Commodity Blog

Posts Tagged ‘gold’

Silver has history of being a traditional store of value. It is also used in industry, medicine, photography, jewelry manufacturing and in the making of coins. But should investors consider this precious metal when devising their trading strategies these days, when everyone’s attention seems to turn to gold, and how the commodity will perform in the future?

Analysts predict that silver will follow gold performance, which means it should steadily rise in 2010. It is not unexpected if we’ll recall the fact that most factors favorable for gold, like declining dollar and demand for commodities as investment assets, are also bullish for other precious metals, including silver. But, what’s even more interesting, some factors, that are bearish for gold, are in the same time favorable for silver. Just think how many investors and consumers will be repelled from gold by its skyrocketing price. And all these people may turn their attention in silver.

There are still some factors which are bearish for silver. With widespread use of digital photography demand for silver in photography industry was diminishing at pace around 10% a year and even 16% in 2008. Yet this decline in demand can be easily offset by demand from other industries like medicine, where silver used because of its antibacterial qualities. And while new technologies are replacing the old, silver is finding new applications, laptops and cell phones being the examples of modern technologies requiring silver.

Demand from industry rise as economy rebounds. Will supply satisfy this demand? It is not likely. It is true that output in China Russia, Mexico, Peru, Australia, Turkey and Bolivia is growing. But about 80% of silver are mined as a byproduct of other base metals and there are only a few pure silver mines left, with their reserves are depleting. And we should remember that most silver is not recycled, like gold, as it has much lower value. Therefore silver is gone forever after it is used.

Demand for silver is rising while stockpiles are dwindling. Analysts estimate silver price in 2010 in the range from $25 to $27.50. But as silver is greatly undervalued compared to gold, we can expect even greater increase in price of the precious metal in the future years as trader turn their attention to this less expensive but quite profitable commodity.

Gold purchases rose 38 percent in the first quarter, led by investment demand that exceeded usage by jewelers for the first time since at least 2004, according to the World Gold Council.

Global demand increased to 1,015.5 metric tons, from 733.9 tons a year earlier, the London-based council said today in a report based on figures from research company GFMS Ltd. Investment purchases more than tripled to 595.9 tons while jewelry demand fell 24 percent to 339.4 tons.

Gold rose to an 11-month high of $1,006.29 an ounce on Feb. 20 as governments spent trillions of dollars to fight recession, sparking speculation inflation will accelerate. In India, the world?s largest gold buyer last year, jewelry demand was the lowest in at least 20 years and net retail investment turned negative for the first time as holders sold metal for recycling, the council said. Chinese demand was six times that of India.

Gold prices could easily trade above $1,000 a troy ounce in the coming months and may even trade above $1,100/oz from investor demand, but the rise won’t be a straight line, U.K.-based GFMS Metals Consulting said Tuesday.
“The price may have pulled back a fair bit from the February highs but that was largely just the market’s reaction to jewelry demand crumbling and scrap booming,” Philip Klapwijk, chairman of GFMS, said at the group’s Gold Survey launch. “It’s far from game over for investors and it will be that crowd which sets the price alight.”
However, Klapwijk warned that a summer lull or the need for inflationary pressures to build could mean sub-$900/oz prices in the short term to between $800/oz and $850/oz. Furthermore, rising scrap supplies are weighing on prices, he said.
The global supply of scrap gold in 2008 rose 27% to a record high of over 1,200 metric tons.
“We expect another record year for scrap sales,” Klapwijk said.
Countering that, net investment last year soared by nearly 76%, with record inflows into gold exchange-traded funds during the year providing significant support to prices, GFMS said.
That investment will grow in 2009 due to ongoing concerns over the global economy and health of the financial system.
GFMS said fiscal and monetary policies currently being enacted, particularly by the U.S. administration, is the root cause of gold’s potential, because of their ability to generate inflationary pressures.
Central banks will also be reluctant to raise interest rates while prospects for economic growth are still uncertain and the dollar could weaken if other countries lose their interest or ability to finance U.S. debt. Both will support gold prices, GFMS said.
In addition to forecasting strong investment demand, the group said central bank gold sales should fall further in 2009 and that should help offset a drop in jewelry use to its lowest level since 1988 last year and increased scrap sales.
However, gold mine output should recover from its 12-year low hit in 2008 and rise by 30 tons in 2009, GFMS forecasts.
“Strength in investment will certainly be needed to overcome weakness in the fundamentals,” Klapwijk said.

