research paper piyush ozarkar

8/6/2019 Research Paper Piyush Ozarkar

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Impact of Global Financial crisis on prices of commodities (Crude Oil, Gold, Silver and

Copper)

Index

1.0Introduction.2.0Crude oil

2.1Factors affecting price of crude oil.2.2About OPEC.2.3Effect of global financial crisis on prices of crude oil.

3.0Gold3.1Factors affecting price of gold.3.2Effect of global financial crisis on gold price.

4.0Silver4.1Factors influencing price of silver.4.2Effect of global financial crisis on silver prices.

5.0Copper5.1Factors affecting price of copper.5.2Effect of global financial crisis on copper prices.

6.0Conclusion.

7.0References.


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Author: Piyush V Ozarkar

Designation: Lecturer (B.B.A Faculty)

Institute: Bhonsala Military College, Rambhoomi, Nashik-05

Mobile: +91 8975037800 Email-id: [email protected]

Impact of Global Financial crisis on prices of commodities (Crude Oil, Gold, Silver and

Copper)

1.0 Introduction

Global financial crisis of 2008 which was triggered due to subprime crisis in USA generated a

shockwave that shook financial markets and economies throughout the world. It gave rise to a

chain reaction that took hold of various economies across the globe. More or less every nation

had to suffer the heat of this financial turmoil, with varying magnitude.

Series of events regarding bankruptcy of well known financial organizations, inflation issues,

stagflations, unemployment shook almost all financial markets of the world. Worlds major

market indices showed a steep southward movement. Indian benchmark indices also showed

negative trends during that period. This financial crisis has also affected the industrialconsumption and output. All these aftereffects have created a wave of negative sentiments in

minds of investors across the world

Subprime crisis of 2008 has affected all kinds of security markets, bond markets, currency

markets and commodity markets also. This paper focuses mainly on impact of the global

financial crisis on prices of commodities mainly Gold , Silver ,Crude Oil and Copper , that are

traded in electronic form on various exchanges. This paper will also focus on various macro -

economic and market factors that affect the price movement of the mentioned commodities. Theselected commodities belong to different categories , Crude oil is energy related commodity ,

Copper is a base metal , gold comes under precious metal or bullion and silver is used as both

industrial as well as precious metal.


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2.0 Crude oil

Crude oil accounts for worlds 40% energy demand. According to the US energy information

Administration, worlds fuel consumption is expected to be 88.16 bbl/day .India ranks 10th

regarding consumption of crude oil in world. Major part of crude oil extraction and production is

done in Middle East Asian countries, in North African Countries. Crude oil satisfies major

energy needs of industries in developed economies as well as emerging economies. Thus demand

and supply of crude oil is significantly affected by the world economic and financial health. Let

us understands factors affecting the price of Crude Oil.

2.1 Factors affecting the prices of Crude Oil

1) Crude oil prices are majorly determined by markets demand and supply conditions.2) On demand side major factors affecting the crude oil prices are

A) World economic growth.B) Consumption by developed economies such as USA, Japan and European

developed nations.

C) Demand by emerging economies such as India, China, and Brazil etc.3) On Supply side economics factors that significantly affect the crude oil prices is

Extraction, production and inventory by Organization of Petroleum Exporting Countries.

4) A fluctuation in dollar exchange rate is also one of the major factors that affect the pricesof crude oil in world market.

5) Other minor factors such as Climatic conditions, Wars, Political conflicts amongimporting and exporting nations also contribute to variations in prices of crude oil.


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2.2 About OPEC

OPEC stands for Organization of Petroleum Exporting countries. It is an intergovernmental

organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq,

Kuwait , Libya, Nigeria , Qatar , Saudi Arabia and UAE. OPEC controls almost 40% of worlds

crude oil trade .it Accounts for about 75% of worlds proven oil reserves. Production, Storage and

extraction by OPEC countries significantly influence the crude oil prices.

