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.
Analysts urge commodity investors to be mindful that different factors move demand for metals, oil, food and other raw materials.
Investors can play the commodity market by buying an index like the Rogers International Commodity Index, the Dow Jones-AIG, or S&P GSCI.
Another option would be to own a publicly traded ETF like Spider Gold Trust (GLD.P) which allows investors to participate in the price movement of gold. Physical bullion is another option, and more aggressive investors can own miners. In oil, investors can own IGE.OL iShares S&P North American Natural Resources Sector Index Fund.
In fact, some in the industry expect commodities to begin to diverge in the second-quarter, with precious and base metals set to make the biggest price gains. Meanwhile, oil and gas prices should flatten out and prices of agricultural commodities should head lower.
For instance, concern over Europe's debt crisis was a key factor driving gold to record highs last year. But the surge in gold has abated some, as concern about an imminent Eurozone catastrophe fades.
Meanwhile, benchmark Brent crude oil has been trading around $125 a barrel, up 16 percent so far this year, on concern about a potential showdown with Iran over it nuclear energy program.
Some investors said potentials risks coming from the Middle East may still make commodities a tough bet.
Commodities will diverge during the second quarter, with precious and base metals set to make the biggest price gains, oil and gas prices to be flat to down and agricultural commodities prices mainly heading lower, according to analysts.
"This year commodities are not going to have the best performance," said Bill Witherell, chief global economist and international portfolio manager for Cumberland Advisors.
"We are looking at fairly sluggish commodity prices this year. Investors shouldn't suffer significant losses but it is not going to be a very attractive area," Witherell said.
Reporting By Manuela Badawy; Edited by Matthew Goldstein and Walden Siew