Growing economic uncertainty related to the current global economic recession as well as the prevailing volatile financial market conditions, which have so far influenced investors to buy gold, could set off another gold market rally that could take the price above the $1,000/oz mark, according to CPM Group’s Gold Yearbook 2009.
The detailed analysis of the gold market, which is bounded into a hard-cover book, has been released Tuesday by the CPM Group — the New York-based metals consultancy.
“Gold, which has played a monetary role for centuries, appears to be enjoying a rehabilitation of its historical might and role as a financial asset, as investors look toward safe haven assets in these volatile times,” CPM noted.
In the Yearbook, CPM discussed the concept that gold, which is now in the ninth year of a major period of historically high investment demand for gold and consequently rising prices, is undergoing a secular upward move in both investor interest and prices. Yearbook 2009 puts forth the thesis that the rise in investor gold buying and prices since 2001 reflects a restoration of gold as a significant component of financial assets worldwide.
“The gold market appears to be in the early stages of a secular, long-term shift in which gold is reclaiming at least a portion of its status as an important financial asset used by institutional and individual investors, and governments worldwide as a form of savings and a financial asset,” CPM noted in the yearbook. “Gold is moving back to the status it had for most of the past five millennia. Gold has lost status as a financial and monetary asset over the past four decades. Now it is reasserting itself.”
GOLD SUPPLY SEEN RISING FROM INCREASED MINE OUTPUT, GOLD RECOVERY
In discussing gold supply and demand fundamentals, CPM has estimated that total supply of gold rose 3.3% to 114.8 million oz in 2008 from 111.1 million oz in 2007, and could rise further to 118.6 million oz in 2009.
Mine output declined further last year, reaching 55.3 million oz from 58.7 million oz the previous year, said CPM, adding that mine production may rise to 57.2 million oz this year.
Secondary supply of gold, recovered from various types of discarded jewelry and other scrap, soared to 38.5 million oz in 2008 from 32.4 million oz in 2007 and is projected by CPM to rise further to 40.5 million oz this year. Sales from “transitional” economies is pegged at 21 million oz.
Fabrication demand for gold has declined overall since 2001, partly reflecting the rise in gold prices. Last year, fabrication demand — consisting mostly of jewelry, electronics, dental and medical uses — declined to 77.4 million oz from 82.9 million oz the previous year. This year total demand is projected to fall further, to 71.3 million oz, with jewelry demand declining to 56.5 million oz from 60.8 million last year. Industrial demand, meanwhile, could decline to 14.8 million oz this year from 16.6 million oz last year.
Turning to gold sales from central banks and other government sources, the CPM Yearbook noted that in 2008 official sales fell to 5.8 million oz from 15.9 million oz in 2007. This reduced the total available supply to the gold market to 120.7 million oz from 127.0 million oz in 2007. This year official sales may be no more than 5 million oz and total available supply may be 123.6 million oz.
“Most central banks may have sold much of the gold that they have wanted to sell over the past two decades,” said CPM. “They may sell much less going forward and are likely to sell less given current economic conditions. The Gold Yearbook discusses official transaction trends and also speaks to the recent proposal to sell gold by the International Monetary Fund.”
According to CPM, investors continued to buy large quantities of gold last year, with total purchases of bullion reaching 43.3 million oz, compared with 44 million oz in 2007.
“Amid the continued inclination to acquire safe-haven assets around the world, investor buying is projected to reach a record 52.3 million oz this year,” said CPM. “Continued volatile and weak financial and economic conditions are expected to be supportive of strong investment demand this year as well. Combined with short term and speculative activity, gold prices are expected to surpass last year’s record intra-day high of $1,033.90, seen on March 17, 2008.

You know the mining industry is prepared for a tough year when it lines up New York University economics professor Nouriel “Dr Doom” Roubini as its featured speaker for the flagship Diggers and Dealers conference in Kalgoorlie in August.
But judging by the stellar turnout at the 20:20 Investor Series Gold Day in Sydney last week — with more than 250 interested investors in attendance — perhaps the Diggers organisers could have instead opted for a gold bug like the former Newmont Mining chairman Pierre Lassonde, the featured speaker in 2007.
So far, it looks like it will be a rather subdued year at Diggers, particularly for the West Australian nickel miners. Their latest financial results show that Mincor Resources, Panoramic Resources, Independence Group and Western Areas have put in the best performance possible in conditions so tough that Consolidated Minerals and Norilsk Nickel have shut up shop.
But if the gold price continues to hover near a record $1500 an ounce in Australian terms — and with costs like fuel, labour and equipment falling — the gold bugs will be out in force.
After his company hosted a mining conference in Florida last week attended by several Australian-listed companies, a BMO Capital Markets analyst, Tony Robson, observed: “There are two markets. It is almost like there is gold and everything else.”
Robson said he expected that would continue to be the case for the next six months, and possibly for 12 months. So while there may be some great bargains in base metals, investors looking for near-term outperformance are likely to give gold a very close look.

