Hope of recovery driving strong commodity prices

The rally on commodity prices is expected to continue on increasing signs that the worst of the world recession may be over.

"The recent surge in commodity prices appears to have been driven primarily by hopes of a strong recovery in the global economy," said Capital Economics analyst Julian Jessop.

"However, there are still many reasons to be cautious. For a start, although some commodity firms have undoubtedly taken advantage of lower prices to rebuild stocks in anticipation of a pick-up in final demand, that increase in demand has yet to materialise," he said.

New York crude oil hit $70 for the first time in seven months on Friday as the dollar slid on news of a dramatic slowdown in US job losses, traders said.

New York crude spiked to $70.32 a barrel, the highest level since November 4. It later retreated sharply as the dollar recovered.

"This initial rally in crude looks to have failed", aided by a recovering dollar, said Adam Klopfenstein, Senior Market Strategist at Lind-Waldock – a full-service futures brokerage company primarily serving individual traders. A struggling US currency makes dollar-priced crude cheaper for buyers holding stronger currencies, in turn stimulating demand and pushing up prices. When the dollar strengthens the reverse tends to apply.

The US unemployment rate meanwhile surged to a 26-year high of 9.4 per cent in May, while the number of job losses slowed to a better-than-expected 345,000, data showed on Friday.

The Labor Department monthly report, seen as one of the best indicators of economic momentum, offered conflicting signals about a weak labour market, but suggested that the pace of massive job cuts appeared to be easing.

The number of non-farm jobs shed in the economy was much lower than the 520,000 expected and better than the revised figure of 504,000 in April.

It was also about half the monthly decline of the past six months.

Oil prices have experienced a roller-coaster week in reaction to movements in the dollar, US inventory data and predictions made about crude futures.

Prices slumped on Wednesday after a surprise jump in American crude reserves that indicated weaker-than-expected demand.

The US Department of Energy announced on Wednesday that American crude oil inventories leapt 2.9 million barrels in the week ending May 29 to reach 366 million barrels. Most analysts had expected a 1.7-million-barrel drop.

Crude futures rebounded strongly on Thursday after US investment bank Goldman Sachs said crude futures could strike $85 a barrel by the end of 2009.

"Crude's ability to completely deny... [Wednesday's] sharp sell off, strongly underscores the new found optimism in the energy complex," said ODL Securities analyst Marius Paun.

Goldman Sachs said its bullish price forecast stemmed from a global economic recovery and energy shortage. Further ahead, Goldman predicted that prices could strike $95 a barrel by the end of 2010.

After plunging from record highs above $147 last July on supply concerns, oil prices touched multi-year lows in December, at one point nearing $32 a barrel, as the slowdown crushed demand for energy.

By Friday, on the New York Mercantile Exchange, light sweet crude for delivery in July jumped to $67.97 a barrel from $65.94 a week earlier.

On London's InterContinental Exchange, Brent North Sea crude for July climbed to $67.76 a barrel from $65.05 a week earlier.

Gold prices approached $1,000 an ounce before traders cashed in their gains late on. By late Friday on the London Bullion Market, gold fell to $962 an ounce from $975.50 a week earlier.

Silver rose to $15.65 an ounce from $15.52.

On the London Platinum and Palladium Market, platinum climbed to $1,275 an ounce at the late fixing on Friday from $1,175. Palladium jumped to $257 an ounce from $236.

Base metals prices struck multi-month highs after data showed a pick-up in Chinese manufacturing, traders said.

Copper reached $5,145 a tonne in London trade – the highest level since October.

China's manufacturing activity expanded in May for the third month running, official data showed on Monday.

The official Purchasing Managers' Index for the manufacturing sector pulled back slightly to 53.1 in May, down from 53.5 in April, the China Federation of Logistics and Purchasing said in a statement on its website.

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