2.3 Effect of Global Financial Crisis on price of Crude Oil.

Crude Oil is one of the major energy source , hence growing and healthy economy requires

more consumption of Energy resources such as Crude oil to satisfy the energy needs of there

robust economy. This directly affects the demand and supply of the Crude Oil and thus on the

prices. If demand for the crude oil is more than that of supply then there is obvious increase in

the price of the Crude oil. Similarly if there is lack of demand worlds major oil producing

countries will cut there production which may bring down the prices of crude oil.

After the major turmoil crisis on 2008, measure developed economies came to halt, there was

slag in industrial development and increase in unemployment, stagflation. There was tremendous

decrease in the demand of Crude Oil from countries such as US and Japan. Global financial

crisis of 2008 had affected the overall demand of Crude Oil across the globe. However the

demand from Emerging countries such as India and china had increased in spite of the global

slowdown due to robust nature of these economies.

Tables given below displays information regarding the production and consumption patterns of

crude oil , Prices of crude oil , import and export patterns And also the GDP growth of various


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countries. This data provides a brief idea about how changes in economic condition during

financial crisis had affected the crude oil prices.

Worlds Crude Oil Production and Consumption between 2006 -2009

Year/ 2006 2007 2008 2009 % change from

2008-2009

Production (Million bbl/day) 81.557 81.446 81.995 79.948 -2.6

Consumption (Million bbl/day) 84.367 85.619 85.239 84.077 -1.7

Source: BP Statistical view of world Energy 2010

World oil production increased by 0.7% from 2007 to 2008 and consumption decreased by -0

.44% .After the financial crisis in 2008 the world oil consumption according to the report

published by BP-Statistical review Production of oil across the world fell by 2.6 % from 2008

and 2009 and Consumption dropped by 1.7 % after financial crisis of 2008.

Consumption of Crude oil by US, Japan And United Kingdom between 2006-2009

Year

Million bbl/day

2006 2007 2008 2009 % change from

2008-2009

USA 20.687 20.680 19.498 18.686 -4.9

Japan 5.213 5.039 4.846 4.396 -10.7

UK 1.785 1.714 1.681 1.611 -4.3



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Above chart summarizes consumption pattern of Crude Oil by developed countries who had to

face major heat of Global financial crisis 2008.There is decrease in consumption of crude oil

from 2006 to 2009 by US , Japan and United Kingdom.

In 2009 consumption of crude oil by US decreased by 4.9%, Japanese consumption decreased by

10.7 % and that of united kingdom decreased by 4.3%.As a effect of Subprime crisis these

economies had slowed down and went into recession, There was halt in there industrial

production and increase in unemployment which directly affected the demand of crude oil from

these countries.

Consumption of Crude Oil in India and china between 2006-2009

Year/

Million bbl/day

2006 2007 2008 2009 % change from

2008-2009

India 2.580 2.838 3.071 3.183 3.7

China 7.410 7.771 8.086 8.625 6.7


There is completely opposite picture regarding consumption of crude oil by emerging nations

especially India and China. There is increase in the consumption in the year 2009 by 3.7 % and

6.7% respectively by Indian and Chinese economy.

This was due there robust and conservative economy that was cushioned due to conservative

banking system and financial policies, and hence they did not suffer at large extend from the

financial crisis.


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Crude Oil prices reached record high of $ 147/bbl in July 2008 on the back of commodity book

cycled due to heavy consumption by developed nations. However from August 2008 demand

from major oil consuming countries came to sudden halt, and recession loomed into their

economies .Oil Prices started falling, to curb the falling crude oil prices OPEC countries

introduced series of cuts in production and export of Crude oil prices.

Due to financial crisis many operator in commodity market liquidated their positions to cover the

loss margin, hence increasing the selling pressure and affecting the prices negatively. The other

reason was sudden fall in demand due stagnation in world economy.

Impact on Import and Export of Crude Oil

Reduction in consumption and production of crude oil affected the import and export volumes.

Following chart depict the impact of global slowdown on import and export volumes of major oil

importing and exporting countries.

