Commodity prices at mercy of world economy
NEW YORK (Reuters) - Further declines in oil and metals prices after coordinated global interest rate cuts suggest that commodities will not return to their giddy heights until the world economy is on more solid footing.
Wednesday's performance also undermines the theory that commodities move independently of other markets. This argument made sense on days when oil and metals prices rose and equities fell but becomes less meaningful when they slump together in the current financial crisis.
"The primary difference we have here is the change in worldwide investor psyche," said Adam Sarhan, founder of New York's GlobalMacroResearch.com.
"Just months ago, we had a strong, booming global economy. Now, all that has changed and people are panicking and taking any risk they can off the table -- and that includes commodities," Sarhan said.
Oil fell by as much 4.5 percent on Wednesday and copper 6 percent, while cocoa and sugar prices tumbled too after a half percentage-point cut in global interest rates led by the U.S. Federal Reserve failed to inspire investors in commodities.
When the Fed cut rates on past occasions, the dollar fell and commodities priced in the U.S. currency enjoyed a run-up from the reduced carrying costs for investors.
The dollar fell again after Wednesday's rate cut. But oil and copper hit new multimonth lows this time and grains like corn and wheat joined the slide before rebounding in late trade.
The only market that rallied throughout the way was gold -- the one asset, other than cash, that investors seem to want now.
"The key problem still exists even with this rate cut," said Bill O'Neill, partner at LOGIC Advisors in Upper Saddle River, New Jersey.
"The key is confidence, confidence, confidence. And until we get some change there, the atmosphere for gold is going to continue to be very positive, and copper and the base metals is going to continue to be negative."
Phil Flynn, analyst at Chicago's Alaron Trading, concurred: "You can cut rates to the bone, but if nobody's willing to lend you money, it doesn't really matter."
Commodities underperformed stocks and bonds for the first time in a year during the third quarter, with losses that wiped out gains for investors in almost every major commodity index in 2008.
CitiGroup estimated that the net long position in commodities -- reflecting the position of investors betting on prices to rise -- fell $50 billion between July and September as investors dumped oil and agricultural futures.
Figures from the U.S. Commodity Futures Trading Commission showed that open interest -- the total number of options and/or futures contracts that are not closed or delivered on a particular day -- fell across the board in key commodities over the last quarter, led by declines of 20-30 percent in energy markets such as crude oil and gasoline.
U.S. crude oil hit a record peak above $147 a barrel in July, climaxing a six-year bull run in commodities.
On Wednesday, it closed at $88.95, down almost 40 percent from the year's high, after data showing a big drop in demand in the United States, the world's No. 1 energy consumer.
"It's still too early to say what this means for future demand," Tom Bentz at New York's BNP Paribas Commodity Futures Inc said, referring to Wednesday's rate cut. "Right now, the perception is that demand is still struggling."
(Additional reporting by Rebekah Kebede, Eileen Moustakis, Robert Gibbons, Carole Vaporean and Chris Kelly in New York; and Karen Norton in London, editing by Matthew Lewis)
