New Commodities Boom? Don't Bet on It

06/02/2009 12:26 pm EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor of The Kiplinger Letter, says commodities have bounced back from their lows, but the economy isn’t strong enough to keep them elevated.

A new commodity price explosion? Nah.

The recent rise is more rebound than run-up. With gasoline prices up 25% since February, crude oil running $30 higher and 27%-40% jumps in prices for copper, nickel, and other key industrial metals, there’s a whiff of inflation in the air—and the ghost of the 2007-2008 oil and commodities skyrocket.

But it won’t last long. There’s simply nothing on the horizon to sustain a sharp up trend. So, what is behind the current increases? Mostly that prices fell too low last fall. Investors ran for cover when the bubble burst and the US and other economies contracted sharply.

Oil prices dropped 75%. Many metals—about 50%. Another factor: A bit of economic optimism creeping into investors’ psyches and fed by recent signs that the worst is over, a bottom in the housing market is nearing and GDP will start to grow again come fall. What’s more, there’s a trickle of capital seeping into markets again. Investors are reemerging from safe havens, sniffing around for improved returns.

The inevitable correction from last fall looks very steep. But today’s prices for oil and many other commodities are actually still down by about 45% to 60% from the 2008 peaks and about where they were a few years earlier, in mid-decade.

From here, prices aren’t likely to climb much more. Brisk gross domestic product (GDP) gains are still a long way off. We expect only modest growth next year—about 2% at best. Plus, the days of easy credit and leveraged investments are long gone, and with them, the tidal wave of speculative money from hedge funds, institutional investors, etc.

For nickel, copper, and tin, [we see] a downward drift of 12% to 15% in coming weeks, with a modest strengthening toward year-end. Aluminum—roughly half that decline. For oil prices—up maybe $10 more to about $70 by late June, then slipping to the low $50s by the end of July.

With the exception of the usual Labor Day bump, oil prices are likely to hover in the $50s until November or December, when an economic pickup should nudge prices toward $65 a barrel and keep them there into next year. Available crude supplies are about three million barrels a day more than usage, [so there’s] plenty to quickly dampen all but the most severe concerns about supply disruptions.

[We expect] more or less the same pattern for gasoline prices—first, up 15¢, to $2.50. Then, from the July 4th weekend to the Labor Day break, drifting back toward $2.25 a gallon. [There may be] a brief up tick for end-of-summer road trips and [then they’ll be] stable again until November or December.

[We see] natural gas dipping 15% in the next month or two, then slowly rising to an average of $6.50 per million Btu for the cold months, close to last winter’s price.

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