Year 2006 2007 2008 2009 %change 2008-2009

Imports ( Million bbl/day)

US 13.612 13.652 12.872 11.444 -11.14 %

Europe 13.461 13.953 13.781 13.458 -1.9%

Japan 5.201 5.032 4.925 4.283 -13.0%

Rest of the world 20.287 22.937 23.078 23.718 2.8%

Exports ( Million bbl/day)

North Africa 3.225 3.336 3.260 2.760 -15.3 %

Middle East 20.204 19.680 20.218 18.426 -8.5 %


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Above chart shows that, there was cut in the imports of Crude Oil by developed nations. Import

of crude oil by US was reduced by 11.14% during the year 2009 , similarly Japan and European

nations had reduced their imports by -1.9% and 13.0 %.However in case of remaining parts of

the world overall there was increase in the ports by 2.8 % during the year 2009.

To control the falling price of the crude oil Middle Eastern countries as well as North American

countries tried to reduce their export volumes by 8.5% and 15.3%.

Effect of all these could be seen on the Crude Oil prices. The table below shows the prices of

crude oil from year 2006 -2009.

Crude Oil Prices ($ / bbl) from the year 2006 to year 2009

Year 2006 2007 2008 2009 % change(2008-09)

Spot Price($/bbl) 61.50 68.195 94.34 61.39 -34.92%


From above table it can be seen that after 2008 crisis the Spot price of the crude oil showed a

downfall by 34.92 % in the year 2009.From above study and analysis it can be concluded that

1) Due to global financial crisis the economy of developed countries such as US , UK andJapan came to stand still

2) The industrial development was hampered and affected the world economy3) This effected reduction the consumption of crude Oil, due decrease in energy needs.4) After achieving peak price of $147/bbl in July 2008 the prices of crude oil suddenly came

down by 34.92% to $ 61.39 / bbl in 2009.

5) OPEC countries tried to curb falling prices by cutting down the exports.


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6) However there was still great demand for Crude Oil from Emerging countries such asIndia and China, In spite of global financial crisis.


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3.0 Gold

Of all the precious metal, gold is most popular as an investment. Investors generally buy gold as

a hedge against any political, economic, and social or currency crisis it also includes decline in

investment returns from security market, rising inflation, war and social insecurities.

It is seen that gold behaves like a currency .Generally people look toward gold as safe heaven

investments when they are uncertain about the economic and financial conditions.

3.1 Factors Affecting price of gold

1) Policies of central Policies of central bank regarding sale and purchase of gold and goldreserves affects the price of gold in the country. Global prices are also affected by

policies of international financial organizations such as IMF etc

2) Financial and economic conditions; Gold is used as hedge against inflation and currencydevaluation .If there is problem with financial health and economical conditions, then it

could affect the returns from deposits, markets, bonds and currency. In such conditions

people look towards gold as safest way to invest. Hence increasing the demand for

yellow metal and affecting the price.

3) Jewelry and industrial demand: Jewelry accounts for over 2/3rd of worlds annual golddemand. Gold is also used in industries, in dentistry and medicines; price of gold is

affected by demand and consumption from these sectors.

4) Future market transactions: Gold is traded in future market, in many exchanges such asLME, MCX India etc. Sentiments of traders in these market are affected my global

economic conditions, hence leading to price fluctuations in this market. Speculation is

also one of the factors that affect the price of gold.


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3.2 Effect of Global financial crisis on Gold prices

Global financial crisis in 2008 had badly affected the economies around the world, there

was slump in the growth across the world. This badly affected the industrial development

giving rise to unemployment and bad industry output. Many countries were either

affected by deflation or high inflation This all had ultimately affected the peoples

sentiments regarding banks, deposits, security markets, bonds etc in negative way . Bad

economy indicates insecurity regarding the investments and money. In such situation

people prefer to invest in gold to be on a safer side.tgi directly affected the price of gold

since there was increase in the demand for gold in future as well as physical market.

Data given below depicts the world economic health.GDP and inflation index has been

considered as major indicators to show the growth in economy.

