30% compared to six months ago. Americans are beginning to react to the hefty hikes in oil prices by buying smaller more fuel-efficient cars and travelling less.
This "demand destruction" will probably continue in the coming months, and oil prices could well fall further. Looking ahead to 2009, however, this does not alter the picture of a still rather tight oil market. Demand for oil remains buoyant in Asia and the Middle East, supply still has problems keeping up, and prices probably do not have to sink much further before OPEC begins to consider cutting back production. Nevertheless, the fact that demand is now being affected by the higher prices means that one can confidently dismiss the doomster prophecies of oil at $200 or higher in the coming year.
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