Barrick busy
For investors that trust industry leaders, it is worth noting that Canada’s Barrick Gold — the world’s largest goldminer — last week said it wanted to expand through acquisitions and was able to easily access credit and equity markets to fund deals.
Outside of China, there aren’t many miners in other sectors that could make a similar statement. And even inside China there is an interest in investing in the Australian gold sector, in light of recent signals to that effect from Zijin Mining.
Outside of pure acquisitions, Barrick has also demonstrated it is seeking to keep its mills near Kalgoorlie running at full capacity by striking toll treatment deals with Crescent Gold and Cortona Resources.
In Cortona’s case, Barrick will quickly mine out the 80,000 ounce North Monger deposit as early as this year, while covering all the costs. In return, the Australian junior will receive millions of worry free dollars (the higher the gold price, the higher the margin) to help develop its Dargues Reef project near Canberra, where it has so far proven up 286,000 ounces of resources at 6.2 grams per tonne.

Gold spin-offs
Just as miners were keen to spin off uranium properties into new floats a few years back, some base metals miners are now preparing to do the same with their gold projects in order to realise more value for shareholders.
Base metals miner Kagara owns cash positive copper and zinc operations, even at current prices, but it also has $150 million of debt due to be repaid by October. Its market value, once in the $1 billion range, has plunged to just $91 million — less than the amount it has spent on its oft-overlooked gold projects.
Kagara is seeking to capitalise on those gold projects by spinning off its undeveloped Red Dome and Mungana projects in Queensland as Mungana Goldmines. The new company will help Kagara reduce its debt load and will provide investors with a chance to invest in a new goldminer with 1.6 million ounces of resources.
The Drum understands Newcrest Mining has previously expressed interest in the porphyry deposits, which bear some similarities to its Ridgeway operation in NSW’s Cadia Valley and are amenable to sub-level caving. Newcrest recently raised $750 million — mostly to speed up internal projects — but it could again express interest in the Mungana portfolio.

Chasing capital
The word “opportunistic” is starting to grate on the ears of many gold company directors as they seek to raise cash from investors, who have so far proven very willing. After all, in light of the dismal global economic situation, wouldn’t a company lucky enough to have that ability want to raise as much as possible to fund growth when there is a window of opportunity?
The margins can be lucrative at the moment. Intrepid Mines is making a $1000 an ounce margin from its Paulsens high-grade mine in WA due to the high gold price. It expects to produce 20,000 ounces this quarter.
Focus Minerals last week raised $28 million to refurbish its Three Mile Hill mill and to increase the pace at which it is able to bring nearby deposits into production. It wants to produce 100,000 ounces a year and has already proven up 111,000 ounces of reserves and 1.8 million ounces of resources from its Coolgardie project. It expects the mill could be in operation from early next year.
Meanwhile, Allied Gold raised $31 million to help fast-track expansions in Papua New Guinea and to help retire debt early.
No doubt, many other gold companies will follow suit with capital raisings in coming weeks.

Total South African gold production fell by 13.6% to 220,127 kg in 2008, the lowest level of production since the 218,031 kg produced in 1922, the country’s Chamber of Mines said Tuesday.
The 13.6% decline was also the largest single drop in gold production since the strike-induced 13.8% decline in 1922, the CoM noted.
“Key reasons for the year-on-year decline in gold production include the impact of the electricity supply curtailment in early 2008, which forced downsizing in the gold mining industry and the significant impact of safety-related closures,” the CoM said in a statement. “The mining of lower average grades facilitated by higher prices also contributed to the decline in production.”
The closure of the gold mining sector from January 24–31, 2008, was the first time that the South African gold mining sector had been closed since the Anglo-Boer war between 1900 and 1902, the CoM noted.
While South Africa had slipped to world production position 2 behind China in 2007 the country’s rank declined a further position to third in 2008 after China and the US, it added.
In the fourth quarter of 2008, South Africa’s total gold production decreased by 0.9% to 55,242 kg when compared with the third quarter of 2008; on a year-on-year basis, gold production was down by 10.7% in the fourth quarter.
For gold mines members of the Chamber, production decreased by 16.8% to 182,490 kg in 2008. The 4.2% decline in tons milled to 51 million mt combined with the 13.1% decline in the average grade contributed to the overall decline, the CoM said.
But despite the decline in production, South Africa’s gold mining sector “remains a crucial part of the economy,” the CoM stressed. In 2008, the industry employed 166,000 people (average first three quarters), paid about Rand 15.5 billion ($1.55 billion) in salaries and wages, spent about Rand 14 billion on procuring goods and services in the local economy, accounted for about 2.5% of GDP (directly, indirectly and induced), spent about Rand 9 billion on capex, paid about Rand 4 billion in taxes, and earned about 7% of the country? s merchandise exports (or about Rand 48 billion), the CoM said.