Worlds GDP ( % change ) from year 2006 to 2009

Year 2006 2007 2008 2009

GDP(% change) 5.206 5.339 2.834 -0.577

Source: IMF report on world economy 2011

The table shows percentage change in worlds GDP form year 2006 to 2009 , it seen that

since 2007 the worlds GDP is showing decreasing trend and in the year 2009 i.e. after

financial crisis of 2008 the GDP is in negative figure 0.577 indicating halt in world

economy.


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GDP and Inflation of Advance Economies and Emerging Economies

Year 2006 2007 2008 2009

Advance Economies

GDP(% change) 3.005 2.718 0.243 -3.23

Inflation(% change) 2.356 2.162 3.395 0.14

Emerging Economies

GDP(% change) 8.209 8.734 6.13 2.513

Inflation(% change) 5.568 6.451 9.234 5.22

Source: IMF report on world economy 2011

From above table it can be depicted that GDP of advanced economy decreased due to

global financial crisis of 2008. in the year 2008 GDP was 0.243 % and in 2009 the

percentage change was 3.23, Inflation in advanced economies is also showing

decreasing trend and it is 0.14 in 2009, this shows advanced economies and tending

towards deflation. Picture is quite better in case of emerging economies the GDP has

been decreased to 2.513 in year 2009 from 6.13 in 2008, but there is problem of high

inflation in these countries.

These all factors have affected the demand for yellow metal since people have lost

confidence in economy due to slower growth and inflationary worries. Hence they tend to

go towards safe heavens of gold.

This has affected the prices of gold which can be depicted through following table

Gold Price ( $ /ounce) from year 2006 -2007

Year 2006 2007 2008 2009 % Change from 2008 - 2009

Price ( $/ounce) 603.46 695.39 871.96 972.35 11.51 %


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From above table it can be seen that price of gold in constantly increasing due financial

worries among investors. After global financial crisis in 2008 the gold price gave a

sudden jump of 11.7 %.

Thus it can be concluded that Gold prices were increased due to increase in demand for

gold as a safe investment due to slow down in the global economy, as a effect of global

financial crisis.


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4.0 Silver

Silver is considered as a precious metal as well as industrial metal since it has demand

and consumption under both of the categories. Silver has many industrial applications

and uses. And it is also used as form money and has a store value. Silver is largely used

as a precious metal after gold in form of Jwellery, coins, utensils etc. Unlike gold silver is

notoriously volatile regarding its price. The reason behind this is lower market liquidity

and demand fluctuations between industry and store value.

4.1 Factors influencing the price of silver

1) Traders and investors Silver is also traded in derivative market; this market iscomparatively small but having large players. Thus investor sentiments and

speculations largely affect the price of silver in future market

2) Industrial and commercial demand: Silver has heavy demand from industries suchas photographic plate, reflectors, medicines, clothe industry, biocide and biomedical

products etc.

3) Economic anf financial conditions : Silver is considered as a safe heaveninvestment after gold , hence economic and financial uncertainties have large effect

on the demand and hence on the price of silver.

4.2 Effect of Global financial crisis on Silver prices

To know how global financial crisis of 2008 affected the prices of silver, it is important

to understand how the crisis affected the global demand and supply of the silver. Table

given below shows the data related to demand and supply of silver from the year 2006 to

2009.


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Years 2006 2007 2008 2009

Supply ( Million Ounce / year)

Mine Production 640.9 664.4 684.7 709.6

Net government sale 78.2 42.5 27.6 13.7

Old Silver scrap 188.0 181.8 176.0 165.7

Total Supply 907.2 888.7 888.3 889.0

Demand ( Million Ounce / year)

Industrial 427 456 443.10 352.00

Photography 142.4 124.8 104.9 82.9

Jwellery 166.3 163.5 158.3 156.6

Silverware 61.0 58.4 56.9 54.5

Coins & medals 39.8 39.7 65.2 78.7

Producer hedging 6.8 24.2 11.6 22.3

Implied Net demand 64.0 22.0 48.2 136.9

Silver Price

(LME : $/Ounce)

11.549 13.384 14.989 14.674

Source: The silver institute.

