Analysis: Commodities look to simmer not boil this year

Tue Mar 27, 2012 1:46pm EDT
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By Manuela Badawy

NEW YORK (Reuters) - Even with crude oil prices nearing record territory, experts see signs that the market for commodities is running on fumes.

The prices of many commodities are losing steam as much of Europe is likely headed into a recession and China's economy is slowing down from its once torrid pace, industry analysts say.

Gains in the commodity asset class are going to be limited, but some sectors within the commodity class are poised to benefit by year-end from a global economic recovery, experts say.

"At some stage oil prices have to slow down, otherwise growth gets hit," said Kevin Norrish, managing director of commodities research at Barclays. "Our base case is that the growth outlook is reasonably positive for the world and oil prices will soften enough for there not to be a problem."

Brent oil prices rose to around $125 a barrel on Tuesday, from a record of $147.50 in the summer of 2008.

Commodity markets are off to a better start this year after taking a breather in 2011. The S&P GSCI .SPGSCI index is up 5.8 percent this year, after falling 1.2 percent in 2011. The expectation is that the demand for commodities will strengthen later this year as the U.S. economic rebound picks up steam.

However, one big uncertainty is the direction of oil prices. If oil remains stubbornly high, the pace of economic growth will slow and that will affect demand for other commodities.

"If (an investor is) getting into commodities today we would say it is not a terrible time, but it is not the cheapest time to have gotten in," said Alec Rapaport, managing director and head of fixed income and commodities at Commonfund, which manages money for endowments, foundations and other institutions.   Continued...