Recession fear forces oil and metals lower

Oil and base metals came under pressure Monday after Morgan Stanley forecast a mild US recession in 2008, warning that fear and an associated reduction in exposure to “risky” assets could send commodity prices below levels warranted by fundamentals.

But with a US recovery expected in the second half of 2008, “we see any commodity price weakness, not related to fundamentals, as a buying opportunity,” said Hussein Allidina, of Morgan Stanley. “Any decline in demand is likely to be cyclical and short-lived, while supply-side constraints are largely structural, foreshadowing higher commodity prices in the long-run.”

Nymex January West Texas Intermediate fell 50 cents to $87.78 a barrel while ICE January Brent also lost 50 cents at $88.14 a barrel.

Ed Morse, of Lehman Brothers, says the relentless pressures pushing oil prices up since 2002 are set to continue next year. He is forecasting both WTI and Brent to average $84 a barrel in 2008, declining to $78 in 2009.

Lehman expects further disappointments from non-Opec supply growth and for new dilemas to emerge for Opec next year.

“A rift is widening between those [Opec members] unable to raise output and revenues except through higher prices [Iran and Venezuela] and those with more output capacity and diversified economies [Saudi Arabia and other GCC members],” says Mr Morse. “This is set to impede unanimity and may encourage Saudi Arabia to achieve its objectives through output increases.”

In Chicago, traders expect the US Department of Agriculture will Tuesday revise down its estimates for corn, wheat and soyabeans stocks at the end of the 2007/08 marketing year.

Soyabeans hit a 34-year high of $11.27½ a bushel amid concerns about dry weather affecting South American production. CBOT January soyabeans weakened later in the session, down 1½ cents to $11.18¼ a bushel. The consensus forecast is for soyabean stocks to fall to 196m bushels, from the November estimate of 210m bushels, and a fall below 200m could set off “alarm bells” for soyabeans, according to Gavin Maquire of Iowa Grain.

Wheat prices were supported by further evidence of strong overseas demand as India launched a tender to buy 550,000 tonnes of wheat.

CBOT December wheat traded above the key $9.00 level, gaining 10 cents at $9.13½ a bushel. Mr Maquire says the USDA could trim its November wheat stocks estimate of 312m bushels to less than 300m, which would support prices further.

December wheat prices in Minneapolis have traded above $10 a bushel for the first time in US history after Canada’s statistical bureau reduced its estimate for the spring wheat harvest by around 600,000 tonnes to just 20.05m tonnes.

Corn dipped ½ cent to $3.99 a bushel with the USDA expected to trim its November corn stocks estimate from 1.897bn bushels to around 1.882bn. But the forecasts range widely from 1.75bn to 2.08bn bushels.

“Agricultural prices will remain resilient to global growth risks, skittish equity markets and a new Fed easing cycle,” said Michael Lewis of Deutsche Bank: “From a valuation perspective this sector remains cheap since inventory-to-consumption ratios across most of the complex are close to multi-decade lows.”

Gold pushed through the $800 level, rising 1.8 per cent to $809.10 a troy ounce.