BUY OR SELL-Copper and oil: short term sell or buy the dips?

Published: 12 Aug 2009 16:35:41 PST

* Copper and oil both key leading economic indicators

* Copper futures at 10-month high this week

* Oil futures doubled since beginning of 2009

LONDON/SINGAPORE, Aug 12 - Will copper and oil, both leading-economic-indicator commodities, hold their momentum and continue to outperform in the coming months as robust emerging market growth supports demand? Or will they founder?

Three-month copper, the main futures contract for the soft metal used in power and construction, hit a 10-month high of $6,258 a tonne on Monday, with unwrought and semi-finished shipments to China rising to record levels this year.

In spite of flagging global demand predictions from the International Energy Agency and other major forecasters and ample supply in storage around the world, oil has risen from below $33 a barrel last December to around $70 a barrel.

Analysts predict near-term hiccups in the two disparate yet intertwined commodities, arising from currency fluctuations, but possible long-term strength coming out of an expected return in Chinese demand.

For related graphic click on: http://graphics.thomsonreuters.com/gfx/JLeff_20091208095645.jpg

SHORT-TERM SELL

Ben Westmore, commodities analyst at National Australia Bank, said Beijing's stimulus package targeted at construction and manufacturing has propped up oil and copper demand in China, but over the next few months that influence could wane.

He cited the volatality of the dollar, which has been negatively correlated to commodities as it has swung to a 10-month low against a basket of currencies last week from a 3-year high touched in March.

"For both oil and copper on a two-week horizon I'd be erring on the sell side. In the short term, oil is rangebound. It won't move higher in the next few months, but copper has more downside," Westmore said.

"In copper, Chinese imports should slow as their stockpiling abates and the price differential between Shanghai and the London Metal Exchange has closed...but late in the fourth quarter, China's export markets will start to pick up and offset the decline in the stimulus."

"In oil, OPEC has been good at implementing supply cuts and it is likely production will be constrained relative to metals going forward."

BUY THE DIPS

At Societe Generale in London, the director of metals research, David Wilson, said the perceived improvement in the economic outlook has begun to pry open the floodgates that slammed shut on the raging commodity market last year.

"We have been telling people to buy into the dips," Wilson said.

Billionaire financier George Soros told Reuters Television in New York this week the U.S. economy had hit bottom and the current quarter will see positive growth due to the government's stimulus spending.

Meanwhile China reported below-forecast growth in factory output and investment on Tuesday, indicating with a barrage of figures that while the economy is moderating after a blistering second quarter, the country remains on course for 8 percent growth in 2009.

"There is so much momentum of investment money coming into commodities, it is very difficult to argue that there is going to be a major correction in the short term," Wilson said.

China ended 5 months of record copper inflows in July, but imports of scrap surged by two-thirds and domestic production of refined copper kept climbing, showing demand from the world's top metals consumer stayed hot in the summer.

OVERBOUGHT?

In Frankfurt, analyst Eugen Weinberg at Commerzbank approached the peak of copper and oil prices touched over the past two weeks with caution, and said both were now overvalued.

"The most important short-term factor for oil will likely be the regulatory changes from the CFTC," Weinberg said.

The U.S. regulator the Commodity Futures Trading Commission has this month held hearings into whether it should limit how many futures contracts hedge funds, investment banks and other speculators can control.

"These changes will likely lead to lower price levels, as most of the investors in the market are betting on high prices, and if you decrease their influence in general, you are killing more bulls than bears," he said.

For copper, Weinberg sounded an equally cautious note, saying Chinese purchases earlier artificially inflated prices.

"The market is overestimating the contribution of the Chinese purchases. I think the prices will come down in the coming months and we will likely see a high availability of copper scrap."