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G. Chandrashekhar

Mumbai , July 20

AN overweight position in energy, a positive view towards base metals from end-second quarter price levels, neutral towards precious metals and an underweight position in the agricultural segment (except sugar) are the highlights of recommendations Barclays Capital has made in its latest Commodity Refiner report for the third quarter of 2005.

Commodities are playing to a different tune, with greater independence from the dollar allowing the individual fundamentals of each commodity to guide current price behaviour, the report pointed out, adding that it has resulted in unique trends not only across commodity segments, such as energy versus metals, but even within the segments themselves, with the metals in particular breaking previously strong inter-complex correlations.

This break has coincided with another surge in commodity prices, with both oil and copper reaching new all-time highs towards the end of the second quarter.

Energy: In the third quarter, acute refining shortages are likely to push product prices to fresh highs, dragging crude oil prices above $60 a barrel, analysts said.

The market sentiment is likely to be set by the slowdown in Russian output growth, by demand signals from the US and China, and by the geopolitical risks surrounding Iran and Iraq. Refined product markets are likely to remain exceptionally tight.

Recently, the focus has been on distillate markets where concerns about availability recently pushed heating oil crack spreads to record highs. More recently, gasoline prices have risen again and product prices are expected to remain high and volatile for the foreseeable future.

Although natural gas prices remain relatively high, a tight oil market will limit the downside, while a warm summer could deplete supplies, leaving the market vulnerable to cold winter weather.

Base metals: Despite slowing western world economies, Barclays Capital still sees an upside potential for the base metals, driven by robust Chinese demand and extremely low inventories.

Consumers are under-hedged after a period of de-stocking, and with investor length having fallen at the end of the second quarter, there is belief that price risk remains on the upside from end-second quarter levels.

"With base metals prices already having reached multi-year highs, risk/reward is now less attractive, but we see value further out on the price curves, especially in aluminium where European capacity closures look likely amid rising power prices, while the intensity of use is on the rise in China," the report observed.

Precious metals: Long euro gold plays have taken over from the gold-silver ratio trade as the more popular fund trade in the precious metals complex.

However, speculative length is approaching historical highs. Although prices are expected to climb to fresh 2005-highs, the rally may be temporary in nature and for profit-taking to take gold prices significantly lower again, probably not until the fourth quarter. On a fundamental basis, platinum is still preferred.

Agricultural commodities: Prices in the third quarter are likely to be driven by weather conditions, as reflected in the recent wheat/corn/soya rally due to the possibility of a fall in supply arising from possible drought conditions in the US and in China's grain producing regions.

"The one agricultural commodity that looks sound based on non-weather fundamentals is sugar, where a weak Indian monsoon and rising demand as an alternative fuel (in the form of ethanol) could propel prices even higher," the report said.

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