MW: Commodities markets have more surprises to unwrap
TOKYO (MarketWatch) -- It's been a lively year so far for commodities, with gold prices surging past $1,000 an ounce and crude managing to double in price over the course of six months, but as the energy and metals markets head into the fourth-quarter, they're likely to yield many more surprises -- not all of them good.
"The surprise may be that the bull run in commodities for this year is probably over," said Phil Flynn, a senior market analyst at PFGBest. "Fiscal stimulus such as quantitative easing was a major factor in the market's big run."
So for now, most commodities may be close to or have already seen their highs for the near term, but some analysts see a promising longer-term future.
Crude-oil futures traded below $35 per barrel in mid-February, then jumped to as high as $75 in late August and gold futures dropped to as low as $805 an ounce in mid-January, then recovered to trade above $1,020. Still, both commodities have struggled to stay solidly above their key levels, apparently lacking the proper support.
"The Fed giveth, but the Fed also taketh away," said Flynn. "Hopefully the next rally in commodities will be inspired not by central bank intervention, but because prices have fallen to a level where they inspire economic activity and natural demand growth."
Most commodities saw their prices rally this year, however.
Industrial metals such as copper, lead and zinc have seen hefty gains year to date, with global economic growth driving demand, according to Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter. "Economic data, particularly in the U.S., has turned for the better."
Year to date, lead boasts a 127.8% return, copper a 108% and zinc a 62.1% return, according to a Sept. 18 research note from Deutsche Bank. Nickel prices have gained just over 50% year to date, while silver's up 61.5% and aluminum's up 27.7%
Even so, "the prices of most base metals are not in the comfort range of miners," said Christopher Ecclestone, mining strategist at Global Hunter Securities. "We need to see some real Western world reactivation to provide a motor for higher prices."
In the long term, the commodities that will do well include gold, copper and crude oil, said Patrick Kerr, managing director at Amerifutures Commodities & Options, adding that pullbacks in the major commodity markets will be opportunities for investors.
"There will be a lot more action in commodities in the years ahead," he said.
Crude guesses
Prospects for crude are awash in uncertainty with analysts unwilling to set their predictions for energy demand in stone.
"Oil has the potential to move higher, maybe as high as $85 but into Q1, all bets are off especially if demand begins to pick up," said Kevin Kerr, editor of Kerr Commodities Watch.
The big questions for the oil market are whether it'll able to whittle away at all its excess supply and whether demand starts to ramp up, he said.
U.S. crude supplies at 338.4 million barrels, as of the week ended Sept. 25, are more than 11% above the year-ago level, but implied demand for petroleum products over the last four-week period was up 5.3% from the same time a year ago, according to data from the Energy Information Administration.
"The optimism about an economic recovery has generally added $12-$17 per barrel of a 'hope premium' to crude prices since the second quarter," said Tom Kloza, chief oil analyst at the Oil Price Information Service. On Thursday, November crude closed at $70.82 per barrel in New York.
"I am inclined to believe that $75 per barrel was the high for all of 2009," said Kloza.
John Person, president of Nationalfutures.com said prices may even trade in the low $50 level by the year's end "due to seasonality weakness and overall uncertainty with the pace of economic expansion with unemployment hovering near 10%."
Looking further ahead, the upcoming year is a bit of a "crapshoot for projections," said Neal Ryan, a managing partner at Ryan Oil and Gas Partners LLC. "Prices should directly correlate to economic activity indicators" but even then, "with supplies at record high levels, the economy will have a buffer period where even sharp increases in economic activity can be satiated with supply."
Energy slump
While the outlook for oil prices is unclear, analysts seem to agree that prices for natural gas and gasoline are most likely to decline in the coming months.
The natural gas market is "well-supplied -- to put it in mild terms," with the view on near-term supply-demand balance "pretty depressing," said Subramanian.
