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Economist Says Demand Destruction Will Drive Oil to $90

Monday, 9 May 2011 | 2:10 AM ET

The commodities market witnessed a volatile five days last week with silver a major loser. Some analysts were predicting the losses for silver would lead losses in other commodities like oil, which saw the WTI contract drop below $100 a barrel.

Oil Barrels
Oil Barrels

With silver making up a relatively small percentage of the commodities market one analyst believes the real action is in oil and predicts losses are on the way, which will point the way for industrial metals.

“Prices had soared as silver finally caught up with gold and probably overshot, but silver is still up 10 percent this year,” said Julian Jessop, an economist at Capital economics in the research note.

Following losses for crude, Jessop believes the demand destruction is beginning to filter through as higher prices lead consumers and businesses to lower demand.

“This process already appears to be well underway in the US, reflected in the latest GDP data and some of the business survey,” he added.

“There are fears too that central banks in emerging economies will follow the lead of the Reserve Bank of India which this week picked up the pace of monetary tightening in response to surging headline inflation.” Gains for the dollar following Jean-Claude Trichet’s dovish comments at last week’s ECB press conference where also a factor for Jessop who is predicting oil prices will fall to $90 a barrel by year end.

“We expect further falls in oil prices to be matched in lower prices for industrial metals.

In part this reflects common drivers, namely weaker global demand and a rebound in the dollar.” “This should help to ease fears about global inflation.

Government bond yields have been falling in recent weeks and we think this has further to go as inflation expectations decline,” Jessop said.

Contact Europe: Economy

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