Commodities such as oil and copper may be at risk of steep price declines as their recent improvements haven’t been grounded in improved fundamentals, according to Barclays.
Investors have been rushing into commodities since the start of the year, with products such as oil and copper enjoying inflows of $20 billion (€17.8 billion) between January and February.
However, Kevin Norrish, author of the Barclays’ note ‘Buffalo jump’, warns that “the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside”.
He added that the kind of investment currently taking place in commodities is not the long-term buy-and-hold strategy for portfolio diversification and inflation protection that underpinned the huge inflows of the previous decade. It is much more short-term and opportunistic. This is seen with the relatively short holding period for exchange-traded product buyers in oil with many having liquidated their positions after just 5-6 weeks after upward price moves.
Norrish concludes with what this means for commodity prices. He said that the recent price movements in oil suggests the potential for a 20-25% move down in prices if positioning were to return to the average levels of the past few months. The potential downside in copper is similar, according to Norris.
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