Aggressive de-leveraging and hedge fund liquidation may have sunk the global commodity market the first time around. But it’s the stagnant global economy that is conspiring to keep it underwater.
When the Reuters/Jefferies CRB Commodity Price Index rebounded 2.3 per cent yesterday, it was a welcome respite in a relentless rout that had knocked the commodity market to its lowest levels in nearly seven years. The bounce ended seven consecutive days of declines for the CRB index, during which time the benchmark had lost 11 per cent, relinquishing whatever modest gains it had mustered from its previous lows of early December.
Analysts say that while they don’t see much more room for most commodities to fall, the latest selloff is a signal that a second wave of worries has overtaken the commodity market. While the credit market crisis and hedge fund redemptions triggered the rapid exodus from commodities over the fall, now the deepening slowdown in physical demand for these products is entrenching the low- price environment.
“[Hedge fund liquidation] is becoming less and less of a factor. But the macro [economic] situation is just killing us,” said Edward Meir, commodity analyst at MF Global in Darien, Conn.
With most economists now seeing the economic slowdown lasting considerably longer than had been anticipated a few months ago, experts generally expect prices for many key commodities to drift sideways for much of this year. They said that while the low prices for some products will discourage production, that will be outweighed by the severe and lingering dearth in demand.
“In the near term, I don’t see a big break in the recent trend,” said Derek Burleton, senior economist at Toronto-Dominion Bank. “Commodity markets are going to remain very focused on the demand side.”
“A more meaningful recovery in commodities may have to wait until 2011.”
Within that dim general view, there are varying degrees of pessimism and hope for the key commodities in the Canadian market:
OIL
The weak demand and high inventories for crude should keep prices in their recent range of roughly $35 (U.S.) to $50 a barrel for much of 2009. However, analysts say oil should get support from the fact that at current price levels, new supplies will slow to a trickle.
“When you’re down at these kinds of [price] levels, the only part of the world where you can bring on new projects is the Middle East,” said Patricia Mohr, commodity market specialist at Bank of Nova Scotia, who predicts that global oil production will actually fall this year.
As a result of this supply slowdown, she said, “once we see some glimmer of hope on the global economy, you’ll see prices come back quite quickly.”
Analysts are looking for prices to average $75 to $80 a barrel in 2010.
GOLD
Gold has bucked the downward trend in commodities, as investors have flocked to it as a safe haven from plunging financial markets and economic and political uncertainties.
While the continued high-risk environment could well keep upward pressure on prices in the short term, and soaring U.S. government debt levels could turn investors away from U.S.-dollar debt and toward gold in the longer term, analysts are concerned that gold’s recent rally may be getting overdone, with gold approaching last year’s record peaks above $1,000 an ounce.
“But the main point is that gold seems to be able to maintain its value,” Ms. Mohr said, which should continue to attract investors to bullion-based exchange-trade funds and to gold equities.
COPPER
Copper is stuck in no-man’s land.
The price is depressed as a result of sluggish demand, but it’s still high enough to keep most producers profitable, meaning little pressure to slow production.
“The big declines are probably behind us,” Mr. Meir said. However, he said, prices in 2009 “are going to be in a sideways pattern.”
However, Ms. Mohr said copper should benefit from government stimulus efforts aimed at expanding electricity infrastructure, particularly in China.
ALUMINUM
Unlike copper, analysts said aluminum prices have fallen considerably below most producers’ cash costs, which is triggering production cuts and killing new mining projects in their tracks.
“In aluminum, everyone is in the red. Everyone is struggling,” Mr. Meir said.
That suggests that even a modest recovery in demand could put upward pressure on what could become a very tight market on the supply side. Analysts said the situation isn’t that different in other base metals, such as zinc and nickel.
“I think all of them are oversold,” said Bart Melek, global commodity strategist at BMO Nesbitt Burns.
CANOLA
Ms. Mohr believes canola is poised to be a strong performer this year.
It’s an attractive product for Canadian farmers because of its traditionally strong profit margins, and could benefit from the threat of drought in some of China’s key canola-growing regions. She said China has already been stockpiling canola in the past months.
TD’s Mr. Burleton thinks agricultural commodities in general look promising. He added that drought worries in several parts of the world could also bode well for grain prices.

