Commodity Prices Rising, But No Spike

It's not demand that's pushing up prices. It's inflation fears generated by the Federal Reserve's credit rescue plan.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

April 2, 2009

One likely impact of the Federal Reserve’s $1-trillion credit rescue: higher commodity prices -- oil, natural gas, copper, nickel and other metals -- as investors cozy up to commodities as a hedge against an inflationary updraft.

There’ll be no giant push, though, just a gentle nudge from the massive cash infusion. "This is not wild speculation, but a rational reaction to the Fed's decision that will inflate the economy and weaken the dollar over the next two years or so," says Phil Flynn, a senior vice president with Alaron Trading, a commodities trading firm.

Oil prices should hover in the $50 to $60 range through early fall, about $10 higher than previously expected. But there's little chance of what happened last year: a super spike that ratcheted up oil prices to nearly $150 a barrel. The economies of most industrialized nations will limp along through autumn at least, keeping oil consumption tepid at best. Look for crude oil prices to average about $57 a barrel this year, down from $100 a barrel throughout 2008.

Slack demand for fuels means gasoline prices won't go up all that much. They’ll rise 10¢ a gallon higher than we forecast a few months ago because of the Fed's action. Figure on prices at the pump to top out near $2.25 a gallon during the peak summer driving season, barring early season hurricanes or big refinery glitches. For the year, the Fed's huge cash infusion is likely to boost gasoline a nickel per gallon, with regular gasoline averaging $2.05 per gallon. Still, that's $1.30 less per gallon on average than in 2008.

Natural gas prices will get some extra lift, too. From the current plateau of about $4 per million British thermal units (MMBtu), natural gas prices won’t soften more than about 25¢ per MMBtu through summer. Then they’ll firm up, heading toward $6.75 or so in the last months of the year. For this year overall, natural gas prices will seem like a bargain, averaging $4.25 per MMBtu, or $4 less than in 2008.

Expect a 10%-15% jump in prices for most metals used in consumer goods and industrial products: tin, nickel, aluminum and lead. Copper and zinc will see somewhat greater increases by year-end: about 25% for copper, to $1.50 a pound, and 33% for zinc, to 60¢ a pound.

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