Is the long bull run finally over?

With energy, metals and grains futures plunging this week from their recent historic highs, many are asking if the long bull run in commodities is finally over.

The short answer is, commodities may be down for now, but do not count them out. Analysts point out that commodities tend to be volatile by nature, and that they have too many fundamental factors going for them to stay down for long.

The Reuters-Jefferies CRB index of 19 commodity futures closed on Wednesday at 388.30, down eight per cent from its record high set a week earlier. The Standard & Poor’s Goldman Sachs Commodity Index, 73 per cent weighted to energy prices, fell to 671.12, down seven per cent from last week’s high.

Analysts said the long-term outlook for shortages in key commodities will continue to buoy prices, even though profit taking by hot-money hedge funds is taking the froth off markets from crude oil and gold to corn, soybeans and wheat.

“We had a bit of a correction – but it’s to be expected given the magnitude of the advance and the volatility of the markets,” said Bill O’Neill, managing partner of Logic Advisors and former commodities research head for Merrill Lynch. “The long-term growth patterns set up extremely well for commodities – looking a year, two or three years forward. These are long-term, demand-based rallies,” O’Neill said.

Recent Wall Street fireworks, with the Fed orchestrating a historic “fire sale” of broker Bear Stearns, continue to prompt liquidation of speculative commodity positions, some of which is covering speculators’ loans or losses in other markets.

Recession talk in the United States is also causing sales as nervous investors pull their money from commodities. Analysts, however, cite little change in the bullish fundamentals that have driven commodities for months: the weak dollar, demand from China for food and raw materials, and growth of biofuels.

Outlook murky

Still, the short-term outlook is murky given the credit fears roiling stock, bond and money markets. “We are very much in the grips of this external financial market instability,” said Rich Feltes, senior vice-president and director of MF Global Research. “There’s a fear of another major financial institution succumbing to the credit market woes. With that, there’s a flight to quality, a flight to the sidelines for capital until this thing settles.”

Analysts said margin calls on hedge funds in stocks and bonds had prompted much of this week’s reaping of profitable commodity positions, along with jitters about the financial stability of other brokers besides Bear Stearns who service accounts of many big commodity fund speculators.

“People have decided to get smaller as credit lines have been diminished and that has caused them to reassess their willingness to commit to high-priced commodity markets,” said Dan Basse, president of AgResource, a Chicago consultancy.

O’Neill said: “Money flow and the speculative end of the market have become the dominant influence in the market.”

Strained and nervous

So speculators are nervous and, perhaps, a bit strained. But analysts say their love affair with commodities should resume when the dust settles from Wall Street’s tremors.

So far in 2008, gold has passed $1,000 an ounce, crude oil $110 a barrel, and US wheat $25 a bushel. All are levels that speculators could only dream of six months ago.

In fact, grain firms and food companies, hurt by historically high grain and fuel prices, welcomed this week’s down-draft in commodities. Rising input and financing costs have squeezed their bottom lines.

Analysts say several key drivers behind bullish commodity prices remain intact. Number one is the weak dollar.

Most global commodities are still priced in dollars. So a weak dollar makes them cheap for consumption among non-US buyers in Europe and Asia with strong currencies and reserves.

The US Federal Reserve’s aggressive interest rate cuts to ease the credit crunch in the wobbly US economy weakens the dollar. Inflation fighting still seems secondary to the Fed, analysts said.

“The outlook for the economy is anything but positive,” said Stephen Schork, editor of The Schork Report. “Dollar weakness is why crude is so high. Until the White House wakes from its slumber and defends the dollar, there will be dollar weakness.”

China’s breakneck economic expansion is another prime reason why oil, metals and grain prices are so high. With $1.6 trillion (Dh5.8trn) in currency reserves at January-end, China has plenty of reserve to import cheap commodities to fuel domestic growth, modernisation and food needs, keeping inflation under control as Beijing pushes to create 10 million new jobs a year. (Reuters)