Gold N.Y. Spot $ 911.60
Silver N.Y. Spot $ 13.10
Lead LME Cash $ 0.5216
Copper LME Cash $ 1.5694
Zinc LME Cash $ 0.5194
Nickel LME Spot $ 4.94
Aluminum LME Spot $ 0.6296
Platinum N.Y. Spot $ 1033.00
Palladium N.Y Spot $ 214.50
Oil WTI Cushing $ 040.50
Natural Gas (Henry Hub)($/MMBtu) $04.77

USD-AUD $ 1.4990
AUD-USD $ 0.6671
CAD-USD $ 0.8202
USD-CAD $ 1.2192
EUR-USD $ 1.3012

Gold may average higher for each of the next three years and climb to a record driven by increased demand and a declining dollar as governments ramp up spending to battle the global recession, according to Morgan Stanley.

The metal may average $900 an ounce this year, up 20 percent from an earlier target of $750, the bank said today in a report. It may average $1,000 in 2010, $1,050 in 2011 and $1,075 in 2012, up as much as 34 percent from previous estimates, the report said. The commodity peaked at $1,032.70 on March 17.
Morgan Stanley joins Standard Chartered Plc in raising its target for gold prices amid concern that the dollar may drop as the supply of the currency is increased. President Barack Obama, sworn in yesterday, plans an $850 billion stimulus on top of a $700 billion bank-bailout package enacted under his predecessor.
“Devalued currencies, growing global incomes and a renewed appreciation for gold should keep prices higher,” Morgan Stanley’s New York-based analyst Hussein Allidina wrote. “A globally synchronous and aggressive fiscal and monetary stimulus may be needed to re-inflate the global economy, and we think this continues to present significant upside to gold prices.”
The International Monetary Fund has forecast that advanced economies including the U.S. will contract simultaneously this year for the first time since World War II, spurring stimulus plans backed by more state debt. Gold, regarded by some investors as a safe-haven asset, can rise when the dollar falls.
‘Weaker Dollar’
“Gold will remain relatively stable in the first half of the year, then later, a weaker dollar, pickup in inflation and flight to safety will help gold test its record high again,” said Chen Yonglin, an analyst at Citic Securities Co.
Gold climbed for an eighth year in 2008, gaining 5.8 percent “in a year when most other asset classes saw double- digit losses,” Morgan Stanley’s Allidina wrote. “The U.S. dollar should weaken as the global economy recovers.”
The metal for immediate delivery traded at $851.35 an ounce at 2:37 p.m. in Singapore, and has averaged $846.18 an ounce this year.
Standard Chartered said in a report e-mailed Jan. 15 that gold may average $971 an ounce in 2009, up 11 percent from the bank’s previous forecast. A weaker dollar, lower supply of the metal and safe-haven buying by investors should drive gold to more than $1,000 an ounce in the second half of this year, according to StanChart analysts led by Helen Henton.
Jim Rogers, the chairman of Rogers Holdings who correctly predicted in April 2006 that gold would reach $1,000 an ounce, said last month that he planned to buy more of the metal, adding that the price “will go much higher.”
Platinum may average $875 in 2009, $1,000 in 2010, $1,050 in 2011, and $1,150 in 2012, down as much as 42 percent from previous estimates, according to Morgan Stanley. Palladium may average $180 in 2009, $200 in 2010, $220 in 2011 and $240 in 2012, down as much as 39 percent from earlier calls, it said.

The wild gyrations in commodities last year were a brutal reminder of how volatile and dicey this market can be, especially when the economy turns sour.

It was a classic boom-to-bust cycle. Prices that seemed to defy gravity in the first half had trouble finding a floor later in the year. Public uproar over rising costs was damped. As demand dried up, suppliers were forced to make painful production cuts. Investment gains that took years to build disappeared in just a few weeks.

