G20 report gives insight into reasons behind cheaper commodities

TOKYO - Cheaper oil is widely expected to provide a boost for Japan's economy over the next year. But many market participants do not seem to be fully aware of the reasons for the sharp fall in oil prices, not to mention its pace.

"The Report of the G20 Study Group on Commodities," issued in November 2011, was prepared under the leadership of the Bank of Japan Deputy Gov. Hiroshi Nakaso, who was at the time the bank's executive director. The report provides some insight into the reasons for the recent fall in oil prices.

It seems that Nakaso believed the analysis of the report is also effective in understanding the recent plunge in international commodity prices. The report is worth examining to understand how the BOJ sees falling oil prices.

The report cited the following two points as factors in the rise in commodity prices in the 2000s: a fundamental shift in the supply-demand balance, and the growing presence of financial investors in commodity markets. These are also the keys to the recent "reverse oil shock" of falling prices making markets more volatile.

The fundamental shift in the supply-demand balance refers to supply capacity constrained by long-term insufficient investment, which pushes up prices of oil and other commodities.

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