Commodity bear market now worse than stocks' slide

8:58 PM, October 16, 2008

In the retail business, a half-off sale usually attracts a swarm of shoppers.

So far, that isn’t happening in the battered commodity market, where buyers pretty much remain on strike.

Oil on Thursday joined the lengthening list of raw materials now marked down at least 50% from their record highs: Crude futures in New York slid for a third straight day, losing $4.69 to $69.85 a barrel.

That left the price down 52% from its record close of $145.29 a barrel on July 3.

Oil’s plunge has been even steeper than the stock market’s dive. The Standard & Poor’s 500 index has fallen 39.5% from its all-time high reached a year ago.

Oiloct16 Prices of copper, orange juice, wheat, corn, silver and nickel, among other commodities, also have been cut in half from their 52-week peaks.

Remember how raw materials were supposed to provide protection against the vagaries of Wall Street?

During the final run-up in commodity prices in the first half of this year, too few investors stopped to wonder what would happen to demand for energy, metals and other hard assets if the world faced a serious recession.

We’re finding out now. One catalyst for oil’s dive on Thursday was the government’s weekly report on U.S. inventories, which showed that crude supplies rose 5.6 million barrels last week, to 308 million. The increase was well above expectations.

"It was a pretty bearish report, and we’re probably going to see a few more of those," said Rick Mueller, director of oil markets at Energy Security Analysis in Wakefield, Mass.

With the economy sliding, "There has certainly been a lot of demand lost here and in Europe," he said.

But waning consumption is only half the story. Commodity prices also are suffering as investors and speculators bail out of futures contracts and other securities that were heavily used to bet on raw materials prices in the heyday of the bull market.

Some big investors have been forced to dump commodities and other assets to meet clients’ redemption requests. Hedge funds, which had been huge players in commodities, faced at least $43 billion in investor redemptions in September, according to an estimate by TrimTabs Investment Research of Santa Rosa, Calif.

"There has been just a massive liquidation in all asset classes," said Carl Neill, energy analyst at Risk Management Inc. in Chicago.

Still, even as artificial (speculator) demand dries up, the world’s basic need for oil isn’t going away. We can live without a lot of things, but energy isn’t one of them.

A report last week from Deutsche Bank analyst Adam Sieminski estimated that crude would have to fall to $35 a barrel "to bring prices in real terms back to their long run historical averages."

But because global oil supply and demand patterns have changed dramatically in recent years (think: the rise of suppliers such as Russia and consumers such as China), Sieminski said that a more realistic floor for the price would be about $60 -- which, suddenly, isn’t very far away.