All this is expected to leave a profound mark on commodities markets for years to come, and 2009 is expected to be another difficult year. The Dow Jones-AIG Commodity Index, a broad benchmark, finished 2008 with a 37% loss, the worst year since the index was launched in 1998. Oil fell 54% for the year to $44.60 a barrel, down $100.69 from its record settlement in early July.

Commodities kicked off the year on a strong note: On Jan. 2, the first trading day of the year, crude-oil futures touched $100 a barrel — the first time it had surpassed the three-digit mark — before settling at $99.62. With stocks weighed down by uncertainties about financial institutions’ subprime exposure, commodities gained favor among investors as an asset class they believed would help their portfolios weather the storm.

A rosy outlook for emerging markets like China and India, the primary driver of the commodities run-up for several years, kept traders flooding into the market. Investments that track a variety of commodities indexes gained 37% in the first half to $200 billion, according to the Commodity Futures Trading Commission.
Precious metals soared in March, in a flight to quality as Bear Stearns Cos., the nation’s fifth-largest investment bank, collapsed. Gold, a traditional investor safe haven, hit all-time highs of $1,003.20 a troy ounce and silver rose to $20.685 a troy ounce. Both platinum and palladium reached records in March, fueled by a severe power outage in South Africa that hurt production.

Corn and soybeans reached their all-time highs around late June due to severe flooding in Midwest, the U.S.’s main producing area.

Oil continued to move higher amid expectations that emerging markets’ insatiable appetite for energy would counter the economic slowdown in the U.S. Wall Street firms argued that global production couldn’t keep pace and one-upped each other with sensational forecasts. Goldman Sachs Group analysts shocked the market in May with a prediction that oil could reach $200 a barrel within two years. In June, Morgan Stanley called for oil to spike at $150 a barrel by July 4.

Morgan Stanley was close. Crude oil reached $145.29 a barrel on July 3, a 51% gain from the beginning of the year — the pinnacle of commodities’ 2008 surge.

Then the tide turned. Soaring gasoline prices in the summer led to less driving and had an effect on consumer spending. Politicians proposed legislation to curb speculation in the oil markets, which became an issue in the presidential campaign. Some market players were spooked by the prospect of stricter regulation and stayed away.

Entering the fall, commodities took another hit as the credit crisis worsened after the failure of Lehman Brothers Holdings. Prices of all assets plunged as hedge funds and investment banks liquidated their positions to shore up capital and reduce leverage.

Demand for basic materials weakened as the financial crisis spread and tipped the world economy into recession, and commodities’ downward spiral gained speed. Oil hit its low for the year, $33.87 a barrel on Dec. 19. The International Energy Authority predicted that global oil demand would shrink this year, for the first time since 1983.

The second half’s decline was so brutal that it wiped out gains commodities had accumulated since 2002. Oil hasn’t been around these levels since 2004. But some still showed gains. Cocoa jumped 31% and rough rice gained 13%. Gold rose 5.8%, its eighth consecutive annual increase.

“It’s very typical for commodities to have a late-cycle rally,” said Lawrence Eagles, head of commodities research at J.P. Morgan Chase & Co., speaking of the first half of the year. Although the U.S. recession began in December 2007, commodities rose for months before weakening demand besieged the market.
Many investors were new to commodities and rushed for the exits when prices started to tumble. “Some of the hedge funds had never experienced any substantial corrections in commodities, and they got caught up here, badly,” said Richard Feltes, director of commodity research at MF Global.

The commodities markets are likely to be even tougher in the coming year. Liquidity is a major concern, with the prospect of fewer players and tighter credit.

“We may see increased interest from end users hedging against price swings,” said David Goodman, co-head of global commodities at Merrill Lynch & Co. “This will not offset the gap left from the exit of several financial players.”
Worries about credit risk will continue to have an impact as lenders may require counterparties to post more collateral to guarantee transactions, which in turn will utilize more capital, Mr. Goodman said.
While demand continues to decline, there is evidence now that supply is contracting, leading some players to hope that prices may be close to bottoming out. Oil-producing countries, mining companies and steel mills recently announced massive production cuts, which could put a floor on prices.
But nothing is certain. On Dec. 17, members of the Organization of the Petroleum Exporting Countries agreed to slash another 2.2 million barrels per day from oil markets, but oil prices continued to fall and earlier announced cuts weren’t fully implemented.
The latest cuts were scheduled to take effect at the start of this year. It might take longer for demand to pick up and have an effect on prices. “The answer now depends on how long this recession will last,” said J.P. Morgan’s Mr. Eagles.