Commodities | Jul 31 2009
By Rudi Filapek-Vandyck
Barclays commodity analysts are not buying into the idea that loose monetary policy by the Chinese central bank has spiralled commodity markets into one big speculative bubble. They do note, however, this idea has found a growing group of followers and as such is keeping many investors if not sidelined, than at least very cautious.
No surprise thus, most commodities have underperformed other assets in July and Barclays believes August might well see a continuation of this. But then again, reflect the analysts, the first half year of 2009 has seen a tremendous outperformance for commodities against all other assets. The key factor behind this outperformance has been, of course, China.
Barclays thinks Chinese buying activity overall will slow down from here on. A signal that commodity markets might be ripe for a pull back as well? Maybe, but the analysts remain of a firm conviction that higher price levels for commodities have now been established and this is not going to change overnight. What is important for further continuation of the rally in commodities is that demand will pick up in regions outside China, hence why investors should now focus more on what’s happening in Europe and in the US, the analysts argue.
It is their view that demand in these key regions for global economic growth will soon pick up and to show their confidence Barclays analysts have decided to remain long in the copper market, targeting US$5,950/t for the LME December contract.
In general, Barclays believes a recovery in demand in the US and Europe should translate into higher prices for all base metals in the year ahead. By the final quarter of this year, the beginning of 2010 at the latest, the next leg in the base metals price recovery should start as the OECD restocking cycle will ramp up, predict the analysts.
Barclays analysts do have one major concern, though: crude oil prices. They don’t like the focus by US authorities on the impact of speculators on the price of oil, and they don’t like the fact that oil prices seem to detach themselves once again from what are arguably short term bearish market fundamentals. Or to put it in their own words: “We are concerned about the potential for another dislocation in WTI prices as inventory is high and rising again at Cushing and the situation is also being exacerbated by the regulatory risk surrounding US energy markets.”
Barclays does believe the underlying trend on a global scale is for gradually declining oil inventories, but the analysts have obviously not forgotten what happened in the oil market last year while observing a close relationship between oil prices and equities thus far in 2009. For now, the team has a one-month target of US$70.0/bbl for West Texan Intermediate.