Commodity super cycle on verge of downward trend

07 May 2013

Analysts predicting 2013-14 could be the start of lower prices for commodities such as oil and gas

Since 1999 commodities prices have been in a bull market with record highs hit for oil, gold and other metals during the last 14 years.

This has become known as a ‘commodity super cycle’ and as the premier oil producing region the Middle East has been one of the largest beneficiaries of soaring prices.

However, despite the price increases of commodities during such a cycle lasting for 10-15 years, they are usually followed by a downward trend lasting anything up to 20 years.  

The oil industry has witnessed an incredible rise in prices with a barrel of oil selling for just $17 in January 1999, but hitting $147 in 2008 and averaging $111 in 2012.

This huge influx of petrodollars has given the region not the chance to reinvest billions in its oil hydrocarbons industry. It has also allowed many countries in the region to initiate extremely ambitious economic diversification programmes aimed at ensuring prosperity for many generations to come.

However, the recent drop in commodities such as gold, copper and iron ore has prompted many analysts to forecast that 2013-14 could be the start of the downward trend in prices. This is viewed as being more realistic than the massive drop in prices that occurred in the direct 2009 aftermath of the global economic crisis.

Weak economic data from the US and China has resulted in downgrades on demand forecasts and pushed prices down. The price for Brent crude is currently hovering at the $105 per barrel mark, but touched $100 in late April.

While oil remains in triple figures the major oil producers of the Middle East will be happy, but with demand forecasts lowering and the threat of a glut in supply fuelled by unconventional oil and gas sources the signs are worrying.  

A drop in prices could affect the Middle East hydrocarbons projects sector in a number of ways. Many projects that are aimed at developing unconventional oil fields will not be cost effective if oil prices dip to under $80 per barrel.

Unconventional gas schemes will still be deemed viable if the country needs the gas. Saudi Arabia’s chronic shortage of gas means the kingdom is burning much of its oil for power production. Producing gas even at $6 per million BTU still offers better value than burning oil.

In the downstream sectors large-scale petrochemicals schemes could be hit if manufacturing suffers a significant drop in key emerging markets such as China and India. Any further decrease in demand could affect new schemes aimed at the large production of polyolefins that rely on large-scale export to these markets.

The Middle East and Africa have got enormous growth potential and this could drive demand for commodities as huge construction projects are implemented.

However, with such uncertainty over commodity prices many of the region’s major economies may pause to think about how much money they spend on mega-projects across all sectors.   

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