Summit News

Commodities rebound seen overdone

NEW YORK (Reuters) - The rebound in oil prices from recession lows looks overdone based on economic fundamentals, and the risk of deflation could burst the bubble, according to high-profile economists speaking at the Reuters Investment Outlook Summit this week.

Prices of gold and base metals were also cited as being overvalued at current levels.

Nouriel Roubini, known for having predicted the financial crisis that rocked the global economy in the past two years, said crude oil prices rose “too high too soon,” -- from below $32 a barrel in December to $73 last week.

If oil keeps climbing toward the $100 level, it would deal an “economic shock” similar to the one seen in 2008, Roubini, chairman of economics research firm RGE Monitor, said.

“For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits,” he said.

Brian Fabbri, chief economist for North America at BNP Paribas, said the investment bank’s fair value for oil was $45 to $50, considering the dim global economic outlook and U.S. oil inventories standing at near 19-year highs.

“Global investors began piling into commodities partly because of the weak dollar and partly because they wanted to piggy-back on China’s growth,” said Fabbri.

“But if the advanced world, which accounts for two-thirds or three-quarters of global GDP, goes into deflation next year, clearly that’s not good for commodities. Then this ‘let’s-follow-China’ theme we’re riding could probably come to an end,” said Fabbri, who also foresaw the financial crisis.

Robert Prechter, another prominent analyst in the energy market, said oil would likely run out of steam at $80, adding that it was highly unlikely that the market would get to last year’s record high above $147.

“We will not see that for years, if not decades,” Prechter said.

Even Abby Joseph Cohen, senior investment strategist for Goldman Sachs, the investment bank that recently predicted oil could hit $85 by year-end, voiced some reservations about the current rally in commodities.

“You have to ask whether the price to which they got was the appropriate price,” she said.

Roubini said aside from oil, even gold -- a favorite hedge against the dollar -- looked pricey as deflationary threats persist and other geopolitical risks seemed contained.

U.S. gold futures are currently hovering at around $930 an ounce after getting near to testing last year’s record highs above $1,000.

Fabbri, the BNP Paribas economist, said the run-up in base metals prices over the last three months was also not reflective of fundamentals or growth prospects for the U.S., European and Japanese economies.

Prices of copper, the leading base metal, have risen almost 60 percent on the year to trade above $2.20 a pound, mainly on China-linked buying.

Additional reporting by Frank Tang, Haitham Haddadin and Carole Vaporean; Editing by Leslie Adler