It is seen from the above chart that demand for silver for purpose of industrial fabrication

decreased by 11.9% in year 2009.Overall industrial consumption posted 352.2 million ounce of

consumption in the year 2009. Many industries such as automobile industries where demand for

silver is high reduced their production as result of slump in economy due to the crisis of 2008


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hence demand for silver was affected. However demand for silver had rise in first quarter of

2009, but it was mainly due to demand for silver as hedge against uncertainties and risk of

financial turmoil.

There was rise in implied net investment in silver increased by 184 % to 136.9 million ounce in

2009.Apart from China and India; there was decrease in demand for silver in Jwellery market.

On supply side, above the ground supply of silver such as net disinvestment, producer hedging,

net government sales, scrap decreased by 86 % in the year 2009. This was due to high

investment and drop in supply of scrap silver.

Effect of this could be seen on the price of silver, which was increased by 10.7 % in 2008, this

was mainly due to increase in demand of silver as safe heaven investment instrument even

though there was slump in industrial demand. In 2009 price of silver decreased by 2.10 percent

mainly due to decreased industrial demand.


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5.0 Copper

Copper is the base metal which is largely used for industrial purpose in production of wires,

conductors, electrical gadgets etc. Copper is also traded derivative market across the world.

Most of the price fluctuations in copper is due to change in demand from industry and supply

from mines, inventories, and scrap.

5.1 Factors that influence price of copper

1) Changes Demand and supply contributes to major price changes in copper. Copper in usedat large scale in various industries. Thus if the industrial growth is affected then demand for

copper is also reduced accordingly hence affecting the price.

2) Problems in mines such as natural calamities , strikes , causalities, accidents etc hampers themining of copper , which reduces the supply and affects the price of copper in international

market.

3) Import and export of copper among countries, affects the price. China is one of the largestimporters of copper; bulk purchase by china can affect the price of copper.

4) Copper Being traded in derivative market the market sentiment affects the price of copperfutures , indirectly affecting the spot prices.

5.2 Effect of global financial crisis on Prices of Copper

Copper has a major demand from industries around the world, thus any slowdown in industrial

growth affects the consumption of copper. A slowdown in industrial growth may reduce copper

consumption , leading to imbalance between demand and supply and hence affecting the price.


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During global financial crisis of 2008, industrial growth was affected at large , and growth

became sluggish. Production of goods was cut down at large extent. This had affected the

demand and consumption of copper.

Following table shows production and consumption of copper from the year 2006 to 2009.

Year 2006 2007 2008 2009

World refine production( Thousand Metric ton) 17,291 17,934 18,201 18,276

World refine usage( Thousand Metric ton) 17,034 18,203 18,023 18,099

LME copper price ( $ / ton) 6727 7126 6952 5764

COMEX Copper price ( $/ pound) 309.42 322.84 313.18 236.54

Source: icsg

From above table it can be seen that price of cooper at LME exchange was reduced by 17.08 %

and 24% at comex. This was mainly due sluggish industrial growth which hampered the demand

and consumption of copper and hence affecting the price.


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6.0 Conclusion

It can be concluded in this paper that Subprime crisis of 2008 created a ripples in the financial

world, due to which there was slow down in the industries and economies. This affected the

demand for commodities such as crude oil which satisfies the major energy need across the

world , base metal such as copper which is largely used for industrial production purpose,

precious metal like gold which is consider as safe investment , or metal like silver which a

precious and is also largely used in industries. The financial turmoil created imbalance between

demand and supply of the commodities, which led to reduction in prices of Crude oil, silver and

copper and increase in the price of gold as hedge against the uncertainties in the year 2009.


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7.0 References

1) http://www.icsg.org/index.php?option=com_content&task=view&id=57&Itemid=602) http://www.silverinstitute.org/supply_demand.php#demand3) http://www.copper.org/resources/market_data/homepage.html4) www.gfms.co.uk/publications_Silver_Survey.htm5) www.imf.org6) www.wikipedia.org7) http://www.icsg.org

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