The lesson from other commodities: Prices can fall, too

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Crude oil’s winning streak hit a speed bump on Thursday, as near-term futures dipped after four straight gains, easing $2.36 to $130.81 a barrel after trading as high as $135.09.

The stock market this week has begun to despair that oil will ever fall significantly. But commodities being commodities, we know there’s no such thing as a perpetual one-way elevator ride in price.

Wheat prices in the first quarter were on a tear, and hit a record $12.82 a bushel in futures trading on March 12 amid fears of global grain shortages. Since then the price has plunged, to $7.45 a bushel now, a drop of 42% from the peak.

Looks like the market’s worst concerns about world wheat supplies won’t come true in the near term. Reuters reports that the United Nations Food and Agriculture Organization today forecast the global wheat harvest to be a record 658 million tons this year, up from 605 million last year.

Running down a short list of commodities, we find orange juice futures at $1.05 a pound, down 30% since late December; soybeans, at $13.25 a bushel, down 15% since March 3; and gold, at $917.90 an ounce, down 8.5% since reaching a record $1,003 on March 18.

The World Gold Council this week published its report on first-quarter demand for the metal. As the price surged demand tumbled, oddly enough: Total consumption amounted to 701 tons in the quarter, the lowest in five years and down 16% from a year earlier.

Jewelry demand was particularly weak, plunging 21% from a year earlier to 445 tons -- the lowest since 1993. In India, where consumers typically are big gold jewelry buyers, ‘The high and volatile gold price deferred purchasing,’ the council said.

Is oil different from all other commodities? The price has to be a function of supply and demand (including demand by speculators). Right now, even as record oil prices certainly are changing many peoples’ consumption habits, there is a widespread belief that the price can only go higher.

On the supply side, the most vociferous oil bulls say the critical issue is that we won’t be finding much more crude on this planet, and that whatever we do find will be extremely expensive to extract. That may well underpin prices in the long run.

But in the short run, upside price frenzies in commodities, as in anything else (remember housing?), have a way of fizzling just as everyone becomes convinced the sky is the limit.