Oil, commodities rally can weather short recession

By Matthew Robinson - Analysis

NEW YORK (Reuters) - The strong global demand for oil and other commodities that pushed prices to record peaks this year can weather a light U.S. recession and would only face a major slowdown if the downturn dragged on.

The surging economies of China and other emerging markets triggered a five-year bull run in commodities, and their consumption of oil and steel should keep rising despite a widely feared U.S. recession, analysts said.

"An economic slowdown is likely to impact commodities demand growth in the United States," said Sarah Emerson, director of oil consultancy Energy Security Analysis Inc in Boston. "But I don't think the slowdown will be deep enough or long enough to have a significant impact on global commodities demand growth."

U.S. oil shot to a record $100.09 a barrel on January 3 and gold and other precious metals hit all-time highs earlier this week. Industrial metals prices saw steep rises in 2007 as well.

The soaring cost of raw materials has added to concerns about the U.S. economy, already buckling from the subprime crisis and credit crunch. U.S. retail sales data on Tuesday showed an unexpected downturn last month, the strongest sign yet of recession in the world's top oil consumer.

"The odds of (a U.S. recession) are pretty good, and I think you are going to see a negative sign in front of GDP in the next six months," said Chris Jarvis, senior analyst for Caprock Risk Management in Hampton Falls, New Hampshire.

"The U.S. has limped along here and really hasn't had a major impact because they are not the only big fish in the sea anymore."

China's oil demand jumped 30 percent between 2003 and 2006, according to U.S. Energy Information Administration data, leading a 14 percent rise in non-OECD demand. U.S. demand grew 3 percent while OECD demand grew 1 percent over the period.

Analysts said a weak U.S. dollar and fuel subsidies in some nations have also insulated energy demand growth against the higher commodities prices.

LONGER-TERM TROUBLES

Still, analysts warned a longer term retraction in the U.S. economy could begin to erode commodity demand, as China becomes more reliant on exporting products to sustain growth.

"In our judgment, many people have exaggerated the degree to which China and other emerging markets are decoupled from the United States," said Edward Morse, chief energy economist for Lehman Brothers. "If you look at Chinese export growth a lot of it is in energy-intensive and metal-intensive sectors."

"The export market for China is going to become challenging because demand is going to either grow at a snail's pace or reverse," he added.

Global oil demand growth estimates of 1.5 million barrels per day (bpd) for 2008 could fall below 1 million bpd in 2009 if a U.S. recession dragged on long enough to hurt Chinese demand, Morse added.

Demand could face further obstacles if the United States and European OECD nations adopt more protectionist policies to shore up weak manufacturing sectors against goods from emerging markets, Morse added.

(Reporting by Matthew Robinson, Richard Valdmanis, and Alden Bentley, editing by Matthew Lewis)